Leasing a commercial retail space can be an exciting venture for your company. However, there are a lot of factors to think about when considering whether to lease a commercial retail space and how to do so.
As a business owner, it's important to take your time in understanding the commercial property leasing process, as it can have a long-term impact on you and your prospects. This article will detail what a commercial property is and the legal steps involved in leasing commercial retail space.
What is commercial property?
Commercial property are premises used for business matters, as opposed to residential purposes, accounting for 13% of the value of all buildings in the UK.There are several sub-sectors of commercial properties. The retail commercial property sub-sector accounts for 38% by value. Property types Within the retail sub-sector include shopping centres, supermarkets and high-street shops.
Offices are the second largest sub-sectors and Industries are the third largest. Industrial commercial properties include factories, warehouses and industrial units. Other types of commercial property include healthcare, car parking and leisure establishments, such as pubs, gyms, restaurants and hotels.
To lease a commercial property, you must sign a commercial lease which is a legally binding contract between a business tenant (your company) and a landlord. The commercial lease provides the tenant with the right to use a specific property for commercial activity for a set period in exchange for a payment (rent) to the landlord.
The rights and responsibilities of both parties will also be disclosed within the commercial lease, along with other details such as address and type of property, term of the tenancy, rent (how much and how often), and the type of business the property will be used for.
How to lease a shop
Several steps need to be taken to lease a commercial retail space. Each stage requires significant thought and consideration from both the tenant and the landlord. As a tenant, you must ensure that the commercial retail space will be a sound investment for your business, and landlords will also want to achieve the maximum benefit from the commercial property lease.
Location
The first step in leasing any commercial property is to think about location. As a business owner, you must conduct research on various locations and commercial properties before deciding on leasing a commercial retail space. you'll need to ask yourself the following questions:
- What kind of retail property are you looking for?
- How much space do you need?
- What kind of on-site amenities do you require?
- What kinds of first impressions do you want to leave?
- Where do you want your property to be situated?
Rent
Once you have a better understanding of what commercial property you're looking for, it's important as a business owner, that you consider how much rent you can afford because it will be one of the main business costs you encounter.
Rent is typically paid quarterly, but your landlord may have other arrangements that will be set out in the commercial lease. Also, businesses are often asked to provide a guarantee for the rent, so you need to ensure that you have considered this when deciding on a commercial retail space.
If you enter into a long lease, which can last up to five years, the amount you pay over time might be altered. it's important to understand that this could increase or decrease the rent, depending on the terms of the lease. In recent years, retail property has experienced a shortening in lease lengths because occupiers have tended to prefer greater flexibility.
Heads of Terms agreed between parties/agents
Heads of Terms outline the main points of the transaction that have been agreed in principle between the tenant and landlord. They also outline the timeline and obligations of both parties during the negotiation stages.
It’s important to understand that, while they serve as the foundation for legal drafting and are an indication of serious intent from both parties, Heads of Terms are not legally binding.
Solicitors instructed
When considering how to lease a shop, you must appoint a solicitor. Once a solicitor has been appointed by each party they'll be sent the Heads of Terms. Your solicitor will discuss what you intend to use the property for and whether any work needs to be done to the property for you to use it for that purpose.
Speak to a commercial property lawyer
Commercial lease drafted
The lease will be drafted by the landlord's solicitor and title documents, energy performance, and responses to Commercial Property Standard Enquiries (CPSEs) will be provided by the landlord's solicitor.
CPSEs are the typical property enquiries raised on a commercial property lease. it's important to note that it's the landlord’s responsibility to thoroughly check the enquiries, and give answers based on their knowledge or investigations of the property.
Tenant’s due diligence
Once your solicitor has received the lease papers, they'll conduct due diligence per your specifications. Due diligence is the process of understanding the property, the terms of the lease and the way the tenancy will work.
When performing due diligence, your solicitor will look out for any hidden costs, evaluate the terms of the commercial lease, check local laws and also conduct a background check. Due diligence will also entail investigating the title and the property's planning position; property searches on a commercial lease will also take place and be reviewed and enquiries raised by your solicitor. If you and your solicitor fail to perform due diligence, the commercial property lease could negatively impact your business and expose it to financial risk.
