A tactical approach to negotiating leases
One of the first bail applications that I made was for a murderer. In retrospect it was not difficult as however good my argument may have been the magistrate was not going to grant bail.
Your property lease negotiations do require tactics. They are a minefield for the unwary and can make your stay in a property miserable. They contain delayed action mines that can go off six months, one year or three years later, usually when your business is facing its darkest hour.
The lease document only ever becomes important if there is a dispute between the Lessor (the landlord) and the Lessee (you). Unfortunately there is plenty to argue about and to send you rushing to find a copy of your lease.
Lease Rule One – there is no such thing as a standard lease.
There is, however, a fairly standard procedure:
Stage 1: You negotiate and agree a lease with an estate agent.
Stage 2: The Lessor’s lawyer will provide a lengthy document – sometimes 30 pages or more – which invariably contains clauses that were not discussed.
The Lessor’s lawyer will insist that no amendments be made to the lease document. You will feel pretty committed by this stage and therefore in a weak negotiating position.
If you have not taken care in negotiating the lease, you will find that the Lessor has you ‘over a barrel’. The secret is to know what to ask for when negotiating a lease with the estate agent in Stage 1. So that in Stage 2 the discretion of the Lessor’s lawyer to put nasty clauses in the lease is limited.
Here are seven tips:
1. Rental term
If your business doesn’t succeed and you want to get out of the lease or if it does succeed and you need more or better space, you are still committed to the full term of the lease. Make sure that you can transfer the lease to someone else.
You may want to cover part of the rent by taking in tenants. If you don’t specify this, the lease may exclude your right to do so.
Most people concentrate on getting a good deal with their rent. However the rent will increase each year, sometimes staggeringly so.
Apart from a fixed percentage increase, there are two types of rent review – the Consumer Price Index (CPI), which keeps up with inflation; and the market review, which brings the rent into line with other rental values. This can be a killer, because it means that even if your rent is particularly reasonable in the first year, a subsequent market review would destroy the benefit. A CPI review may take place every year but try to limit market reviews to, say, every three years.
If you are taking the lease in the name of your company, they will want personal guarantees, usually by the directors of the company. This is a good reason for not having your spouse involved in the company, especially if he or she is not playing an active role.
This is usually three month’s rent and is kept by the Lessor without interest. Offer a bank guarantee instead. This simply involves the bank guaranteeing the amount without you actually having to pay out the cash.
You would probably expect the Lessor to be responsible for repairs but that is not always the case. Check it out.
7. Put the lease offer in writing
The estate agent should do this for you. If not, set out the agreement you think you have made using the above headings. Mark any correspondence, ‘Subject to lease”.
Got those tips? Well, here are 6 further points to note (I didn’t say this was going to be easy):
• Instruct a lawyer. I know that you think they are a miserable, costly bunch but they love reviewing leases – sad, I know.
Your lawyer can coach you to achieve a successful negotiation.
• Read it. You may sign credit card applications and bank approval letters without reading a word but a lease you must read.
• Insurance. A lease usually requires you to take out insurance. Don’t try to understand the insurance clauses - they may be in three different places in the lease. Just photocopy the relevant pages and send them to your insurance broker.
• Outgoings. Some leases have complicated outgoings provisions. Make sure that the real estate agent has given you details of the outgoings in writing.
• Demolition/renovation clauses. To my mind, this usually spells trouble. If the Lessor is renovating the premises or plans to knock them down, forget it and find something else. You may find yourself surrounded with dust and building works and with a Lessor who still expects you to pay rent.
• Use of premises. The lease will limit your use of the premises to certain activities. Make sure it covers your needs.
Getting a lease is one thing, living with it is another. It’s a bit like playing leapfrog with a unicorn. You’ve got to keep on your toes as mistakes can be costly. Beware.