Moving office – common commercial lease pitfalls
If you are moving offices, what are the key legal considerations and pitfalls to avoid in a commercial lease agreement?
The impact of the pandemic is still being felt in the commercial property market. An increase in working from home and flexible working patterns has led some businesses to downsize to smaller more collaborative spaces. Equally, cost pressures mean some commercial property owners are exiting the market, and thus serving notice on their tenants. By contrast, some businesses have thrived and need larger premises. The reasons for an office move are plentiful!
There are three main ways of securing new premises:
- Buying the freehold of a property
- Leasing a property or commercial space
- Taking a Licence to occupy
We will focus on issues surrounding a commercial lease agreement or licence to occupy and how to avoid potential pitfalls.
Leasing a property or commercial space
A leasehold agreement is a legally binding contract that gives the tenant the right to use the property for business activity for a fixed period, usually five years or more, in return for payment of rent. The lease agreement sets out both parties’ respective rights and responsibilities. These rights give the tenant exclusive possession meaning they can decide who does or does not enter the commercial space.
Carrying out due diligence before signing a commercial lease is essential to limit financial risk. Take advice from commercial property experts to avoid pitfalls and address issues such as:
- Length of the lease – be careful not to sign up for a longer lease than anticipated. A long lease may be cheaper, but is it the right option for your business to be tied in for such a period
- Break clauses – fixed or rolling, you are likely to have to pay for this. Also, make sure you are clear on the terms for exercising any break clause as mistakes are easily made that render the break null and void
- Planning use class and permitted use – make sure the user class of the premises fits your business purpose (eg office or retail). Check what type of business are you permitted to carry out on the premises, what can be stored onsite etc
- Assignment or subletting – can you sublet any part of the property, especially if you are taking premises to expand into and need income from the unused bit in the interim
- Rent reviews – make sure you understand how these will be dealt with and what the obligations are.
- Repairing obligations – check your liability in terms of repairs and maintenance and also dilapidation liabilities when you finally exit the premises
- Service charges – that cover building maintenance, insurance, security, cleaning etc. Ideally, get these capped so you don’t end up with a huge bill for a new roof repair for example
- Energy efficiency standards – check what work may be planned to ensure the premises meet required standards
Licence to Occupy
A licence is more of a permission than a long-term agreement. Bear in mind that there will be less security involved as the licence can be revoked at any time. But of course, flexibility works both ways so a licence may suit a less established business that is unclear about future expansion and needs a more flexible option. It is also likely to be cheaper and have fewer set up costs associated.
The paramount consideration is to ensure that it is a licence to occupy and not a lease in disguise! The terminology is important, and you are advised to get legal advice from a commercial property law expert.
Other considerations
When choosing your new office there are many things to bear in mind:
- Location – cheap is usually cheap for a reason – perhaps it’s not in a great location or has a poor reputation
- Is there any parking
- What are the links to public transport.
- Is there a decent IT infrastructure and decent internet service
- What condition is the building in – get a building survey report to check condition
- Can you afford it – be sure of your budget and remember to factor in the deposit, rent, service charges, utilities, maintenance, insurance, business rates etc
- What are the staff implications – seek HR advice as required
There are many considerations when moving office and you are advised to seek expert legal advice. Contact one of our commercial property solicitors today: