Moving to a bigger space is one of the remarkable milestones of a business owner. In your journey to finding a new home for your business, there are some factors that you should consider before signing a commercial lease agreement.
While it’s best to have a professional to be on your side throughout the process, it pays to weigh the pros and cons on your own before a decision becomes set in stone. There’s no denying that renting a space is a risky move for a business.
Exerting your due diligence in finding the best space is one of the best steps that can save you from profit loss and a lot of future problems that are out of your control.
As a group of professional chartered surveyors in London, Phoenix & Partners has seen a lot of businesses that flourish and a fair share of those that failed to stay afloat in their new space. After several years in the business, we noticed some consistent factors often overlooked by tenants during the selection process.
In this post, we will share twelve tips every tenant should consider before signing a commercial lease. Sometimes luck in a location of a business is the outcome of preparation and hard work. At this stage, your preparation is what you’re investing in.
12 Things to consider before signing a commercial lease in the UK
Every country has specific zoning real estate laws that will affect the way you can rent a commercial space. We included the country-specific and general factors for consideration for commercial space leasing in the UK. First on our list is your budget.
1. Can your budget cover the costs?
The cost of renting a commercial space is no joke, not to mention all the other fees tangled with it. If you’re planning to rent your first physical store, you have to make sure that you can sustain the on-the-spot and ongoing fees of commercial space.
Oftentimes, the attention of the tenants is fixed on the monthly rent and projected monthly operational expenses of their business. With pale faces, their decisions are challenged as soon as all the fees are laid out in the head of terms agreement.
In the UK, the overall costs of renting a commercial space usually involve the following:
- Deposit: The deposit in a commercial lease is worth three to six months’ rent. It’s a pretty hefty amount of money that financially secures the landlord in case anything happens during the lease term.
- Rental costs: The rental cost of the commercial space is the agreed amount between the landlord and the tenant. The base rent is not set in stone and oftentimes, landlords set the bar high because tenants usually bargain for a lower amount. According to a survey in the 2nd quarter of 2021, commercial spaces in London from West End to Bond Street have the most expensive rent which is at £2,150 per square foot. The cheapest rent, on the other hand, is in Bristol at £95 per square foot.
- Service charges: The service charge is an amount paid by the tenant on top of the rent for the maintenance and repair of shared facilities. The service charge is often intended for the following facilities:
- Outdoor spaces like paths, gardens, and roads.
- Salary of the estate staff.
- Insurance for the common areas.
- Fees for maintaining the regulatory and safety compliance (fire hazard or emergency equipment).
- Utilities: The utilities will be part of the monthly operating expenses of the business. If your business needs equipment that demands high energy, you may need to independently work with your utility provider to sustain the power load demand you need. The flexibility of the power load supply of commercial space is one of the attractive features to tenants if they use high-powered equipment.
- Maintenance and repair fees: The maintenance and repair fees are often part of the lease negotiation between a landlord and tenant. Some landlords may ask you to just pay the fees while some will give you the responsibility to shell out funds in maintaining and repairing the building.
- Stamp duty tax: Tax is another factor that you can discuss with your landlord. Some landlords may do the job of paying the taxes for you while others give tenants the liberty to pay for the taxes of the building on their own.
- Business rates: Business rates is a tax paid by the tenant for renting a non-domestic property. The average business rate in the UK is usually 50% of the annual rent of a commercial property. Due to the pandemic, the government set a 50% relief on business rates for eligible retail, hospitality, and leisure properties from April 1, 2022, to March 31, 2023. You are eligible for the relief if the property has been used as a:
- restaurant, café, bar, or pub.
- cinema or music venue.
- hospitality or leisure business (gym, spa, or hotel).
- Insurance: Commercial spaces in the UK require liability insurance before signing a lease. The insurance ensures a financial cushion for landlords in case of emergency and calamities like a fire breaking out in the property during the lease term.
- Rent reviews: Rent reviews are a process where landlords evaluate the real estate leasing market every five years and evaluate if they will raise the rent of the property. It is a variable cost that you can negotiate with your landlord at a lower rate before signing the lease.
- Dilapidation claim: One of the heated topics of commercial leasing is the dilapidations claim. It is a clause in a lease where tenants are required to restore the original structure and appearance of the place before the end of their lease term. These include renovating the place and removing structures to turn the place back into a blank canvas. A tenant may spend on the services and repair works needed or he/she may pay the estimated amount of repairs and renovations needed to the landlord.
Other factors that may affect the cost of the commercial space are the location, condition, and reputation of the building. Commercial spaces with low footfall have lower rates. So, don’t easily fall for the cheap rents. They are usually cheap for a reason.
2. Should you lease or get a license?
Aside from leasing a commercial space, one opportunity that business owners look into is a license. Both require the tenant to pay rent. They are also legally-binding agreements acknowledged by the court. A license is way cheaper than a lease. However, there are several differences. These include:
- Commercial leases require the commitment of the tenant to adhere to the lease terms and exercise the right of the landowner to keep some people out of the property. Whereas, a license gives a tenant fewer accountabilities and does not guarantee the right to exclusivity in the property.
- A license serves more like permission than a long-term agreement in terms of setting up a business for a specific purpose in a shorter period on a property.
- Unlike a commercial lease, there is less security involved in a license because their agreement can be revoked anytime the landlord wishes to do so.
3. Where is the location of your competitors?
The strategic location of your business can make or break your business in your new commercial space. Ponder the following questions in finding the best location to rent for your brand:
- Can your business survive if you rent a space near or beside your competitor?
- Is it worth the risk to compete in a location dominated by your competitor? If so, what are your plans to get the attention of their regular customers?
