What length of term best suits your interests?
Let’s imagine that you are starting up an office-based business in an area where there are lots of offices. You don’t know how much you will have expanded in a few years time, but you’re probably intending to expand. So you don’t want to sign up to a long term for a particular set of offices which might turn out to be too small for you in a few years time. Since the success of your business is not based on the premises themselves – unlike a pub, for example – you won’t mind switching to some bigger, perhaps more desirable, offices. In fact you intend to. You won’t be worried about no offices being available, because you already know there’s a strong office market locally.
With the restaurant, a bar, or a pub it’s certainly in your interests to take a longer lease, even in excess of 20 years. The reason is that once you have got your business off the ground, and become established with a regular customer base, you may want to sell the business. The buyers needs to see that they will be getting a guaranteed long period of ownership in the place they are taking over. If you take a 20 year term, and you sell after seven years, the length of term that remains is still attractive to a buyer. If there are only months or a few years left to run, the buyers then need to worry about whether the lease will be renewed. The buyers will probably be protected by the fact that there are only limited grounds on which landlords can refuse to renew a business lease (assuming that it is “inside the act”), but that’s not the same comfort as knowing they have a guaranteed long period ahead of them.
If you have very high fit-out and start-up costs when you take your new premises, that would be another reason why you might want a long lease term to give you an opportunity to recover your initial costs.
In these situations, it will be important to you that your long lease term is “inside the act” – meaning it has the rights to renew the lease granted by the Landlord and Tenant Act 1954. The point of taking the long lease term is to feel confident that your business won’t be terminated by the landlords taking back the premises, so you want to improve that comfort to the maximum by preserving your rights to extend the lease when the term does come to an end.
You may want to have it both ways – and sometimes you can. You may want to take a long lease term to protect the long-term survival of the business you are intending to create, but the other hand you may want to be able to cut your losses and get out of the lease early if things don’t go to plan.
The answer is a “break clause”. A typical break clause gives the tenants the right to end the lease on a particular date or dates – for example, on the second anniversary of the start of the lease erm, or at any time after a particular date (“a rolling break”).