Good advice when negotiating heads of terms (HoTs) on a commercial lease can help tenants save expense, reduce delays, and get better business outcomes. Our checklist highlights the key points to consider.

Covenant strength

  • Paperwork and preparation: In general, there’s relatively little tenants can do at short notice to improve covenant strength. However, do cover the basics such as ensuring trading accounts are up to date and gathering any paperwork to show you’ve paid rent timeously on other premises you lease or have leased.
  • Covenant vs guarantee / rent deposit: If the landlord demands a guarantee or a rent deposit, use your trading accounts and rent payment history, where possible, to show that your covenant is strong and that no guarantee or rent deposit is needed.

Length of lease and break options

  • Duration: As a tenant, consider how long you wish to be tied into the lease. If you agree a longer lease duration, both you and the landlord should look to secure a break option (e.g. every five years).
  • Break option: You should also discuss whether any break should be tenant-only (recommended) or for the benefit of both parties. An alternative is a shorter lease with a tenant-only right to extend by giving notice to the landlord.

Inducements

  • What to consider: When asking for or agreeing to inducements from the landlord, tenants should take into account the nature of the property, what inducements have been agreed elsewhere, and how long the property has been vacant. You should also consider whether a capital contribution might be preferable to a rent-free period (e.g. to support a fit-out) or if both would be appropriate.
  • Other issues to explore: In negotiating inducements, you should also consider the cost of your planned fit-out, other long-term improvements you intend to make, and the lease duration. With a longer term that gives the landlord additional security or increased investment value, you should argue for a longer rent-free or a higher capital contribution.

Fit-out arrangements

  • Timing: Try to agree the fit-out with the landlord before the contract for the lease is concluded. This can help to prevent delays eating up any rent-free period and also reduce costs (since tenants are responsible for landlords’ costs associated with consenting to any alterations, including fit-out, if not agreed before conclusion).
  • Construction documentation and collateral warranties: Construction law is complex and you should take legal advice when negotiating or checking any contracts relating to construction and fit-out arrangements. If the landlord has recently refurbished or redeveloped, the tenant should ensure that the landlord procures collateral warranties for the tenant from the contractors involved.

Rights and obligations

  • Repairing: Depending on the condition of the property, tenants should explore whether the landlord should carry out any remedial works as part of the deal and whether there should be any explicit exclusions from your repairing obligation
  • Schedule of condition: If the property is in suboptimal condition, it’s worthwhile asking for a schedule of condition. This records the condition of the property at the start of the lease and limits your repairing liability, requiring you to repair only to a state no worse than the condition shown in the schedule.
  • Alterations: As a tenant, you should secure as much freedom as possible to alter without consent. This will avoid the time, cost, and administrative burden of obtaining the landlord’s consent.
  • Alienation: Tenants should secure as wide a right to assign and / or sublet as possible, making it easier to divest yourself, or shift the burden, of your obligations under the lease. You should also try to secure the right to share occupation with group companies and consider whether any rights for franchisees or concessionaires are required.

Rent and service charge

  • Basis of rent reviews: This is an important consideration for tenants (and landlords) and the HoTs should be clear on whether the rent will be reviewed against open market value or increased in line with the Retail Prices Index (RPI) / Consumer Prices Index (CPI).
  • Pros and cons: CPI / RPI rent reviews provide clarity but, from a tenant’s point of view, should always be capped. An open market review could result in zero increase or a rent increase higher than the index, depending on the local market, so come with greater uncertainty.
  • Tenant Works: Tenants should ensure that any works they have carried out to the premises are excluded at review.
  • Service charge: When negotiating the service charge, you should study the previous three years’ accounts and find out what share of the landlord’s costs are attributable to the property you want to lease. You should also ask to see the current and future years’ service charge budget and try to secure an annual cap, perhaps subject to an uplift linked to RPI / CPI.

Advice tailored to each client

Lindsays’ Commercial Property teams are on hand to help tenants with practical advice and solutions – right through from negotiating heads of terms to checking the terms of a lease or helping resolve an issue or dispute arising from an existing lease.

We can also connect you with surveyors, agents and other advisers who know the local market well. Together, we’ll use our expertise, local knowledge and understanding of commercial property realities to support your business.