A commercial lease: is it right for you?

When starting a new business there are a huge number of things to consider, with office work space being a significant one.

Signing a lease commits the business to expensive overheads, and start-ups in particular will need to be mindful of this type of financial commitment.

It is vital that your office space provides you with a good foundation to operate from, is suitable for all your requirements, and is not the cause of any difficulties or unexpected financial issues in a pivotal time for the business.

We have listed a few key lease provisions that you should be aware of.

Rent free periods sound good…

Although these may seem very appealing, a rent free period might be offered for various reasons that are beneficial to the landlord. It may be that the rent you pay after the rent free period is actually inflated to compensate for this – you should look carefully at these points.

During uncertain times such as the current Coronavirus pandemic, tenant’s may potentially have more power in lease negotiations with landlords to obtain a rent free period. However, be aware that a rent free period may not always be as good as you think!

Have a break!

Having dates when you know you can break the lease is important, especially for start-ups where finances and plans may be more flexible and unpredictable than usual.

A break clause is a clause which enables you to end the lease earlier than the agreed term. It may be that the break clause only comes into effect on particular dates, and with relevant notice but this is a point that you can negotiate when taking on a lease. Whilst having a lot of flexibility around a break clause can seem like a good thing, also be aware that a landlord’s break clause can provide uncertainty for your business.

Collaboration is key

Sometimes you may want to collaborate and share the office space with another start-up, investor or other company. Even if not planned from the outset, this should be a consideration for any start-up taking on office space, as requirements and plans can change.

This is why the alienation clause in a lease is very important. This will stipulate whether the landlord permits assigning or underletting part or the whole of the premises to another, and whether you may need the landlord’s consent. A key consideration is the ease by which you could potentially share your office space if needed or wanted for collaborative or cost-saving purposes.

Rent reviews, service charge and much more

There are additional financial points to consider on top of the annual rent. Rent reviews take place regularly so the landlord can adjust the rent in line with current market conditions. It is likely the landlord will want wording in the lease providing the rent will be reviewed ‘upwards only’ meaning it will only ever increase or remain the same, even if the market dips.

Service charge is paid to the landlord to cover the costs of maintaining the property i.e. cleaning and the maintenance of any communal areas. You may only be taking a small space in a large building, so make sure to look out for whether the service charge is a fixed charge or a proportional charge, and the terms on which the landlord can calculate the service charge.

We appreciate there is a lot to think about when considering a lease, and each company will need to consider their requirements individually. Bird & Bird are here to answer your questions and advise you on how to tailor the lease to your needs.