Dan Yeo, managing director at LeaseAssured, shares his key considerations for indie owners taking on new shop premises
Taking on new shop premises can be daunting for any business owner, whether it’s your first ever physical location or your twenty fourth. Your choice of premises can affect everything from the customer experience to your monthly cash flow.
And while it is tempting to focus on the frontage, footfall, neighbouring businesses and how the space will look once you have fitted it out, there are some less exciting – but arguably more important – details to consider before signing a commercial lease.
From hidden costs and repairing obligations to break clauses and signage, here are seven things independent retailers should check before committing to a shop lease.
1. Check the permitted use of the premises
Every commercial lease includes a “permitted use” clause. This sets out what the premises can be used for and should reflect both your current business and a realistic view of where it might go.
“Retail” on its own may not be enough. If you plan to sell clothing and accessories, run ticketed styling events, offer workshops, serve drinks, carry beauty products or use part of the space for appointments, discuss this at the outset.
A use clause that is too narrow can create problems later, even if the activity feels like a natural extension of your brand. It can also make it harder to sell or transfer the lease if your business changes.
The lease is only one part of the picture. Check that the proposed use is acceptable from a planning, licensing and building-control perspective too, especially if you are changing the nature of an existing unit.
- Calculate the true cost of your shop lease
The rent is important, but it is not necessarily the whole monthly property cost. Ask for a clear breakdown of everything you will be expected to pay, including:
- service charge
- insurance rent
- business rates
- utilities
- VAT, if applicable
- any contribution towards shared marketing, security or estate management.
Service charges deserve particular attention in shopping centres, arcades and multi-let buildings. Ask to see the current budget and recent accounts, find out what is included and ask whether there is a cap. A low rent can look less attractive once service charge and insurance are added.
Business rates are normally payable by the occupier of a shop, although relief may be available depending on the property and your circumstances. Build the full occupancy cost into your forecast, not just the rent quoted by the agent.
3. Understand your repairing obligations
Commercial leases commonly make the tenant responsible for repairs. In some cases, that can mean much more than day-to-day upkeep: you could be required to put an older property into good repair, even if it was not in good condition when you took it on.
This is one of the biggest risks for a first-time tenant. Before committing, inspect the premises carefully and consider having a survey carried out. If the building is older or has visible issues, ask whether your repairing liability can be limited by a schedule of condition. This records the state of the premises at the start and can help prevent you being asked to improve it beyond that condition when you leave.
It is important to understand the repairing obligations before agreeing the heads of terms. At the end of a lease, repair disputes can lead to a dilapidations claim, so this is not wording to skim.
4. Agree your shop fit-out, alterations and signage
Most independent retailers need to make a space their own. That might mean new flooring, display systems, changing rooms, lighting, a shopfront sign, window vinyls, air conditioning or a small stockroom alteration.
The lease will usually say what you can do without consent and what needs the landlord’s written approval. Do not assume that a verbal “that should be fine” is enough, particularly where your fit-out is a key part of the launch.
Ask early:
- Can you install your proposed signage and shopfront branding?
- Do you need a formal licence for alterations?
- Who pays the landlord’s legal or surveyor costs for consent?
- Must the premises be returned to their original layout at the end of the lease?
- Is there a rent-free fit-out period before you begin trading?
You may also need listed-building, planning or advertising consent, depending on the property and location. Making the timetable part of your pre-lease planning helps avoid paying rent while you wait to open.
5. Choose the right lease length and break clause
A longer lease can provide stability and may give you more confidence to invest in a high-quality fit-out. But it is also a long commitment if sales do not meet expectations or the location is not right.
A useful middle ground is a lease with a tenant break clause. This gives you an agreed opportunity to end the lease early, usually on a stated date and after giving a specified amount of notice.
The detail matters. The break date, notice period and any conditions need to be clear. Some conditions can make a break harder to exercise than tenants expect, for example a requirement to have paid all rent due or to give vacant possession.
Also ask whether the lease has the protection of the Landlord and Tenant Act 1954. In broad terms, this can give business tenants a right to seek a new tenancy at the end of the term, but landlords and tenants can agree to exclude that protection before the lease is granted.
6. Check deposits and personal guarantees
Landlords often ask a newer retail business for security, particularly where it has limited trading history. This may be a rent deposit, a personal guarantee from a director or both.
A rent deposit should be documented properly in a separate deed, covering when the landlord can use it and when it must be returned. A personal guarantee is more serious: it can make an individual personally responsible for the company’s obligations. If one is requested, ask whether it can be limited in amount or time.
It is better to address security honestly at the heads-of-terms stage than discover it late in the legal process.
7. Agree heads of terms before the lease is drafted
The best starting point is a clear set of heads of terms: the short commercial summary that records the deal before the full lease is produced. It should cover the rent, term, break rights, use, deposit, repair position, service charge, fit-out works, incentives and who pays legal costs.
A commercial lease is not simply a formality after you have chosen the premises. It is the document that governs your ability to trade there, make changes, manage costs and eventually leave.
Taking the time to agree the right points first means the legal drafting has a much better chance of reflecting the deal you thought you had made.
Dan Yeo is managing director of LeaseAssured, which helps landlords and tenants create commercial leases online with solicitor review.