Heading for success with your heads of terms?

Savvy Landlords always seem to have a head start when it comes to agreeing lease terms – but tenants can put up more of a fight in this market to ensure they can trade cost effectively and successfully. Kate Mallaband, commercial property solicitor and Landlord and Tenant specialist at OSG gives tenants a “heads up” when it comes to agreeing a better deal.

Kate says - The Landlord’s strategy is clear – steel a march on the tenant before they instruct a solicitor. By winning the first negotiation battle, the lease that determines the relationship for the rest of the term will be Landlord biased.” Unfortunately, no matter how good the tenant’s solicitor is – the deal can rarely be unpicked and the transaction becomes an exercise in damage control. By taking the early initiative and getting the advice tenants need they can avoid terms that hamper their business potential.

Here is how:

• Have an exit strategy - Think about asking for a tenant’s break clause – this allows you to end the lease early and is an easier alternative to trying to transfer the lease or sublet if you need to move on. Don’t accept extensive conditions or penalties being tied to your break clause. Also, make sure your ability to dispose of the lease (by assignment, underletting or sharing possession) is not unduly restricted.

• Calculate your costs - Stamp Duty Land Tax is payable when your lease exceeds the nil rate threshold based on a calculation involving the rent and term. Be wary of agreeing a long term on the basis that you will exercise a break option as you will still pay SDLT on the full term with no refund (so Kate suggests considering a shorter term with a contractual right to renew which defers some of the SDLT liability until the longer term is required). Don’t roll over on legal costs either - tenants should resist paying the landlord’s legal costs as the fairer position is for each party to pay their own costs!

• Be Canny about Cashflow - Ask for a rent free period (especially when taking new premises that need fitting out). This is likely to be agreed and helps with start up costs. Monthly rent payments (as an alternative to the traditional quarterly payments) will also be acceptable to some landlords.

• Limit your exposure - Unless the premises are in pristine condition, consider whether a schedule of condition could be used to limit your repair obligation to keeping the premises in the same condition as existing (and this will be key when costly dilapidations are considered at the end of the term). Try to agree to cap your service charge to avoid expensive surprises down the line. A fixed initial figure can be increased by reference to RPI throughout the term and this is preferable to a variable charge dependent on works carried out. Rent reviews can also be capped to a fixed amount or by reference to RPI as an alternative to an upwards only open market review.

• Preserve your goodwill - Don’t agree to contract out of the security of tenure provisions of the Landlord and Tenant Act 1954 if the value of your business is linked to location. The Act gives you statutory protection allowing you to renew your lease which you shouldn’t relinquish if possible.
 

If you would like further information, please contact Kate on 01524 846846.