Negotiating heads of terms for a letting (tenant’s perspective)

For all commercial businesses one of their main liabilities will relate to the properties that they occupy for the purposes of their business; whether owned outright or occupied under a lease. Where negotiating a lease the tenant should be seeking to minimise or limit their potential liabilities and to ensure greater flexibility as to what they are permitted to do under the lease.

Many occupiers, particularly retailers and leisure operators, are very experienced in lease negotiations. A number of other businesses however do not take leases on a regular basis.

There will be a wide range of operational and practical issues which a tenant needs to consider ranging from the energy efficiency of a building to the electricity capacity – particularly when a tenant is taking space in quite an old building it is important to check that the building actually has enough power to cope with the modern 24 hour use which many tenants now require and the demands of modern IT.

It is always tempting to quickly agree heads of terms when the tenant is under pressure to find new space. However, making sure you agree all the key issues at the outset will ensure that negotiations proceed more quickly and efficiently – it is not just a question of agreeing the rent and the term.

Key issues on heads of terms

• Tenant's break right – include a tenant's break right at certain points during the lease term (eg 5 years / 10 years) on service of a fixed notice period. You should try very hard to resist the imposition of any other pre-conditions (i.e. compliance with terms in lease) as the wider the conditionality for the break, the greater the chance that the break right could be frustrated where exercised by the tenant.
• Additional rent free – also you might suggest where there is a tenant’s break right in the lease that the lease include an incentive to remain in occupation of the property; eg 6 month rent free post the break date if the break is not exercised.
• Service charge - you should (particularly with short term leases) seek to negotiate a service charge cap that is linked to RPI increases. This will provide greater certainty over expenditure under the lease (or part of it) - and protect against unexpected surprises.
• Repair obligation - try to limit your repair obligation (eg no replacement of carpets etc or no dilapidations liability). To provide additional certainty you might want to agree a schedule of condition for the property. The tenant will be required to put the property back into the condition as detailed in the schedule of condition.
• Statutory obligations – a lease will normally require the tenant to carry out any works required by any statute or other legal obligations. In the case of a 15 year lease that may be fine. However, a tenant taking a short term lease of, say, 5 years or less will want to limit their potential liability to undertake works which statute may require going forward.
• Underlettings - depending on the nature and size of the property, you should consider whether it would be possible to underlet parts of the property to separate occupiers and if so on what basis. Your need for space may change over time and the ability to underlet the whole or parts of the property may significantly assist cash flow in the future.

If you are seeking to negotiate a new lease or would like further advice on the above, please contact Robert Patterson.