As we are talking about opening a small place on a shoestring, we will assume you don’t have the capital to buy the freehold for your premises outright; hence you’ll have to lease it.
Leasing a commercial property is not for the faint hearted and it may take a long time, depending on how speedy and committed you and the other parties are, and on how many parties are involved.
There are several pitfalls to avoid and if anything is unclear you must confer with your solicitor straightaway.
Leasing the premises
As leases are written in archaic English and leasing commercial premises is an altogether different experience than leasing (renting) a residential property, you must enrol the services of a solicitor. As in the case of an accountant too, I would recommend choosing a local one.
Make sure you establish what the fees are before making any commitments. It is most likely that you will be charged at an hourly rate, around £200/h +VAT. Ask how many hours this should take and make some contingency plans as it will invariably take longer than originally planned. Because you are charged by the hour (or pro rata), before you make a phone call or send an email, ensure that you are being as concise as possible and only say what is absolutely necessary (at £4 a minute, this is not a “start with small talk about the weather” sort of call).
Once you agree in principle to lease premises you should receive a document called “Head of Terms”. This will outline very briefly the main points you and the lessor have agreed on before moving into drafting a lease. As I am no legal expert, so my advice is only based on my personal experience. If you would like to read more about commercial leases you can check the Lowable website.
From my experience, here are a few things that you need to be wary of:
Cost of drafting the lease:
It seems to be a common practice that the “entering” party must bear the legal costs, for all parties, of sorting the lease. You must make sure that these costs are capped or at the very least that your agreement states “reasonable” costs.
This puts all of the bargaining power in the hands of the lessor’s solicitor, and you are effectively at their ransom. If they come up and say to you: "It’s taking more time than foreseen and I need extra money", either you pay, or the transaction will be stuck.
The money you have already paid is simply unrecoverable, even if the costs do seem “unreasonable”, do we really want to spend time and money complaining to the legal Ombudsman? Scary right?
In my case at Pecoro, things were delayed. The initial figure we were given was £2400+VAT and we ended up spending £3600+VAT which was very frustrating!
In most cases you will be signing a “full repair” lease - which means that you are responsible for repairing anything that breaks or needs repair, as well as the general upkeep of the premises.
A pipe bursts? That’s on you.
The roof falls down? That’s on you.
To give you an idea, it’s just like if you bought the leasehold of a house, your lease is only 10 to 25 years long!
What happens at the end of the lease?
This will depend on whether you lease is “protected” or “unprotected”. In layman's terms, if your lease is unprotected you need to vacate the premises on the day of expiration. This is a very scary prospect. Unless you can negotiate another lease term or sub-lease the premises by this date, this means you would have to move all your equipment, stock, and possessions out by this date. Not an easy feat in a commercial environment.
If your lease is unprotected, you will have to swear under oath before an independent solicitor (not involved in your current transaction) that you are forfeiting certain rights.
Your landlord will ask you for a personal guarantee.
As we said before, you most likely will bear the cost of any repairs so the landlord will want to make sure they can get their money, one way or another. Even if you're a limited company, they will ask you, the person, to sign the lease. Only very large operators can afford to sign the lease in their own company’s name.
Differences from a residential lease:
Unlike a residential lease or tenancy agreement where the tenant has plenty of rights and the landlord plenty of legal duties, with commercial leases the balance of power swings heavily in favour of the landlord.
Among other rights, if you are late paying your rent, even by one day, the landlord can “peacefully” enter the premises and change the locks! For more info read this article. Once again this should be another incentive to read the small prints VERY carefully.
You are committing for a lonngg time - and the longer the commitment, the higher the need to be able to get out of your lease.
At the very least, you must be able to “reassign your lease”, which basically means sub-letting to someone else.
Another option is a breakout clause. With my lease we have the option of leaving, at any time if six month's notice is given. This is very generous and gives me peace of mind, however it’s not very common.
Something more realistic is to have a breakout clause that you can opt for at a certain point in time, say after one year, three years and so on. This will give you the time to ascertain that your business model is profitable, but also that this is something you want to do for the rest of the time left on your lease.
If there is no clear way of getting out, you must walk away, in my opinion, especially for a small or new operator as the risks are just too great. As we have seen with the pandemic, there are outside circumstances that we can never anticipate, and even a business that has historically done very well can very quickly become unprofitable, for no fault of their own.
Time is ticking:
Once you sign the lease you start paying!
Most likely you will be required to pay three months as a deposit and three months in advance. You may want to rebrand, change the layout, the furniture, repaint, give the place a good clean, check the boiler and the electrics, install, or change phone line and internet - therefore, my advice is to have everything you need to do before opening written down, the tradesmen booked in and the equipment ready to be shipped.
Make it very clear to everyone involved that this is a race against the time, and you won’t tolerate unnecessary delays. In light of this, asking for a “grace period” (where you don’t pay rent for, say, the first two weeks or reduced rent for the first month). It’s always worth a try.
A tip: It’s better to never give an exact opening date, until you are absolutely positive you can make it. Better opt for a vague one, such as “spring 2022” or “May 2022”.
Be ready to walk away: if something doesn’t feel right, and you can’t shake off that feeling of uneasiness, it’s better to walk away and look for a better opportunity or at least one you feel more comfortable with!
Check out the next post of this series: