It’s vital that you understand the financial responsibilities for your business. No one wants to be caught off guard with unexpected costs. The costs involved with a commercial tenancy are not always evident. Here we explore the costs and considerations that may be required by a tenant in a commercial lease.
Introduction to a commercial lease
A commercial lease sets out the tenancy arrangement for a business to occupy a premises. The lease itself is a legally binding agreement between the landlord and tenant aimed at setting out the key rights and responsibilities for each party.
Is it essential to understand the costs involved in your lease to ensure that you can commit. If payments cannot be met then you risk breaching the lease.
Annual rent
The main cost consideration for a commercial lease is often the annual rent. This is usually the highest cost within a lease and typically calculated on the size and use of the business premises. Most leases have a base annual rent payable either quarterly or in monthly instalments.
The annual rent is not set in stone and may change throughout the lease. It is important to understand whether there is a right for a rent review. Rent reviews alter the level of rent paid and can occur more than once in a lease term.
Nonetheless, if you do not pay your rent on time, then the landlord may be able to charge an additional interest fee for late payment.
Types of tenant costs
Although the annual rent is often the key figure in mind, it does not stop there and more cost considerations need to be noted.
Security deposit
It is likely that your landlord will require a security deposit. This is typically based on 3 to 6 months’ annual rent and is an upfront cost payable on completion of the lease so will need to be readily available. Deposits are provided for within a Rent Deposit Deed read ancillary to the lease. The Rent Deposit Deed primarily clarifies which occasions the landlord can access the funds, such as a tenant default in payment of annual rent, or repair obligations.
Insurance
Insuring the premises is usually the landlord’s responsibility and will be dependent on the provisions of the lease. Where the landlord insures, they typically recover the cost for the premium from the tenant via the ‘insurance rent’.
Service charges
A service charge may be payable for maintenance of the premises and/or the communal areas. For example, reimbursing the landlord for providing fire equipment, or structural maintenance to the building.
Maintenance & repairs fees
The lease will detail the repairing obligations of each party for the premises. Where the landlord incurs fees for maintenance they are likely to recover these through the service charge. Tenants need to be comfortable with the state and condition the premises is in at the outset of the lease and the wording of their repairing obligation. Repairs can be costly and need to be weighed up in light of the lease term.
Nonetheless, the lease will provide for how the premises should be returned at the end of the term with reinstatement of any works and full repairs likely. The landlord can claim for dilapidations in restoring the premises following termination of the lease.
Permission costs
Where landlord’s permission is required under the lease, their costs are usually agreed to be covered by the tenant. This is typically for alterations, assignments and underlettings of the lease and premises. Costs include liability for their legal, consultant and professional fees.
Utilities & Rates
Generally the tenant pays and directly commissions the utilities, business rates and contents insurance for the premises and their business use. Where these are incurred by the landlord they are likely to require reimbursement through the service charge.
VAT
It is worth bearing in mind that many of the above considerations likely payable under a commercial lease are potentially subject to an additional payment of value added tax (VAT). VAT is payable on all relevant sums under the lease where the landlord is VAT registered and has opted the premises for tax with HM Revenue and Customs. With VAT currently at a rate of 20% it is worthwhile ascertaining the VAT status of the lease from the outset.
Stamp Duty Land Tax
Although stamp duty land tax (SDLT) is regularly a consideration for purchasing property, it is also applicable on the grant of a lease. SDLT liability is assessed on a calculation of the lease provisions weighed against the tax criteria. SDLT is a self-assessed tax and you will need to be comfortable whether a liability is due from the outset as payment is required within 14 days from completion of the lease.
Negotiating tenant costs
We recommend using an experienced commercial property agent to negotiate the lease provisions and advise on appropriate rents for the business premises. In the first instance, heads of terms can be utilised to set out the key points of the lease and kick start negotiations. Additionally, your accountant will also be a good point of reference to ascertain the breadth of the business on future cost liabilities. Commercial property solicitors work closely with agents and accountants to ensure that your transaction is streamlined.
How Goughs can help
Our Commercial Property Solicitors at Goughs appreciate that every lease is different and every business is unique. We can help you understand the costs associated with your lease and ensure you are comfortable with your obligations from the outset.
