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The legal issues surrounding an office move are paramount to the ongoing success and security of your business.
There are numerous pitfalls when exiting your current lease and taking a new lease of a premises, and the right negotiation tactics are crucial.
We have set out below a summary checklist of things to consider when entering into discussions with your landlord about your lease.
Considerations when exiting your current lease
1. Exercising a break clause
The first thing to check is whether your lease has a break clause, giving you the right to end the lease early.
Timing is critical, as most breaks can only be exercised on specific dates during the lease.
You will have to serve written notice to the landlord, and the lease will set out how many months ahead of the break date this must be done.
There are many possible traps here, especially if the lease sets out detailed requirements for how and where your notice must be served.
Getting your solicitor to check the lease and serve the notice on your behalf is always safest.
2. Surrendering a commercial lease
If you do not have a right to break, you will need to approach your landlord to negotiate ending your lease early by surrendering it.
Your landlord is under no obligation to agree, as empty premises are not an attractive prospect.
However, they may have another possible tenant lined up or are planning a redevelopment or change of use. If so, it may suit the landlord to bring your lease to an end.
3. Assignment or underletting
If you do not have a break clause and cannot agree to a surrender, your other option is to look for someone else to take on the premises, either by taking on the lease itself or by taking an underlease.
Before you start looking, you should check with your solicitor whether or not your lease allows an assignment or underletting, as these are sometimes restricted.
4. Dilapidations
Dilapidations are the items of disrepair that a tenant is obliged to rectify or remedy under the terms of the lease.
If the lease ends and the tenant’s obligations remain outstanding, a landlord is entitled to pursue a dilapidations claim for damages.
This can often place an onerous financial burden on the tenant as landlords are entitled to recover the reasonable costs of undertaking the works, typically set out in a schedule of dilapidations prepared by a surveyor, as well as loss of rent for the period that the repairs are undertaken.
You should ensure that you fully understand these implications and take steps at the outset to minimise your liabilities before signing a commercial lease.
Considerations when taking a new lease
1. Schedule of Condition
The effect of having a Schedule of Condition in the lease is that the tenant is not expected to put the property in any better state of condition of repair than it was at the start of the lease.
Therefore, a Schedule of Condition sets a benchmark against which the property can be assessed in the future.
Without having a Schedule of Condition, you could find yourself in financial difficulty at the end of the lease if the lease requires you to ‘put’ and ‘keep’ the premises in ‘good and substantial repair’.
2. Service Charge
Where the property is part of a building, the landlord may require you to pay a service charge to cover building expenses (such as lighting, heating, maintenance of common areas and repair of structural parts).
The lease will specify how the amount is to be calculated. It is important to watch out for a ‘sinking fund’ (i.e. the landlord’s ability to collect a reserve sum for any major expense or unexpected costs in the future), especially if you are only taking a short-term Lease.
The landlord should provide copies of the service charge accounts from previous years, which can give you an idea of the likely costs you may be asked to pay.
In addition, you may be able to agree to a service charge ‘cap’.
3. Alterations
The lease may require you to obtain consent from the landlord before carrying out any works or alterations to the property.
If you need to carry out any fit-out works to make the property suitable for your business, obtaining any necessary consent before committing to the lease would be advisable.
You may need to prepare and provide the landlord with specifications and plans showing the proposed works.
The lease will usually provide for the property to be reinstated to its original configuration before the end of the term, so any departure from this should be specifically negotiated.
4. Collateral Warranties
A tenant taking out a commercial lease of a new build premises on a full repairing and insuring basis will want to ensure that it has the required construction security in the event of defective design or workmanship by a contractor involved in the construction or refurbishment of the commercial unit.
A collateral warranty will provide the tenant with a contractual link to a contractor who worked on the build.
By imposing obligations on a service provider, you will be able to bring a claim in contract against a service provider for defective works which has caused you a loss.
