How To Complete The Grant Of A New Business Lease

As a tenant, leasing commercial property is an important commitment that you must get right to allow your business to thrive. The basis on which you rent your premises dictates matters vital to your commercial operations, such as the use you can make of them, how much rent you must pay and how long you can stay. If you are a landlord granting a lease, you must safeguard your investment by ensuring, amongst other things, that you receive a steady income stream from the tenant, and that the property is left in a good state upon the expiry of the lease.

Completing the grant of a business lease can be a complex, intricate operation, which necessitates balancing the requirements of both the landlord and tenant. Here, we consider the key steps involved in the grant of a new business lease and the issues landlords and tenants should be alive to when entering into one.

Key steps involved in granting a new business lease

Whilst each commercial property lease will have its own nuances, and the parties their individual requirements, every transaction usually involves the same key steps, which we detail below.

• Choose the right property or tenant

Many businesses choose to rent rather than buy their commercial premises. Renting has several advantages over buying, including lower upfront costs, greater flexibility and, often, less risk. However, leasing your commercial premises is a significant undertaking, and must not be entered into lightly. The current market trend is for commercial leases to last for an average of between 3-5 years, but some can last far longer, so you must be sure that the premises are the right fit for your business before you commit.

From a landlord’s perspective, it can be disastrous to become saddled with a problematic tenant, even if only for a few years.  So, before agreeing to grant a lease of your premises to a new tenant, you must undertake several crucial background checks, including that the nature of their business will not contravene any planning restrictions, impact your obligations to neighbouring tenants or disrupt your tenant mix. You must also check their financial position and ensure they are capable of meeting their financial commitments under the lease.

Once both parties are happy to proceed with the proposed tenancy, they can draw up Heads of Terms.

• Heads of Terms

Heads of Terms detail the basis on which the parties agree to proceed with the lease. Whilst they are not legally binding but rather ‘subject to contract’, they are indicative of the terms each party is willing to accept and detail the framework for the future agreement, so they are often fiercely negotiated by the parties and their agents. Clear, comprehensive Heads of Terms allow a transaction to proceed more swiftly and without issue, thereby reducing the risk of derailment and the parties wasting time and costs on a deal that does not complete.

The key points that Heads of Terms should cover include the following:

• The parties.

The Heads of Terms should clearly identify who will be the landlord and tenant under the lease.

• The premises.

The identity and extent of the premises to be let must be carefully defined both in writing and through the use of a plan.

• Permitted use.

Clearly, tenants must ensure that they can carry out their business activities on the premises they rent. At the same time, landlords may have obligations to nearby tenants to prevent specific uses, or they may operate a tenant mix policy to ensure an appropriate blend of tenants within the property. The permitted use element of a deal is vital to both parties and should be addressed in the Heads of Terms to avoid issues down the line.

• The term.

The parties must agree on how long the lease term will be and when it is intended to commence.

• Break clauses.

A break clause entitles the landlord or tenant to end the lease before the term expires without incurring a penalty. If the parties negotiate a break clause, the Heads of Term should state when and how the parties can exercise the clause, together with any conditions.

• The rent

The initial rent, together with any VAT payable, should be stated in the Heads of Terms, along with payment frequency and method. If the parties have negotiated a rent-free period or rent deposit, those matters should also be included.

• Rent review

Landlords usually seek to ensure that the rent is subject to periodic review. In these cases, the regularity of the rent review and the method or formula of review, for example fixed increases, index-linked, or in line with market rent, should be included in the Heads of Terms.

• Statutory rights

The Landlord and Tenant Act 1954 gives tenants statutory rights of renewal at the end of a lease term. However, to retain control of their property, commercial landlords often propose that these rights be excluded, so the tenant must return to the table and negotiate a new lease if they wish to remain in the premises at the end of the tenancy. If such exclusion is to apply to the rental, it should be expressed in the Heads of Terms.

• Assigning the lease or subletting the premises.