- Which area can you dominate before your competitor takes over it?
The location of the commercial space is indeed the hardest to find and negotiate with. This is the stage where a chartered surveyor or real estate professional can become very helpful to help you meet the best locations and the nicest landlords in an area for a lower price.
4. Where is the best strategic location for your business?
Aside from considering your competitive advantage, you should also consider the efficiency of delivering your products and services to your customers. Check if the location allows you to provide faster shipping of products, better ambiance for the customers, and close to high foot traffic like schools, universities, or train stations.
5. What are your non-negotiables in a lease?
On the legal side, it’s equally important to set the things that you agree to be responsible for and the parts that you can compromise or negotiate in a lease agreement. By setting a non-negotiable list, it will be easier for you to find the property that can match your expectations in the commercial space without sacrificing your business needs.
The negotiation process in renting a commercial pace can be grueling, especially in highly competitive areas. So, staying firm and persistent is a skill that you need or will develop throughout the process.
6. Are there any zoning laws or incentives that you can take advantage of?
In the UK, some unique benefits can help lower your rent costs. Look into these opportunities and see if you can opt for a location where they exist:
- Local Enterprise Partnerships (LEPs)
- Enterprise Zones (Tax breaks and business rate exemptions)
- Structures and Building Allowance(SBA) (Allowances)
7. Can you use the changes in the use class order to help you save on costs?
In September 2020, the use class order in the UK was changed to adapt to the changing retail scene in the country. Most of the class A properties like shops and retail spaces are now in a broader category under class E. Check out the changes in the use class here.
The advantage of the new use of class order is it gives commercial properties a leeway for a mixed-use setup. For example, a shop owner can opt for an industrial office under Class E which is way cheaper than a shop on the high streets of London.
8. What are the nuisance laws, amenities, and the history of the surrounding environment?
Nothing beats asking the locals around your prospect area about the history of the building you’re looking into renting. They can tell you things that your landlord will not tell you. These include the reason why the previous tenant left, the incidents that happen in the place, and why it is rented for a very low price.
Another attractive thing to look for in a location is the availability of amenities like nearby distribution centers, government offices, and markets where you can conduct marketing campaigns.
9. Can you make any modifications or expansions in the building?
If your business follows a certain theme in the physical store to maintain branding awareness, you should consider sharing your plans for modifying the place with the landlord. Some properties are not subject to any modifications, especially if they are classified as listed buildings.
One part of planning for your business is considering the possibility of expanding your space within the building in the future. You should discuss these possibilities with your landlord so you can arrive at a mutually-fulfilling agreement like discounts and reservation perks.
10. Does your lease include a parking space and rights to open spaces?
Parking spaces and gardens in a mixed-use building can be a breeding ground for disputes if it’s not indicated in your lease agreement. Other tenants may overuse or claim the area which may affect your daily working environment. Check if the space offers you and your staff exclusive parking spaces and area in the open spaces within the property.
11. Is the commercial space near the transport links and delivery hubs?
A store or shop that is easy to find helps boost the customer experience and satisfaction rate of a business, especially nowadays where online trade is the norm. Setting your shop close to transportation links ensures the smooth delivery of your products and services.
12. Is there reliable internet service in the area?
In this technological stage, having a fast internet service in your commercial space gives you an advantage over your competitors. We live in a world where connectivity has become a necessity. It keeps your business systems running, maintains the online sales process, and allows customers to find and have access to your services.
Check the local internet service providers and their customers in the area about their experience. A Wifi-ready commercial space helps your budget since you no longer need to register for an installation which usually comes with a fee.
As the saying goes, reaching the top of a new mountain gives you another mountain to climb. Renting commercial space is indeed an extensive task that requires in-depth knowledge of the local market as well as some negotiation skills to get the best location for your business.
Always remember that as long as you have not signed the commercial lease agreement, you still have a choice to cancel the deal and find another place that works for you. Don’t be afraid to find a property that will perfectly fit your budget, needs, and preferences in a landlord-tenant relationship.
Discuss your commercial space concerns with a professional
Going through the commercial leasing process alone is a very risky endeavor. Let a professional chartered surveyor help you navigate the local commercial property market. Richard Phoenix is a real estate expert in London that helps match business owners with the best commercial properties for their needs. Schedule an appointment today and get the expert advice you need for a better business transition.
Commercial leasing FAQs
How do you complete a commercial lease?
Unlike leasing a house, commercial property leasing is an extensive and long process. There are six stages to completing a commercial lease in the UK. These include:
- Heads of terms preparation.
- Consultation with a solicitor.
- Drafting the lease agreement.
- Agreement review for both tenant and landlord.
- Final lease agreement preparation.
- Signing the lease agreement.
What rights does a commercial tenant have in the UK?
Commercial property tenants have protected rights under the Landlord and Tenant Act 1954. Some of them include:
- Right to Exclusivity which states that they can decide who can enter the commercial space
- Right to continue with the tenancy unless he/she violates any of the indicated exceptions in the Act of 1954.
What makes a commercial lease legally binding?
A formal lease is legally binding when it has been reviewed, agreed upon, and signed by both the tenant and the landlord. The agreement will also be dated for reference.
Can the landlord change locks without notice in a commercial property in the UK?
A landlord can change the locks of a commercial property when the rent is in arrears for a certain number of months. The tenant cannot barge into the property and destroy the new locks as it will become a criminal offense.
Can a landlord enter a commercial property without permission in the UK?
No, the landlord should provide a notice 24 hours before he plans to check on the property. He/she can only enter the property through an agreement with the tenant.