Using your power as a tenant

In the current market, commercial tenants are now in a position to negotiate more favourable lease terms, writes Bonita Backhouse, a senior associate from law firm Thomson Snell and Passmore.

These are the areas you should consider when negotiating a lease:

Previously, landlords would insist on long terms, maybe five or ten years. The market has now shifted towards shorter terms, maybe three or six years.

Break clauses
Ask for a break clause and consider this in conjunction with the length of term. For example, a six-year term may be acceptable if there is a break at three years.

The principle is that if a business is successful a tenant can remain in the premises for the whole of the term, but if the premises become a liability, there is an option to break. Most break clauses are tenant breaks, but break clauses can be mutual. A mutual break can move the balance of power back to the landlord.

Break clauses can be tricky: remember, the devil is in the detail!

Rent review
Landlords are still looking for the traditional open market rent review, but it is worth asking for an alternative type of rent review. The most common alternative is an upwards/downwards rent review. This means that the rent reflects the current market.

A landlord may not agree to an entirely floating rent review, but one with a ‘cap and collar’ may suit both sides. The ‘collar’ will stop the rent falling below a minimum level aiding the landlord’s cash flow. The ‘cap’ will prevent the rent going above a maximum sum which can aid the tenant’s budgeting.

Instead of agreeing a reduction in headline rent, the landlord may be more amenable to a concession. Ask for a rent-free period, maybe three or six months or request a contribution towards ‘fit-out’ costs.

The negotiation of all commercial leases is complicated by the Landlord & Tenant Act 1954. This Act gives tenants the right to remain in the property at the end of the term of their lease and can give other useful rights to tenants.

See also: Should you continue to lease or buy your own property when growing?

Nick Britton

Nick Britton

Nick was the Managing Editor for when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...

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Commercial Property