Lease agreed and reporting
Once your solicitor has conducted due diligence and is satisfied with the information, the commercial property lease may be subject to further negotiation and then and agreed upon.
Lease completed
After the negotiations have taken place and an agreement has been reached, you and the landlord will sign the respective parts of the lease. Once it has been signed, the lease will come into force, you take possession and the rent will be due to the landlord.
How to negotiate a Commercial Lease Agreement?
As mentioned in the previous section, an important part of the commercial property leasing process is the negotiation stage which should be completed at the start of the agreement process. When you're thinking about how to negotiate a commercial lease agreement, consider the following factors:
- Requesting a rent-free period or rent incentive such as a period of paying half rent
- Agreeing that you can take the lease out in a company name rather than your name – taking a lease out in your name can expose you to significant personal liability; not all landlords will agree to this because they may want some security, but it's a good term to include
- Requesting a break clause – this will give you the right to end the lease early, which affords you some flexibility in that, while you may commit to a 5-year lease, you may be able to terminate the lease early
- Limiting your repairing obligation – where possible, try to limit your repairing obligation as you may be required to repair inside or outside of the business
- Checking that your lease complies with the Landlord and Tenant Act of 1954
As a business owner, you may also want to seek legal advice during the negotiation stages. Speaking with a commercial property lawyer will help you through the process.
How long does it take to sign a commercial lease?
Leasing a commercial retail space is an exciting venture and can be a long-term investment into your business. Therefore, it's important not to rush the commercial leasing process, otherwise you run the risk of signing a restrictive lease that will not benefit your business. Before you sign the lease, you must ensure that you're satisfied with the agreement, so as not to be tied into a lengthy contract that could harm your business in the long term.
The renting process of any commercial property can take a long time, because of all the thorough checks completed by both the tenant and the landlord. While some very short leases have a period of a couple of weeks, you should allow six to eight weeks from the time you receive the Heads of Terms from the agents to the time you sign the commercial property lease.
How to terminate a commercial lease?
In the event that the premises are no longer suitable for your business, or your company is struggling financially, you might need to consider how to terminate a commercial lease. Here are some options to consider when thinking about how to end a commercial lease:
- A legal break in the lease – some leases include a 'break clause,' which allows both the tenant and the landlord to end a lease after a predetermined period
- Negotiating a lease termination – if no break clause has been included, your landlord may be willing to negotiate an early termination (this should provide a clean break in terms of your liabilities, but you would need to seek professional advice to ensure that you have no further legal obligations to the landlord)
- Costs of early exit – you would have to pay for professional advice for yourself and, most likely, your landlord solicitors and possibly a conveyancer would be involved, so the longer it takes to negotiate a deal, the more expensive it will be (you'll need to weigh up the cost of continuing the lease, against the early exit costs to determine which option is more appropriate for your business's financial situation)
- Assigning a commercial lease - if there is no break clause and the landlord is unwilling to negotiate a lease termination, you may be able to assign it to a third party
Get legal assistance from LawBite
Leasing a commercial retail space is a significant step for your business, and at LawBite, we understand the complexities involved. Our expert commercial property lawyers are here to guide you through the entire process, ensuring a smooth and legally sound experience.
Navigating the nuances of commercial property leasing, from Heads of Terms to the final lease agreement, requires diligence and expertise. Our dedicated team provides tailored legal assistance during negotiations, lease drafting and due diligence, safeguarding your interests at every turn.
Don't let the excitement of a new venture lead to rushed decisions. Take advantage of our expert advice on negotiating lease terms, understanding legal obligations, and seeking optimum flexibility for your business. Our commercial property solicitors are committed to empowering you with the knowledge and support needed to make informed decisions.
As you embark on your commercial property journey, trust LawBite to be your legal partner. Explore a seamless leasing process, where clarity meets expertise, and make the right choices for your business's future. To speak to one of our expert commercial property lawyers, book a free 15 minute consultation or call us on 020 3808 8314.
