As a startup, there is nothing more exciting than being able to invest in your own commercial property lease. Whether this is an office, storefront or something else entirely - having a space dedicated to your business, outside of your living room, can be invigorating.
However, before signing a commercial lease there are a few things you should take into consideration about renting as a business.
1) Can You Break a Commercial Lease
One of the big questions when renting a commercial property is sustainability. Will your business continue to make enough profit to rent in the long term? Are you able to remove yourself from the property if your company does experience a downturn or complete closure? This is fully dependent upon the terms of your lease.
As a general rule, leases are granted for a fixed term over a period of months or even years. In some cases, there may be a clause for the early ending of a lease by the tenant, or at the very least for the tenant to appeal to the landlord to do so. However, if this is not the case and you cannot find an acceptable replacement to sublet to then you will be obligated to pay until the end of the lease - even if you have vacated the premises.
It is also worth noting that subletting can be a separate issue in itself. Many commercial landlords will allow it, due to the fact that they are aware that businesses can downsize or move regularly. However, a landlord may need the reassurance of this third party's ability to pay the rent and that they will also not be left with them still occupying the premises when your lease comes to an end. As such, it would be left to you to manage this subletting even if you choose to leave the premises yourself.
If this is a worry you have during your commercial property search, then it is best to search out a lease that will grant you early release if necessary.
2) Additional Costs
So, when you rent a house there are other costs outside of rent. The same holds true for a commercial property. If you are renting a commercial space then you may be liable to contribute to the upkeep of the space, even structural areas such as the roof and walls. Lifts and reception areas may also come under your lease as a service charge. This may never occur over the terms of your lease.
Insurance premiums - to cover damage and loss of rent due to damage - are also the responsibility of the tenant.
Other costs are standard utilities, business rates and other such tenant outgoings (cleaners, repair technicians, etc.).
3a) Property Repair
A landlord is required to upkeep a property in regards to private renting, but this is not the case when it comes to commercial properties. For some, leases will come with a full repairing obligation which may amount to tens of thousands of pounds in the long run. Even if the damage existed before your lease began.
To avoid this, you should seek to make it clear in the lease that the property should be in no worse state than when you began renting to avoid these costs. Document all damage and send this to your landlord to ensure they know what they are responsible for when you lease does end. A property survey may also be prudent to cover this issue.
Akin to repair in commercial property is the subject of alterations. Minor or major alterations may be allowed within your commercial lease, but it may also require the permission of your landlord. Major work may require the written permission of your landlord, you need to ensure that you have this before beginning to plan or do the work.
Also important is checking whether or not you will be responsible for reversing these alterations at the end of your lease. For example, if you were to paint your office wall with your company logo or colour scheme. Ensure that this is all clearly set out and agreed upon within your lease if such alterations are important for your company’s leasing of a commercial space.
4) Property Use
Ensuring that you have access to the property during business hours is of paramount concern when first letting as a business. As a 9 to 5 business this should not be an issue, but it can be if you operate outside of normal business hours. Shift work, in particular, will need to ensure that all employees have access to the site when needed.
Security is also integral; especially if you plan to house important company assets onsite. Anything from computers to specialist equipment could be housed on site, so you need to ensure that the security measures in place are robust enough to protect your business. Added insurance is also important to obtain to ensure complete peace of mind.
5) Renewing Lease
Commercial tenants do not, automatically, have the right to renew a lease. At least not always. Check your property lease carefully prior to signing, as it may include a waiver that removes your right to renew and means you are required to leave the property as soon as your tenancy agreement comes to an end.
This type of lease means having to negotiate with the landlord at the end of every lease interval, which may lead to higher rental rates or other costs. If you want to avoid this issue, then ask specifically for an automatic lease renewal unless otherwise stated.
Alternatively, your lease may include a rent review clause which means that either landlord or tenant can address a change in rent rates during the lease. This should be clearly highlighted in any lease in order for both parties to take advantage of it.
Overall, renting your first commercial property as a startup can be exciting; but, don’t forget to read the fine print! Getting caught up in unfair terms, shorter than expected lease periods or unknown service charges can upset your day to day business operations.
This article was written by Zack Halliwell who is a former CEO of a small business and now advises companies on business rates appeals.