Start Me Up - Let it be

Taking on office premises is a major financial commitment and can be a daunting task for any new business. If handled incorrectly, or without attention to detail, it can be the cause of many problems.

If you are considering finding premises and negotiating with the landlord or agents yourself it is important that you are aware of the pitfalls that may be encountered during that process.

First, there are two ways of taking a lease on new premises. You may take an assignment from the existing tenant of their existing lease, or a new lease either directly from the landlord or as a sub-lease from the existing tenant.

Assignment

If you are taking an assignment of a lease you will be taking on a direct contractual relationship with the landlord on previously negotiated terms.

It is worth noting that you may well be taking on more than you bargained for, ie the last few years of a full repairing lease. This means that if the previous tenant has not kept the premises in good repair, you will be responsible for repairs at the end of the term which may be far more expensive than you anticipate.

To avoid this, make sure you obtain a copy of the existing lease as soon as possible and show it to your solicitor - do not wait until you shake hands on the deal itself. It may be better to insist that the current tenant surrenders their lease back and you get a new one from the landlord (although obviously the landlord will need to be persuaded that this is in his/her interests as well).

New lease

If you are taking a new lease you will have agreed the terms before instructing your solicitor and may have signed 'Heads of Terms' which outline the main terms agreed. Once this has been signed and a draft lease prepared by the landlord's solicitors it is difficult to go back and re-negotiate any of the terms. It is therefore vital that you consider every aspect of the lease very carefully before agreeing terms. There are four main things to look out for:

1. RENT

If in any doubt about the level of rent proposed by the landlord take professional advice from a surveyor. You may be offered a term with a rent review. Resist a rent review if the term agreed is five years or less. (Rent reviews are usually upward only - in theory tenants should be able to negotiate an 'either way' rent review. In practice this has almost never happened).

2. TERM

If you are a rapidly expanding business, whilst you may not want to be committed long-term you will want the security of knowing that you can stay longer if necessary. Your landlord, of course, is likely to want to tie you in for as long as possible.

In this instance consider a longer term but with a tenant-only 'break clause' which allows you to terminate the agreement and get out in, say, two or three years if things do not work out. Make it clear from the outset that this break clause is to be unconditional. (A break clause that is only effective if the tenant has complied with all the obligations contained in the lease is useless as it is almost impossible to fully comply and even if you do, your landlord may choose to argue that you have not).

3. REPAIR

Unless you are taking on new or newly-refurbished premises, give some thought to your liability. Your landlord is likely to propose a full repairing lease.

If you are taking a complete unit on an industrial estate your liability will extend to the fabric and structure of the building and "repair" can mean "rebuild". If in doubt have a survey done. If you are taking offices in a large building your repairing obligation is likely to be "internal only". This means that you will be responsible for the coverings on floors (check whether you are required to replace carpets at the end of your term - this can be expensive) and the decoration of walls together with the entirety of internal partitions. You may also be fully responsible for window frames and doors. In any event you will be responsible for the structure and fabric of the building probably by way of a service charge which may be included in your rent. If this is not the case, consider having a cap placed on the amount your landlord can charge you, or you may find that shortly after moving in your landlord commences major structural repairs for which you will ultimately be responsible by way of the service charge.

If any aspects of the structure or decoration of the premises for which you will be responsible are not in good repair when you agree to take the premises, (ie cracks in the walls, broken light fittings, cracked sanitary ware) then ask for a 'schedule of condition' limiting your repairing obligation.

These are often photographic schedules prepared by surveyors, although there is no reason you cannot take a camera around the premises yourself and agree with your landlord the areas which are out of repair. The photos can then simply be mounted onto paper and attached to the lease as evidence of the state of repair when the lease was entered into.

At the end of the lease term you will either put the premises into good repair yourself or receive a bill from the landlord for the cost of doing so. An accurate and full schedule of condition can substantially reduce these costs.

Consider also the impact of Health and Safety legislation. Your landlord is likely to impose an obligation on you to comply with current legislation.

This may well have an impact on you (for instance, with the increasing use of computer screens, tenants of older properties are under an obligation to upgrade the light fittings to 'Category 2' standard and this can be expensive). In addition it may be necessary to install underfloor computer cabling and you will need to agree this with the landlord at the outset.

4. ALIENATION

If you are taking a short lease, ie two years, then it is likely that you will not be entitled to assign or underlet the lease to another tenant.

In all other cases you should insist that you have the right to both assign and underlet without restriction.

For further information contact Eva Richards, a commercial property specialist at leading law firm Cole & Cole, on 01865 262600.

NB: The above is intended only as a brief guide to the process of finding and taking on office premises. Please make sure that you pay attention to detail and remember that it is important to obtain legal advice when entering into any form of contractual commitment.

RENT

Take advice on comparable rents

BREAK CLAUSE

This should be tenant only. This is particularly relevant if there is a rent review on restriction on alienation

REPAIR

Consider what works you need to carry out What is the state of repair of the building (do you need a survey?) Consider a Schedule of Condition and/or a service charge cap

Alienation - Resist restrictions

Last year, 2,000 new companies came into being in the IT sector.

Talented individuals with IT sales and marketing expertise form the backbone of any ambitious start-up.

Over the next few months, Infomatics will be running a series of articles covering all aspects of starting a business, beginning with advice on procuring the perfect premises