Key Lease Negotiation Points For Landlords
Whether you are negotiating a new business lease or renegotiating an existing one, it is crucial to prepare beforehand, be specific about your desired results, and identify any areas where you may be flexible. According to property experts, including Sittingbourne letting agents, the market circumstances, competitiveness, and appeal of your property will all affect your negotiating position. However, a competent attorney will focus on the issues that are most crucial for the landlord, helping both the landlord and the tenant to save money and preserve their productive working relationship.
Reviews of the rent market
Different arrangements for rents are possible. Up until recently, the most typical method for a business lease was a rent that was fixed for the first five years, followed by a ‘upwards only’ rent review after that, and then every five years after that for longer leases. This has benefited landlords because, if rents have increased, the rent either rises to match them or stays the same. The lease rent won’t reduce even if market rentals have dropped. Tenants who don’t want to be locked into overpriced properties and paying more than they would if they took a fresh lease find this to be unappealing in an unpredictable market. If you are not willing to think about renegotiation, you can’t risk losing an excellent tenant. If you have been looking for “value my house for rent”, getting this done will prevent you from losing a potential tenant.
Tenants are now more likely to request that at least a portion of their rent be calculated as a percentage of their turnover after profit, especially those in the retail and hotel industries. To find a suitable renter, you might be ready to accept this, but it’s important to get your lawyer to agree on a specific formula for determining turnover rent. The tenant will want a comprehensive list of costs that can be subtracted from gross revenue before the rent component is determined, as well as a list of revenue streams that are completely excluded. These should be kept to a minimum, and you should make sure there is a notional turnover amount for any typical working days when the tenant decides not to operate.
The third option is to have a rent that broadly tracks inflation and is index-linked. These will be more desirable to the landlord than the tenant in a market with high inflation. The main issue up for discussion will be whether there are upper and lower bounds on how much the rent can fluctuate. Because the formulas used to determine indexed rents can be extremely complicated, your attorney should also provide some worked examples.
Keeping an eye on underlettings and assignments
To guarantee that the property is always occupied by a respectable and financially stable firm, you will need some level of control over whether a tenant can assign the lease to another business or make subleases. The majority of this is governed by law, and landlords are required to respond reasonably, but there is room to negotiate a list of situations in which you can lawfully reject assent or apply conditions. They could prohibit assignments to businesses within the tenant’s group or to businesses that won’t be able to fulfil all of the tenant’s obligations under the lease, and they could stipulate that the departing tenant is current on all rent and other payments owed to the landlord.
Common restrictions that a landlord might impose include, requesting a guarantor for the incoming tenant, asking the departing tenant to ensure that the new renter will pay the rent and abide by the agreement, or requesting a rent deposit as security for any rent arrears.
It is up for discussion whether subletting is permitted or not. The tenant will want as much flexibility as possible, but you should be cautious to avoid having a shoddy enterprise occupy the space. Your attorney will need to negotiate a cap on the number of occupiers at a time if you are ready to enable subletting and ensure that a subtenant is subject to the conditions of the lease. This is crucial because, in an effort to make the arrangement more appealing, a tenant may try to negotiate a less onerous sublease with a subtenant. Watch out for sublease clauses that may weaken your obligation to make repairs.
Maintenance and repair
Make sure the tenant is required to keep the property in good repair and that, in the event that they don’t, you will be able to perform the necessary repairs and recoup your costs. If the property is already a little run-down, the tenant might try to negotiate a less onerous repair duty. If you do agree to this, your attorney will need to revise the contract so that it expresses the tenant’s obligations in detail.
Energy efficiency
An important component of future-proofing an investment property is energy efficiency. In order to legally rent out a house, landlords must currently meet minimum energy efficiency standards (MEES). EPC E is currently the entry level. Although the direction of this regulatory field is somewhat uncertain, it is widely believed that the minimum level will soon increase to EPC C or B.
To prevent tenants from making any changes that would negatively impact energy performance, you will thus require the authority to control tenant modifications. That is comparatively uncontroversial, but the more challenging question is whether you will have access to the property during the lease period to make energy efficiency improvements. Normally, tenants won’t agree to anything that might interfere with their business, but because future energy efficiency regulations are unpredictable, landlords need to be aware of this.
Who would be responsible for the costs of energy efficiency measures will be another challenging negotiation point. The tenant might counter that doing so would allow the landlord to make improvements to the property at the tenant’s expense. You will want to recoup some or all of the cost through the service charge. You can counter that the tenant will save money on energy costs and should be prepared to contribute to the cost. The parties and their solicitors must come to the best agreement they can given the lack of current legal advice on this matter.