Negotiating new UK property leases
By Tom Dymond, Haines Watts
Negotiating a new lease for a UK property? Here are the five clauses in a contract that will have the most impact.
Getting a good deal when negotiating for a new lease for UK business property is complex. Shorter leases are becoming more common, but a contract will still generally be about three to 15 years in length – a period which could see big changes in an owner’s circumstances.
That’s why it pays to get expert support and look at the bigger picture, from the economy and local market conditions to an individual’s long-term business plan so they can find the right site in the best location and negotiate a good deal.
Here are the top five clauses, whether people are looking at a new building or renewing:
1. Market performance versus inflation
Firstly, should you choose a retail price index (RPI)-linked or open market review?
An RPI-linked review will rise in line with how much the index has increased over that period. It’s a predictable choice but negative inflation is rare, so it’s likely that you will see a noticeable increase of about 2-3% on review.
An open market review, on the other hand, is based on the valuation of the property at the date of your review, as if it is a new lease. There hasn’t been much rental growth across the UK, on average, but if the property is located near a new development – a shopping centre, for instance – it may be a different story.
To illustrate the difference this makes to the bottom line, one of my clients chose an open market over an RPI-linked review – and their annual rent increase was £10,000 lower as a result.
2. Lack of schedule is a liability
When a client moves into a new property, they’ll also need to agree on who manages repairs during and at the end of the lease period. It is the client, or the landlord?
With ‘full repairing liability’, the tenant is responsible for handing the building back in good condition, having fully redecorated and refurbished.
Internal repairing, on the other hand, is common where the tenant shares part of a building, such as in a shopping centre, and maintains internal repairs while contributing a percentage to the upkeep of the structure.
A schedule of condition is useful here as it provides a record of the condition of the building.
3. Acting in the interests of the tenant
A tenant is protected by the Landlord & Tenant Act Security of Tenure Act, so they have a right to renew a lease unless the landlord can prove good reason not to do so.
Landlords often try to remove their clause from the contract. If they have a valid reason to do so, a tenant must protectively renegotiate ahead of the expiry date of their lease.
4. Know your value
If a client takes advice it means they are aware of their true negotiating power – to get the right deal, advisors need to factor in the market at large, how the client’s business is growing and the number of other tenants who are interested.
Knocking off 2% at the beginning of the lease may sound like a good deal, but a client may be able to save more over the long-term through other measures. It’s also essential to ensure clients do not become trapped in a contract that no longer suits your business’s needs.
5. Take a break
Businesses will hopefully have a five-10-year business plan, but while this offers a view of the future, it is still wise to build some flexibility into a lease.
For instance, one of my clients always takes a five-year lease, with a break option at year three. This flexibility means that, if they do win a big contract, they can relocate to a bigger site in the area.
Alternatively, at this time the tenant could negotiate to assign the lease to another business with similar financial strength.
So, no matter what property, location or terms a client is seeking, getting expert advice can ensure that people have the right clauses in your lease to support their business as it grows.
Tom DymondHaines Watts, more than 60 offices throughout the UK.
T: +44 1604 746 760, F: +44 1753 576 606
Tom is a Chartered Surveyor and he strengthens the Real Estate specialism in Haines Watts with the provision of a wide range of property advisory services including investment consultancy, site acquisitions, valuations and technical advice.
Published: September 2017 l Photo: lazyllama - Fotolia.com