The most important thing you will do in the entire process of taking a new lease is negotiating the terms of the deal.
The landlord will be quoting the terms they want for the new lease. They will be shown in the letting agents’ advertising or they will send them to you by email when you enquire about the premises.
The landlords may say such and such term is non-negotiable, but nothing is really off the table. The landlords want to achieve a deal. Most landlords are willing to negotiate to some extent – in fact, they are undoubtedly expecting to have to.
The rent is the main thing you’re going to want to renegotiate. You need to figure out what really is the open market rent for the premises – in other words, the rent the landlord should be able to get for the premises after marketing them widely.
It’s not obvious how to find this out. With a house in a street of similar houses, you can make a decent stab at working out the purchase price for the house by looking on Rightmove or Zoopla for the prices achieved recently by nearby houses.
But no such shortcut method exists for discovering rents for commercial property.
“We can argue the rent down. That’s just the start. There are probably 20 or more important terms where getting the right deal will save you money and benefit your business.”
But commercial agents – like me– have access to rent information because we carry out rent reviews. For reviews, we collect information from fellow commercial estate agents in the area in question about the rents and the terms on which they have let property in the area in the recent past. It’s a bit like belonging to a secret society, all the members help each other, because they need help themselves at one time or another.
That is why using a commercial agent as your representative is more productive than trying to figure out the correct rent yourself. For all you can tell, the landlords may be quoting a price wildly over the top.
Another factor is that not all parts of the premises justify rent at the same rate.
With shops, for example, different areas attract different rates. The first few metres or the prime selling area will attract the highest rent. The areas further back will attract progressively reduced percentages of rent. Basement premises, storage areas – the list goes on – will also have their own lower rates, which all commercial agents will be familiar with. Some areas – toilets, and areas with no headroom (e.g. under stairs) should not attract rent at all.
Of course, you can simply try bluffing the letting agents. If they are quoting £20,000 a year, you can just go back with a counter offer of, say, £18,000. Since you won’t be able to explain how you arrived at your figure, they will tend to call your bluff.
Far better to go back with a reasoned explanation based on appropriate rents per floor area and rents achieved in similar or comparable properties nearby. Then the letting agent may realise that the game is up and start negotiating meaningfully.
I am making a case for instructing me to act for you – or if not me, at least another expert commercial agent to fight your corner for you. You are negotiating a lease for years to come. The effect of any error is magnified by the number of years. You are dealing with landlords who want to do the best deal they can. Someone like me makes sure you get the best deal you can.
Rent is the biggest, but not the only, potential battleground in the good fight to achieve beneficial terms.
The following is a list, more or less off the top of my head, of issues that I, as an experienced commercial agent acting for a tenant, would normally argue over, and improve the terms for my client.
We can argue the rent down. That’s just the start. There are probably 20 or more important terms where getting the right deal will save you money and benefit your business.
1. The identity and extent of the premises you will be taking. – Everything needs to be measured exactly, since you are paying rent based on a rate per square foot. You need to make sure that everything you want is included. Then you need to negotiate so that zones for which you should not pay full rent are included at the right price in the rent calculation.
2. Any special rights you will need over any other property. – You need to to make sure you have all the necessary rights. (For example, if you take an office on the sixth floor the lease should grant you, your employees and your visitors the right to use the toilets.)
3. The length of the term. – You have to weigh up the pros and cons of a short lease for flexibility, or a long lease for security and the possibility of selling the business for a profit in the future. Plus the effect of length on the level of rent you should pay.
4. Whether the letting will be “outside the act”. – You should think carefully before giving up your statutory rights to stay on at the end of the lease for a new term.
5. Any break clause which has been agreed. – This may be a good way to hedge your bets.
6. Whether you have an option to extend the term. – This is an alternative.
7. Whether you have to provide any security, such as a rent deposit or a personal guarantee by you or anybody else. – You will probably have to provide some form of security. It’s crucial that you and the landlords settle for the one which is the least costly, which imposes the least ongoing burden, and which is best for your future.
8. How much rent you have to pay, and whether instalments are monthly or quarterly, and on what dates. – This shouldn’t be guess-work. How much you should pay depends on a professional analysis of the appropriate rate per square foot for the different “rental zones” of your premises.
9. Whether you have to pay business rates on top of the rent, or whether it’s included.
10. Whether the landlord is going to be charging VAT on top of the rent. – If you are not going to be charging VAT because you are a start-up business, this is a very important issue. Also it can change in the future.
11. Whether you’re getting a rent free period for a few weeks or months at the start of the lease. – This should be the subject of hard negotiation. A professional can provide the right arguments to sway the decision.
12. Any other incentives you are getting, such as a contribution towards any costs. – You are doing a deal with the landlords and that should involve give-and-take both ways. A professional may be able to get you some extra benefits and assistance from the landlords.
13. Whether there will be rent reviews and, if so, on what basis and on what dates. – The interval between rent reviews is an important issue, and also what the rules for valuation will be. It’s a very technical area.
14. What you have to pay towards service charge or insurance premiums for the building. – A professional can argue cogently on what should be excluded or capped. This will have significant effect on your cash flow.
15. What rights you have to assign, sublet, mortgage, or share possession of the premises. – This may become the most important thing in the lease to you down the line. There is a whole spectrum of alternatives, and you need the most tenant-friendly ones to be applied to you. A professional knows what the good and bad options are. Once the lease is signed, it’s all set in stone.
16. What your repairing obligations will be. – You have to be very careful not to be innocently taking on responsibility for putting right unknown defects in the building. That can be very costly.
17. What will be the initial permitted use of the premises and whether any changes to that are allowed. – How this is worded affects what you can do in your premises, whether you can expand into other business areas in the future, and whether you can sell the premises to someone with a different business.
18. What rights you have to make alterations, and whether you have to put the premises back in their original state at the end of the lease. – It may badly affect your business if you are forbidden to do alterations essential to making better use of the premises – e.g. dividing up rooms, adding facilities. You also need to avoid having to take it all out again at the end.
19. Any alterations or fit-out which you are allowed to make when you move in. – You will probably want to make some changes to the premises right at the start to suit your intended business. Making sure that you have all the necessary rights to do so, before you sign the lease, is crucial. If the landlord or the local council can then refuse some part of your planned work without which you would never have signed the lease, that will be disastrous.
20. Any other particular conditions of the letting. – There may be other possible lease terms which are important in your particular case or these particular premises. Not being familiar with commercial leases, you may not have thought of them .
A variation of one term may have a knock-on effect and require a change to another term.
“A professional can provide the right arguments to sway the decision.”