Bricks and mortar of a commercial lease: The top 5 things your startup needs to know

Taking a commercial lease of a property is complex and likely to be different to any other legal deal your startup will do. Alongside all of your startup considerations, such as applying for funding, setting up your startup comes potentially trying to find a property to trade from. A new property is exciting and will give the business opportunities and the environment to grow but will also be a significant financial investment.  Our legal partner Lawbite outline the top 5 things your startup will need to know below.

From a legal perspective it is vital to ensure that:

  1. The terms of lease that you negotiate suit your startup needs
    2. That you are aware of all of the actual and potential financial implications relating to the lease and property
    3. That you can run your startup and use the property as you intend and that there are no restrictions affecting the property that would prevent you from doing so.

Sitting behind the “contract”, i.e. the lease, we have to consider Land Law, Environmental Law and Planning Law together with the day to day practicalities such access to and drainage from the property and the right to use the Internet and other services that you will need.

So when you have found your ideal property it is important that all bases are covered in investigations and it is our job to help you ensure that you have the information that you need.

 

The top 5 things your startup needs to know are:

  1. Startup Buyers Beware

The legal principle that applies when you take a lease of a property is “let the buyer beware”. This means that the onus is on you to find out everything that you need to know about the property before you complete the lease. The Landlord is under no duty (except in very limited circumstances) to volunteer any information to you. So – if you don’t ask you won’t know.

 

2. Heads of Terms for Startups

The Heads of Terms set out at the negotiation stage what the main terms of the lease will be. They include, for example, the length of the lease, whether you have the right to a new lease at the end of the lease, whether you can end the lease early, repairing and service charge obligations, whether a rent deposit and/or guarantee is needed and what the terms of those will be, what you can use the property for, whether you can transfer the lease to another business or underlet if you no longer need the property, whether you can make alterations and how any rent review will be dealt with.

Heads of Terms set the tone of the lease and, unless certain things are spelt out very clearly, then there may be financial implications detrimental to you in the lease. We therefore recommend that you take legal advice on the Heads of Terms before finally agreeing them.

3. Repair – literally the bricks and mortar on your startup lease

When you sign up to a lease it is not as simple as just paying rent to occupy a property. You will have repairing and therefore financial obligations.

There are two main ways of dealing with repair in a lease:

1 a fully repairing and insuring lease (known as an FRI lease). This can be used when you are taking a lease of the whole building. In this lease you will be responsible for maintaining and repairing the building in the same way as if you owned the freehold. You will also pay to the Landlord all of the costs of insuring the building;

2 an “internal only” lease. This can be used when you take a lease of part of a larger property or building so you don’t maintain the building yourself but the Landlord is likely to want to ensure that they do not end up with any costs of repair. Therefore, through the service charge, they split the costs of repairing the structure of the building to all of their tenants. You will pay your share of the cost of maintain and repairing the building.

The wording of the repairing clause in the lease is extremely important, has been the subject of many cases in the courts and will decide what standard of repair you will be responsible for and is the main way of controlling the extent of your liability. You could for example negotiate at Heads of Terms stage that you only have to keep the property in as good condition as it is in at the date that you take the lease. In which case you will need to agree a Schedule of Condition. Without careful drafting you could find yourself responsible for costs to put the property in a better state than it was in when you took it!

4. Service Charge for your startup

Do you know how much the service charge will be? What will the service charge be used for? Is there a maximum level of service charge that your startup will have to pay?
This information will be discovered in the enquiries process carried out by your lawyers.

5. Stamp Duty for your startup

Startups often don’t realise that Stamp Duty Land Tax (called SDLT) can be payable on leases even if they are for 5 years or less. It will depend on the length of the lease and the amount of rent that you will be paying.

It is important to know if you will have to pay this on completion of the lease as it is payable within 30 days of completion. An SDLT Return has to be submitted to HMRC on your lease whether or not SDLT is payable, otherwise you may have to pay a penalty fee or interest on any late SDLT.

To conclude there are many considerations to take into account when you take on your property.

Lawbite prides itself on helping startups through the process by carrying out detailed due diligence investigations and explaining the complexities in simple plain English.

Jane Webber, LawBite Property Lawyer.

If you have any questions for Jane about any of these 5 things or any other legal aspect of your business you can have a FREE consultation by submitting a request here or calling the Lawbite team on 020 7148 1066 explaining that you’ve come via Startup Direct.

 

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