The Heads of Terms should address whether the tenant can assign the lease or sublet the premises to a third party. Most commercial leases allow the tenant to assign with the landlord’s consent, which cannot be unreasonably withheld. Similarly, the whole of a property can usually be sublet with the landlord’s consent but subletting just a part is sometimes prohibited.

• Service charges and other outgoings

Service charges are the charges incurred by a landlord for providing services to the common parts of the property, such as lifts and utilities. The tenant will be expected to cover the costs of those services or pay a proportion of them if the property is shared by a number of tenants. The Heads of Terms should address key matters, such as the types of services the service charge will cover and how the tenant’s proportion will be calculated.

• Alterations

Tenants often wish to alter their business premises, to accommodate new staff members or change working practices, for instance. The parties must consider how to address the issue of alterations, which is often to prohibit the tenant from undertaking certain alterations without the landlord’s consent. When the tenant needs to alter the premises from the outset, the parties often agree to enter into a ‘Licence to Alter’ at the same time as entering into the lease.

• Repair

The parties must agree on the extent of the tenant’s repairing obligations, and the Heads of Terms should document that agreement. Matters such as the length of the lease come into play, as does whether the premises are standalone or part of a larger property.

• Insurance

The Heads of Terms should state who will insure the property.

• Instruct solicitors.

Once Heads of Terms have been agreed, they are circulated to the parties’ solicitors, and the legal process commences.

• Tenant’s solicitor requests draft papers.

Following their instruction, the tenant’s solicitor will contact the solicitor acting for the landlord to request draft papers. The landlord’s solicitor will then provide the relevant documentation, which usually includes the following:

• A copy of the title to confirm the landlord owns the premises.
• Replies to the pre-contract enquiries, which will often be a combination of general questions and queries specific to the property in question.
• A draft of the proposed lease based on the Heads of Terms.

The tenant’s solicitor will also advise their client on any specific issues that need to be resolved or searches that should be undertaken to gain a complete understanding of the premises, such as environmental, highways, and water and drainage searches. There is no formal legal requirement that a tenant carries out such searches, but most do so to protect their position.

• Lease negotiations.

When the tenant’s solicitor has reviewed the information provided by the landlord’s solicitor, together with the results of any searches, lease negotiations can begin. If the parties prepared thorough Heads of Terms, these negotiations can be fairly straightforward and focussed on resolving general matters and any issues that arose after the Heads of Terms were agreed, rather than substantive terms. However, if the Heads of Terms prove inadequate, the lease negotiations can require considerably more work, so take longer to finalise.

• Completion.

When the parties are happy with the form of the lease, they will sign it. At this stage, the tenant will need to pay any monies required by the lease, such as a rent deposit. Completion follows, during which the lease will be dated and become legally binding. The landlord provides the tenant with keys to the premises, and the tenant takes possession.

• Post completion.

Various post completion matters may need to be addressed. For example, the tenant may need to pay stamp duty land tax, and leases over seven years must be registered at the Land Registry.

How long does it take to complete the grant of a new business lease?

The time it takes to complete the grant of a new business lease depends entirely on the nature of the transaction, including issues such as the type of property involved and how easily the parties can agree on key terms. Once the terms are agreed, though, the lease can usually be prepared and completed within a few weeks.

Key takeaways

Completing the grant of a new business lease isn’t as straightforward as the tenant agreeing to pay rent and moving in. The terms of a lease can have wide reaching effects on the busines operations of both a landlord and tenant, so it is imperative to ensure you understand what you are agreeing to, and the implications. Whilst most commercial leases follow a similar structure, the substance of the terms is lease-specific, and what may be acceptable to one landlord or tenant may not suit others. Drawing up the Heads of Terms is a key stage in the process, during which the parties negotiate the basis upon which they will do business, and their respective rights and responsibilities towards the property and each other. Unless something material comes to light after they have been agreed, it is often difficult to renege on something you accepted in the Heads of Terms later, without potentially derailing the rental, so their importance cannot be overstated. Your commercial property agents and solicitors will have extensive experience in commercial property rentals and will guide you through each stage of the process, ensuring your interests are protected, and you understand the effects of your agreement.

This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited 2024.