No matter the type of business being run, there is a good chance that a business will need to enter into a commercial or retail lease. The commercial leasing environment is always evolving and it is important to ensure that the lease terms are consistent with market standards. We have identified the following common trends in leasing which should be considered when entering into a new lease:
- Office spaces – The demand for commercial office spaces has been in decline. With the rise of remote work, many businesses have switched to operating fully remotely or no longer require as much office space.
- Subleases – If the business finds itself no longer needing as much space, subleasing can be an effective way of getting the maximum value of the existing lease, so that the business can rent out parts of the leased premises which are no longer required.
- Retail leases – Despite concerns that online shopping will negatively impact retail stores, the retail sector is performing well and there has been an increase in retail leasing transactions.
- Industrial leases – The industrial sector remains steady, with performance varying depending on the type of industrial asset. Traditional warehousing is on the decline, while certain specialised industrial assets are maintaining strong performance.
When negotiating the terms of the lease, the following key terms should be considered:
- Rent and outgoings: A prospective lessee should consider and compare the rent of the property to comparable properties, to ensure that the rent being paid is consistent with market standards. It is also important to be aware of all outgoings which will be payable under the lease and factor in these figures.
- Term and option period: A longer term ensures that the lessee’s rights under the lease are protected for an extended period of time. However, if the term of the lease is too long, this may limit the lessee’s flexibility if it wishes to exit the lease. Having multiple option periods should be considered, which gives the Lessee the flexibility of deciding whether or not to continue with the lease, while also securing an extended term for the lease. If the lease contains an option to renew, the Lessee should make sure to diarise the key dates for when it is required to exercise its option to renew, as a failure to exercise the option to renew within the appropriate period will result in the lessee losing the right to renew the lease.
- Personal or director’s guarantee: Most commercial leases will require the director of the lessee company to provide a personal guarantee. Some lessors may be willing to accept a security bond or bank guarantee in lieu of providing a personal guarantee.
- Security: Nearly all commercial leases will require security in the form of a bank guarantee or security deposit. The usual amount of security required is between 3 to 6 months of rent and outgoings, but this often can be negotiated and reduced.
- Termination of lease: It is important to know the circumstances in which the lease may be terminated. Leases often contain provisions which allow the lessor to terminate the lease without notice, if the lessee defaults on the payment of rent. This could result in situations where an inadvertent non-payment of rent allows the lessor to terminate the lease. Lessors also commonly have the right to terminate the lease if the lessee fails to repair and maintain the premises. It is common to negotiate such terms so that the lessor must provide notice to the lessee of the breach and allow time for the lessee to remedy the breach, before terminating the lease. Engaging lawyers to review the rights available under termination is essential to ensure that the lessee’s rights under the lease are secure.
- Repair and Maintenance Obligations: When a part of the premises becomes damaged, it is important to know whose obligation it is to repair various aspects of the premises. Usually, the lessee is responsible for the general repair and maintenance of the premises, but is not required to repair any structural issues in relation to the property. The lease may also include provisions which require the lessee to repair specific items such as air conditioning. Negotiating the lease to ensure that there are no unreasonable repair and maintenance requirements can save a significant amount of money in the event a part of the premises requires repair.
MistryFallahi can assist with reviewing and negotiating lease terms and dealing with any leasing disputes.