Top Ten Tips when Renting Commercial Property
If you are contemplating investing in renting commercial space in Ireland, Flynn O’Driscoll has set out our top 10 tips.
1. Type of Agreement
Understand the type of agreement that youwill you be required to sign. A Lease provides longer term security compared with a licence,which is usually available for shorter term occupancy. Licences can be a good option fornew ventures such as for serviced offices but provide no security of tenure.
2. Know Your Business Needs
In addition to knowing what type of commercial property will be appropriate foryour present and future business needs,understand what you will require to operateeffectively from a property. Do you require flexibility in terms of opening hours? Do you need to grant concession agreements to third parties? Do you need the right to sharepossession with a group company or carparking for customers? Do you needexclusivity? The terms of the agreement arecrucial to the success of a Tenants business. In theory Leases are negotiable. Knowing what
3. Negotiation of Terms
Retain a commercial agent who will negotiate and agree the best commercial terms for you.An invaluable source of knowledge of the local property market, a commercial agent will know what can be realistically and practically achieved in the market. Ensure that the Heads of Terms reflect your understanding of the commercial agreement with your Landlord. Although not legally binding, once agreed, it can be very difficult to change Heads of Terms. Badly drafted Heads of Terms or no Heads of Terms result in uncertainty and consequently delay and increase the cost of legal negotiations. Never sign any agreement without the advice of your solicitor.
4. Financial Obligations
Renting commercial property can involve amyriad of hidden costs. Understand yourliabilities for the term. Obvious costs are rent,service charges and insurance. Understand how these have been calculated, what theycover, when and how they will be reviewed andat what intervals they are payable. Ensure thatyou are happy with how the property has beenmeasured. Be aware that upward only rentreviews are no longer permitted by law so that the rent can go up or down on rent review. It is important that the Landlord does not retain control over the rent review process as there isthe potential for no rent review to be initiated in a poor rental market. There may be other costs associated with the renting of the property contained in the Lease, such as commercial rates and stamp duty. Your solicitor will be able to identify potential areas of financial cost and resist any inappropriate inclusions by the Landlord.
Given the financial implications, carefulconsideration should be given to the partyentering into the agreement. Ideally a limitedliability company, though depending on thetrading and financial record of the company,some security in the form of a rent deposit orpersonal guarantee may be required. Depositsare often a multiple of the rent. As it canincrease start-up costs try to negotiate areduced deposit and seek its release after aminimum period of time once a track recordfor meeting the obligations under theagreement has been established. Depositmonies should be held separately from theLandlord's personal funds. If personalguarantees are required, these would besought from the directors or principalshareholders. Try to limit the terms of aguarantee. For example seek the release of theguarantee after a fixed period or agree arolling guarantee for the term of the Lease butwith liability limited to one year's rent andoutgoings.
Be fully aware of the overall condition of the property before entering into the agreement.Carry out a building survey. This is importantfrom the perspective of the repair covenantwhich can expose a tenant to unforeseen cost.Depending on the nature of the agreement,each party will assume differentresponsibilities for repair and maintenance ofthe property, both internally and externally. Asa general rule if a Lease is in excess of 5 years,it is likely that the tenant will be responsible.Try to agree a schedule of condition of theproperty with the Landlord at the outsetrecording the exact condition of the propertyat the date of the Lease with a provision in theLease that the Tenant is not required to repairand maintain the property in any better stateof repair and condition than exists at the dateof the Lease.
7. The End of the Agreement
The agreement will regulate how the propertyis to be returned to the Landlord at the end ofthe term. Important considerations arerepairs, alterations and occupational interests. Agree with the Landlord at the outset whether your fit out works or any alterations carried outduring the term will need to be stripped outand the Premises reinstated to its original condition. In terms of repairs, the Landlord may serve, a Schedule of Dilapidations by the Landlord setting out the works to becompleted before the end of the term or apayment in lieu of the works. Dilapidations can be contentious and very costly. Get proper advice in relation to the state of repair of the premises at the outset and the extent of repaircovenants under the Lease and manage thecosts of ongoing repairs during the term of theLease. Ensure that any occupational arrangements granted to sub-tenants or licensees expire before the end of the term to ensure that vacant possession is returned to the Landlord.
8. Break Options
It can be difficult to know how long acommercial property will be suitable for your business. Understand your options if you wishto remain on, in, or leave a premises.
Negotiating a break clause can provide someflexibility enabling the termination of the Lease without having to find another tenant to replace you. Break clauses are strictly construed and can often be lost on technicalgrounds for failing to comply strictly with theterms of the break clause such as the timelimits, compliance with covenants andconditions in the Lease and financial payments. Ensure that you are properly advised as to what the requirements of a break clause are and that you can comply with these. Recent case law in the UK has interpreted vacant possession as including the removal often ant’s fixtures and fittings. Your solicitor will seek to resist any onerous pre-conditions to the break. In the absence of a break clause, thealienation provisions in the Lease permit the assignment or subletting of the premises withthe Landlord’s consent, which cannot be unreasonably withheld.
9. Renewal Rights
Options to renew in a commercial Lease arenot common as there may be a statutory rightof renewal. A tenant's right to a new Leasedepends on how long the tenant has been inoccupation. Under Irish Landlord and Tenantlaw a business tenant may have the statutoryright to a new Lease on the same terms as theexisting Lease (other than rent) provided thatit has been in continuous occupation of theproperty for more than 5 years. Landlordsusually require the tenant to waive these rightsbefore signing the Lease. Given the investmentcosts in a property, efforts should be made toresist this requirement. Obtain the necessaryconfirmation at Heads of Terms stage. Alicensee under a licence has no statutory rightsof renewal.
10. Register Commercial Lease
On completion of the Lease, it is now a legalrequirement to register particulars of theLease on the commercial Lease register within30 days of receipt of the stamp certificate fromthe Revenue Commissioners.We will keep you updated as more of the sectionsare commenced.