The first decision to make is whether you would benefit more from a freehold or a leasehold property. The advantage of a freehold is that it belongs to you and you can do with it as you wish: however, it is also a major capital investment to fund from the outset, not to mention it commits you to a specific location. For a young, growing business this may prove to be too much of a commitment and tie the company down.
A lease on the other hand is for an agreed period of time only, so is useful if you wish to move, though it does place you somewhat at the will of the landlord, potentially making you liable to pay rent and possibly service charges. A licence or a tenancy at will is even more flexible, but it would not be transferable, it may involve sharing occupation, and is usually a very short term arrangement.
When choosing a lease, the first point to consider is that the landlord is likely to ask you for a rent deposit as security, so either ensure you have funds available or be prepared to offer a compromise on the lease terms, such as offering guarantors.
Secondly, it is important to remember you will need the landlord’s consent to make alterations to the property. If the works are vital, it is best to agree them with the landlord from the start to save the risk of the landlord refusing consent in the future.
Before moving in, check if the landlord is planning works to the building or estate which may increase your service charges, and ideally try to cap the annual service charge for which you will be liable.
When negotiating lease terms, remember that any clauses that benefit you as tenant can also count against you at rent review because a more tenant-friendly lease could be valued as ‘deserving’ a higher rent.
For some smaller businesses it can make sense to share space with related group companies, other businesses or customers to cut down on rent. However, it’s important you check this with your landlord – a specific clause permitting this will be necessary.
If you have an option to renew or a break clause, make a careful note of deadlines for serving notice to exercise them and seek legal advice well in advance to ensure that you do not lose the right.
When it comes to moving out, make financial provisions and arrangements with contractors well in advance so that dilapidations obligations will not come as a shock and think carefully about your exit strategy.
For instance, do you need a break clause or the ability to assign or sub-let all or part of the premises? You will probably have to obtain the landlord’s consent to do so at the time and will have to pay its costs.
The landlord will want to impose conditions such as you effectively being the guarantor for the new occupant, so before entering the lease, consider the conditions you would be prepared to offer.
If moving premises, consider entering an Agreement to Surrender with your current landlord and an Agreement to Lease with your new landlord: if you exchange both Agreements at the same time, you will then have the contractual certainty of a completion date for the end of your old lease and for the start of your new lease.
It is important to seek advice from a lawyer and surveyor early on so as to avoid long-term issues.
Gemma James is a partner at Mundays