In this feature, Shayne Foley of Keystone Law explains the various tactics tenants can employ at the outset of negotiations to ensure a good deal.

By Shayne Foley, Keystone Law

In the current tenants' market,Shayne Foley outlines the tactics available to get the best deal when entering negotiations for a new lease.

The recession has torn up the traditional rules regarding landlord and tenant bargaining positions with, in most cases, the balance shifting to the tenant. As Shayne Foley explains, there are various tactics tenants can employ at the very outset of lease negotiations to ensure a good deal.

If your business's accommodation needs are growing, now is an excellent time to consider securing space into which to expand. Conversely, if they are diminishing, you may be surprised by how flexible your landlord will be to work with you through this difficult time.

Once you have identified suitable premises, the usual starting point is for the landlord or their agent to supply you with a draft ‘heads of terms' for negotiation. Although these terms are not legally binding, they will have a huge bearing on your final lease and it is therefore vital that you consider them very carefully and take legal or other professional advice before you sign them.  The clearer the terms, the less protracted and costly the actual lease negotiation should prove to be.

So, what should you look out for when negotiating the heads of terms?

Landlord's security: from the landlord's perspective,the better the strength of your covenant, the less likely you will be to default on your lease obligations, particularly the payment of rent. You will be expected to present accounts and other business details for the landlord's consideration.

Landlords will frequently demand security against the risk of a tenant defaulting. The usual forms being either:

• A rent deposit, ranging from 3-12 months’ rent equivalent to be paid in advance and held by the landlord in a separate designated interest bearing account; or
• A guarantor, most frequently a personal guarantor, company director or from a parent company.

Consider demanding an early repayment, either whole or part of the rent deposit during the lease term if the tenant can demonstrate financial soundness.

The premises: It may appear obvious, but the precise extent of the premises should be clearly identified at the outset. The landlord should supply up to date plans. The terms should explain any associated rights, such as parking, storage and hours of use.

Rent, rent-free and other concessions: It is advisable to take independent valuation advice on the rent and other rental concessions such as rent-free periods.  As a very minimum, the initial rent-free period should reflect the time and cost it takes to fit-out the premises to the tenant's specific needs. In a depressed market, landlords are frequently willing to extend this period in an effort to entice new tenants.

Rent review: For leases exceeding three years, landlords will almost certainly wish to protect their asset's long-term value by having the right to review the rent during the lease. Again, this is a matter for valuation advice. Tenants often favour Retail Prices Index (RPI) rent review mechanisms because the rent increase is generally less susceptible to dramatic increases than the more traditional Open Market Value (OMR) process. RPI reviews are also usually settled more quickly and are less expense than OMR reviews. 

Lease term and break options: Generally, lease terms range from three to ten years. The longer the term, the more important it becomes to secure ways of terminating the lease early should your business's circumstances change. The best way to achieve this is through a break option in the lease, which can either be exercisable at a fixed date (say upon the third anniversary) or at any time after a particular date (known as a rolling break). Ensure that the only pre-conditions to exercising a break are the full payment of rent and other sums owed and the vacation of the premises.  Landlords may seek an "exit penalty" whereby the break is conditional on the tenant paying a pre-agreed amount. If you are in doubt you should seek advice.

The service and validity of break options are usually construed strictly by the courts. If the break notice is served late or by an incorrect delivery method, it risks being invalidated with the regrettable consequences of the lease continuing. It is therefore vital not only to diarise the relevant break date well in advance, but also to take legal advice in respect of the actual service.

Alienation - your right to assign the lease or underlet the premises: Break options are not the only method to unload your lease burden. It is standard practice for tenants to have the right to either assign (transfer) the whole of the lease or underlet the whole of the premises, subject to the landlord's prior written consent. If you do assign the lease, you will have to guarantee the assignee's (incoming tenant's) performance of the lease covenants.

Depending on the layout of the premises, it may be possible to underlet in distinct units or entire floors. Consider requesting a right to underlet an entire floor or a predefined or designated part.

Repair: Generally, you will be required to keep the premises in "repair" and return them to the landlord at lease expiry in good condition.  Clearly, if the premises comprise the entire structure, roof and foundations, this can be a major commitment and potential risk on the tenant's part. If so, you should have the premises fully surveyed and identify any problems at the outset, attaching them to the lease in the form of a professionally prepared ‘schedule of condition'. The terms should be clear that the tenant is not responsible for putting the premises into any better condition than that evidenced in the schedule.

Alterations: The lease will almost certainly require the landlord's consent to non-structural alterations. In order to avoid depleting any rent-free periods, you should prepare any works or fit-out specifications as early as possible to ensure that the appropriate landlord's consent, a ‘licence to alter', is available upon completion of the lease.

Hidden costs: These may include:

• Service charges: In the vast majority of cases, the landlord will provide services to its tenants, especially in multi-let buildings or those on large estates. You pay a fair proportion of the costs of these services, which the landlord recovers under its service charge regime. The service charge can fluctuate and therefore you should request as much information as possible at the outset. If you are concerned about potential future costs, make it clear that you do not expect to contribute towards major items of capital expenditure nor for empty premises elsewhere in the building. Finally, ask for a service charge cap.
• Insurance: Generally, the landlord will insure the building and estate within which the premises are located and recover a proportionate cost from its tenants. Ascertain the likely costs at the outset. The landlord should have detailed records.
• Stamp Duty Land Tax: this is a tax based on the lease's cumulative rental value over the term, payable to HM Customs and Excise within 30 days of the lease.
• Rates: Business rates are payable directly to the rating authority by all occupants. Request the information from the landlord or enquire directly of the rating authority. 

Finally, each deal is different and throws up a unique set of facts. The whole process can take longer than you would expect. Do not hesitate to get the professionals involved at the very earliest stages of the negotiation. By doing so, you could save yourself valuable time and costs in the long run.

Shayne Foley is a solicitor in the Keystone Law commercial property team and will be happy to assist you in relation to any property issues, visit www.keystonelaw.co.uk.