Negotiating better terms for your commercial lease
Ask small businesses what their biggest worry is and many will say it’s the high cost of commercial rents and a reluctance by landlords to negotiate.
The government recently extended protection for commercial tenants from eviction until the end of the year. But Coronavirus combined with difficult trading conditions means vacancy rates on retail units are increasing and that’s having an impact on market rents in some areas, providing a rare opportunity to negotiate more favourable lease terms.
It’s best to get it right from the start
Jonathan Hand, of The Lease Negotiator, spent years working as a commercial property agent (acting for landlords). Now he helps businesses negotiate a better deal.
(Jonathan Hand - The Lease Negotiator)
He said: “A lease is a legally binding document and it’s much more difficult to convince landlords to change the terms once it has been signed so it’s crucial businesses get things right from the start. Many business owners lack the technical lease knowledge to avoid expensive pitfalls and, when up against experienced commercial property agents whose role is to get the best possible deal for landlords, they can come unstuck.”
Main pitfalls
Among the pitfalls tenants unwittingly fall into are the length of a lease, contracting out, failing to include a break clause, one-sided rent reviews and underestimating the impact of service charges. And many tenants blindly accept liability for repairs which can run into tens of thousands of pounds.
For those entering into new commercial lease agreements, top of the wish list should be security (the ability to stay long term) and the flexibility to pivot if the worse-case happens. The answer is a rolling break clause but landlords can be reluctant to agree to this because it puts the power of the lease into the hands of tenants.
What about personal guarantees?
Jonathan added: “Landlords often request a personal guarantee (known as a surety) or alternatively a rent deposit. I never recommend a business owner agreeing to a personal guarantee as it leaves them too exposed if the business fails. A rent deposit is the better option in my opinion, although there are many occasions where through negotiation, no deposit is required.”
What about renegotiating an existing lease?
He added: “For businesses which are stuck with a less favourable lease, all is not lost. Ultimately landlords don’t want to get stuck with empty properties and, in these difficult times, some are willing to renegotiate the lease. For landlords the upside to renegotiating can be achieving a longer-term lease or removing a break clause in return for a cheaper rent.”
Three top tips for lease re-negotiations:
1. Have a clear objective – is the aim to achieve a reduction in rent, a lease surrender or a variation of lease terms.
2. Consider what the landlord might lose or gain from these re-negotiations – e.g. would agreeing to a reduction in rent help prevent the tenant defaulting and stop the landlord being left with an empty property?
3. Communication is key – go to the landlord with a solution, rather than just a problem.
Increasingly retailers are approaching landlords with the proposition of linking rent to turnover so landlords get more rent if the business succeeds.
What if you can’t pay the rent?
Aside from the normal legal remedies for default on a lease, businesses which are genuinely viable can try to negotiate more favourable lease terms. According to Michael Gregson of business recovery and insolvency specialists Bulley Davey, depending on the deficiency in the company, the nature of the company’s funders, director loans etc, this could involve the following:
1. Renegotiate more advantageous lease terms, with the rest of the company unaffected.
2. Renegotiate more advantageous lease terms, as part of a Company Voluntary Arrangement (CVA) to deal with unmanageable unsecured debt.
3. One option its to place the initial company into liquidation and seek to negotiate more favourable lease terms in a new, separate company (acquiring the business and stock from the first company) to give the company a fresh start.
Learn more by signing up for our LIVE WEBINAR with The Lease Negotiator:
CLICK HERE to register your interest in the webinar
The Lease Negotiator acts on behalf of business owners, to provide the technical expertise in lease negotiations. Jonathan added: “Our aim is to save businesses time, money and stress and reduce the risk of them being caught out by the landlord.”
For more information or to get in touch with Jonathan direct, visit www.theleasenegotiator.com
Register for a forthcoming live webinar with The Lease Negotiator HERE.
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