Commercial Property

I have just read the September Commercial Development Activity for September 2010 and, that coupled with comments made by one of my golfing partners at the weekend to the effect that there are more redundancies coming from residential developers, has deepened my pessimism.

If the market is as bad as it seems I do wonder why more tenants, when looking for commercial premises are not driving harder bargains.  This is an issue that we Commercial Lawyers have gone on about for a number of years but it is worth another airing.

Commercial tenants, even quite large companies, seem to go into the market without proper protection.  Some seem to accept what the letting agent tells them.  The point to bear in mind is that the letting agent is not acting for the prospective tenant but is employed by the landlord to get the best delay.

Some tenants will negotiate to get a rent review but do not think of the other issues. Here are some points that also need to be considered:

1. Why are you taking on a full repairing lease particularly of an old building on a short lease? What happens if you have to meet a major expenditure? Will you ever recoup the money spent?

2. Why are you taking a lease for 21 years? Why not have greater flexibility?

3. Why is the rent review upwards only?  That can mean that even if the rent is right now at review you will be paying too much rent, which means that if you want to move you will find it difficult

4. Why are you paying the landlord’s legal cost? He is lucky to have you interested; he should probably be paying you.

I could blog on for pages about this but I am sure the point is made.

So what is the solution?

The best method is that before you agree the terms discuss them with a commercial agent that you instruct, just to make sure that what you are being told is a good deal. The agent can just point you in the right direction.

You can go back and renegotiate. That is the cheapest course or you can instruct the agent to act on your behalf. The likely cost you will incur in his fees will probably be nothing to the savings you will make over the term of the lease

Hemant Amin, a commercial property specialist with law firm, Charles Lucas & Marshall, argues that tenants are often at a disadvantage when negotiating a commercial lease.

It has been widely recognised that the tenant is often at a disadvantage when negotiating lease terms. As a result, The Code for Leasing Business Premises in England and Wales 2007 was introduced in 2007. It makes several recommendations as to achieve a fairer balance between the landlord and the tenant and greater flexibility in commercial lease terms.

Typically a tenant will negotiate lease terms with a landlord’s agent. This immediately places the tenant at a disadvantage as negotiation takes place before the tenant’s solicitor becomes involved.

Ancillary to the Code is ‘Leasing Business Premises: Occupier’s Guide’. Its purpose is to give the tenant information which will assist at the negotiation stage of the transaction. From the tenant clients I have acted for, I have yet to hear of anyone who has used the Occupier’s Guide when negotiating lease terms with the landlord’s agent.

In July 2009 the Department of Communities and Local Government published a report on the Code. It concluded that awareness of, and advice in the Code was limited and that it played only a minor role (if any at all) in negotiations.

There still exits a view that negotiations on lease terms are flexible and fair and that the Code was unnecessary. From a tenant’s perspective, it is a shame more is not done to promote the Code and Occupier’s Guide.

Time and time again, tenants who fail to take advice are blissfully unaware of the full implications of taking on a fully repairing and insuring lease. By the time the tenant has agreed the terms of the lease with the landlord’s agent and the heads of terms have been circulated, it is difficult for the tenant’s solicitor to renegotiate terms.

Current market conditions favour the tenant and this has certainly helped the tenant’s negotiating position – rather than the Code. In fact, given the current market conditions, it could be argued that the tenant should expect even more favourable terms than those recommended in the Code.

However, market conditions do change and as the market recovers from the recession we may see a return to the bargaining position which prompted the release of the Code. The Code and Occupier’s Guide could act as a good starting point for negotiations, regardless of market conditions.

One issue raised in the Report was that solicitors do not get involved early enough in a transaction to influence terms. My recommendation would be to discuss the terms proposed with a solicitor, prior to agreeing the terms with the landlord’s agent and the issue of heads of terms.

If you are considering taking on a commercial lease in the near future or are currently negotiating on lease terms contact Hemant Amin of Charles Lucas and Marshall for advice on 01635 521212 or hemant.amin@clmlaw.co.uk