With any commercial lease, there are always many elements to think about before you can finalise the lease.
However, with hospitality leases, there are further sector-specific considerations that need to be included, such as use, fit-out works and turnover rent.
Our Hospitality and Leisure Lawyers explain the key considerations business owners need to think about when negotiating hospitality leases.
Survey the Property
The basic requirements are still important when entering into a hospitality lease, and it is important that you instruct a surveyor to investigate and assess the condition of the property.
As hospitality properties will be receiving a constant volume of customers, it is important that the property is in good repair and condition and looks presentable (or at least can be brought up to this standard).
Before the lease is agreed and completed, you should decide a ‘Schedule of Condition’ with the landlord to detail the exact condition of the property before the lease was entered into.
The Schedule will contain photographs of the inside and outside of the property and will mean that the tenant is not obliged to improve or repair the property to a condition any better than that on the Schedule.
Use
In addition to checking the condition of the property, you must check the permitted use of the property.
Hospitality tenants need to make sure that the property is suitable for their intended business use and there are no restrictions that would affect their business.
Rent-Free Periods
As an incentive, some landlords will offer a rent-free period.
This will give the tenant the breathing space to get set up as a viable business and start attracting customers.
It will also allow time for any fit-out works or cosmetic improvements to be carried out at the property before the tenant starts trading.
A rent-free period can be agreed with the landlord at the heads of terms stage. The date that the rent actually commences will be recorded in the lease itself.
Both landlords and tenants usually accept a rent-free period of 2-3 months.
Fit-Out Works
As above, a tenant may be granted a rent-free period to allow time to carry out any fit-out works to the property and get the property ready for trading.
The lease itself can set out who will be carrying out the works and what the works will involve.
There will be a section that governs the alterations that can be made and any obligations on the tenant to reinstate the property at the end of the lease. For extensive works, the parties can enter into a separate document called a ‘licence for alterations’.
The lease will refer to this licence, but it is the licence itself that will set out the particulars of the works and the parties' obligations.
Turnover Rent
The rent in hospitality leases is sometimes calculated differently from the usual annual rent and is called ‘turnover rent’.
Turnover rent is based on the income that the tenant makes from their business held at the property, for example, the turnover rent for a tenant who owns a café will be based on the income produced from their café business.
This benefits both landlords and tenants as it means that if a business is doing well, then the landlord will receive an increased rent, whereas, alternatively, if there is a market downturn, then the tenant will be paying less rent.
The lease itself will set out what constitutes ‘income’ and what can be excluded. There are two main ways to calculate turnover rent: either as a percentage of the tenant’s annual income or as an addition to a minimum base rent that is set out in the lease.
Turnover rent can be a particularly complex area of negotiating hospitality leases, so it is important that you obtain legal advice on the turnover rent provisions in the lease and understand the implications.
Break Clauses
It is important that a lease contains provisions for a tenant to end the lease early if required, which is a break clause.
This will provide protection to the tenant in the event that business doesn’t go well (and it can no longer afford the rent) or there is a need to move to different premises.
The lease will set out when the break clause can take effect. For example, it may be that a tenant cannot exercise the break clause until the 2nd or 3rd year of the lease. The lease should also stipulate how the tenant can actually effect the break e.g. how much notice they must give to the landlord.
It is usual for a lease to include conditions that must be satisfied before the tenant can end the lease this way, for example no unpaid rent or no breaches of the lease.
Contact Our Hospitality and Leisure Team
There are many considerations to take into account when entering into a hospitality lease, and it is important that you take legal advice as early as possible. This will ensure that the lease sufficiently protects your interests and enables you to run a successful business from the property.
Contact our Hospitality and Leisure Lawyers:
0161 941 4000
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