The length of your property lease can be a crucial element to the success of your business. Whether seeking a short or long-term lease, business owners need to know the plusses and pitfalls of both options. Ensuring the lease terms are long enough for you to recoup your costs and make a profit should be at the top of your priority list.
It seems obvious, but negotiating as much flexibility into the terms and condition of your lease to best suit your business isn't as simple as listing all your business wants and providing them to a potential landlord. Considering first the differences between short and long-term leases may provide you with several different options from flexibility to security. Moving through to the negotiation process, agreeing to terms and moving into you new premises will take time and patience.
The Short & the Long of it...
Short-term leases provide businesses with the opportunity to test a new market, a product or a concept. Short-term leases include serviced offices, short-term office spaces, co-working / collaboration spaces, co-tenancy, and pop up shops / rotating retail. For the retail market, pop-up shops have grown in popularity and have a myriad of advantages. For office bound property searchers you may be best suited to co-working spaces where you can collaborate with other small business owners and entrepreneurs in the case of hot desks or collaboration spaces such as Queens collective, The Common Room, The Cluster, and Weco. Generally, a short-term lease option is best suited to businesses that are agile and can move quickly.
Know What You Are Getting Into
- Gives your business the opportunity to grow
- Won't over capitalise before your business is ready
- Time to establish yourself in a corporate / new environment
- Lower costs for overheads and utilities
- Little to no set up costs
- Recoup your investment quickly
- Test a market, a retail concept or a product
- Moving costs
- Lack of security especially if the business has found a location that is favorable
- Lack of stability
Long-term leases are just that, long term. Everything in a lease is negotiable including duration of the lease: most landlords will seek a minimum 1 year lease but savvy tenants can negotiate a clause to extend year on year, with as many as 10 one year renewal options.
- Increased stability
- Landlords are often more willing to make concessions to long term tenants
- No down time or disruption to the business when moving is required
- Rent doesn't necessarily increase each year, depending on the terms of the lease
- Exclusivity clauses can be included, i.e. this can guarantee that a direct competitor wont move into the same development
- Sublease options may be available on some long-term leases allowing for the tenant to turn a fixed cost into a variable cost
- A commercial lease is a large and complex document, negotiating this can be a long and daunting process
- Costs such as maintenance and repairs may be hefty if the property is not well looked after
- Business owners are locked into a long term lease regardless of business success
Negotiating the lease
Negotiation is the process whereby a landlord and the tenant (you) agree on the terms of a lease. It's an extremely important part of the leasing process where practically everything can be negotiated.
In many first time cases, inexperienced tenants will accept the first offer provided by a landlord especially if they are keen to secure the premises and are emotionally attached, if they accept the first offer or rush through this all important stage, they miss a great opportunity to secure a lease that is more suitable to their business. A lease should be negotiated in terms and conditions that enable smooth and successful operations of your business.
Take your time
Before any paperwork is signed, even before starting a commercial property search, take the time to consider the leasing needs of your business. When business requirements have been identified and you have successfully found the perfect property, you will start the to and fro process of the lease negotiations. This stage can go on for a long period of time so be patient and ensure that the business benefits from the new lease. Ensure that all agreements and promises are put in writing and agreed to by both parties.
Stick to your guns
Be prepared to walk away if you are not satisfied with the proposed terms of the lease.
Directors Guarantees, what you need to know
Directors will often be asked to provide a guarantee support for their company's obligations, typically requested with a party dealing with a company that desire extra security or protection for a transaction. They are sought for one of two main reasons; to ensure that the individual connected to the company remains interested in the ongoing success of the relationship and 2, relating to good credit; for parties dealing with a company to take guarantees from directors, especially in circumstances where the party dealing with the company suspects they may go into default or they do not have the financial means to fulfill all it's obligations.
Guarantees are provided as financial accommodation from a financier, leases relating to premises, sales contacts as well as many other commercial arrangements. They are often drafted for a time period that extends well beyond that of the business you may wish to operate, so reading between the lines is extremely important. Before jumping into providing a guarantee, it's important to understand how your obligations can be limited for you, other directors of your company and the business itself. There are several types of guarantees such as 'joint and several liability', 'all money's guaranteed' and 'notice to default' to name a few. For more information on the definitions and types of obligations that may be requested, read this article on Director Guranatees.
Disputes, and how to avoid them
It is good business practice to have a solicitor draw up the lease agreement to avoid any bias. Each and every lease is individual to the property and the parties involved, utilising the professional services of an experience solicitor, who has extensive experience in property and commercial tenancies, will help avoid disputes in the future. As with all big business decisions, it's safe practice to have a legal team look over all documents and provide advice before signing, moving into your new premises, or paying money/deposits.
Signing on the dotted line
Once the negotiation stage is complete and the final form of the lease is prepared, all parties need to sign the lease. It's always best to read through ALL documents, including attachments and assignment documents, before signing; you should also instruct your solicitor to check that the lease contains every single one of the negotiated and agreed terms and conditions. They should also advise if any new terms or conditions have been added that were not previously mentioned by the landlord that could adversely affect the business. As with all important business paperwork, ensure that a signed copy is kept in a safe place for future reference.