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Premises and staff

Negotiate lease terms on your premises

Most business premises are leased rather than purchased outright. It is more cost effective to lease premises as it avoids any upfront cash outlay. Your company may also need to relocate as it grows, which could be problematic if you have purchased your business premises.

There are also tax advantages for businesses leasing property, as rent is deductible as a business expense.

New businesses will also find it easier to lease rather than buy, mainly because of their credit status and difficulty in obtaining a mortgage.

Some types of leases may be more appropriate for your company. Investigate a few options:

  • Gross lease: Your business pays the rent, your landlord pays insurance, taxes and maintenance, etc. This is the most popular type of lease
  • Fixed lease: Your company agrees to a longer lease term in return for a guaranteed and fixed lease rate
  • Net lease: Your company is responsible for all costs as well as rent
  • Step lease: This contract sets out dates when rent increases will take effect
  • Percentage lease: Your company pays a fixed minimum monthly rate plus a percentage of the gross monthly income in excess of the minimum rent

It is wise to consult a professional lease negotiator at this stage of the negotiations, as you will need to consider the following issues:

  • Length of the lease: Shorter leases of five to ten years are more popular
  • Break clause: A conditional clause that enables the lessee to terminate a lease within the set period, provided that certain conditions are met
  • Maintenance: Define your liabilities clearly. If you agree to ’full repairing obligations’, insist on a clause that you are only liable for repairs which arise as a direct result of your occupancy
  • Improvements or alterations to the premises: If your company intends to add genuine value to the premises, negotiate offset, eg a rent reduction. If this fails, ensure that your improvements are not included in any future valuations or rent reviews
  • Subleasing: Negotiate an ’offered right of alienation’ which gives you the option to sublease at any period during the term of your lease. Try to avoid the inclusion of a sublease recapture clause, which permits the landlord to terminate your lease if a sub lessee defaults
  • Rent: This is usually calculated on a square foot per month or year basis. Check whether the landlord reserves the right to charge Value Added Tax (VAT). Check that the rent is at market value

Action Checklist

  • Adopt the approach that every aspect of a lease contract is negotiable before signing
  • Get planning permission for your intended use of the premises. The onus is on you, not the landlord
  • Instigate a full survey beforehand to detect hidden liabilities
  • Familiarise yourself with the general level of local business rates. Don’t rely on the landlord’s figure
  • Get expert advice when drawing up the contract