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Issues to consider when negotiating the length of a lease

18/06/2019
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Advice | Practice management

Issues to consider when negotiating the length of a lease

By James Dawson

James is head of advice publications in the Practice Support team at the BDA, responsible for the Association’s guidance documents for members in general practice on legal matters including associate contracts and staff employment

Recent research by BNP Paribas Real Estate has shown that the average length of new commercial leases in the UK is 7.1 years. Statistics don’t tell you how long you should go for with your practice’s lease, however, when thinking about this there are a number of factors that you ought to consider.

Security of tenure

A main consideration will be certainty over how long you can stay in the premises. You do not necessarily want the hassle of having to move premises when a lease ends. Too short a term may be problematic as the likelihood of having to move is always on the horizon. This is mitigated to some extent in England, Wales and Northern Ireland as business tenants do, in some circumstances, have the automatic right to renew their lease, as long as the landlord does not have a valid reason not to renew.

If you take on a NHS contract in England or Wales, it will be tied to the premises. You will need to consider your security of tenure because relocation could lead to loss of your NHS contract, or at the very least, a renegotiation of its terms.

Location and space

If you feel you have a good place in a good location you may want to tie that down by taking a longer lease. But if you anticipate that you may want to expand and the premises are not big enough or that you may want to relocate then you may prefer a shorter lease. These are issues you cannot foresee, so be rigorous in your business planning.

Rent

The length of your lease will affect your rent. If you expect local property prices to rise, a longer lease may lock you in to a lower rent for longer. Carefully check your lease agreement – a rent review clause may allow the landlord to up the rent at set intervals. And if you go for a very long-term lease, one that runs for a number of decades, it is possible that you will have to make an up-front payment, a premium, when you take on the lease.

Assets

You have the use the premises whilst the lease lasts, so your lease is an asset. If you find that you want to leave the premises, you can sell on your rights to a third party. Leases can either be sold outright, known as assigning the lease, or you could sub-let the premises. If these are realistic options, then you do not need to be so wary of taking on a longer lease.

You must be aware, however, that many leases will contain clauses restricting a tenant’s right to assign a lease or sub-let the property. Check your lease agreement. Restrictions could range from an outright prohibition on assigning or sub-letting to requiring the landlord to provide their written permission, though in many cases the lease might state that the landlord should not unreasonably withhold it. There may also be restrictions on what a sub-tenant can do with the premises.

Break clause

One possibility to get out of the obligations of a long lease may be to exercise a break clause. If your agreement contains a break clause it could allow you to end the lease early on a set date or after a specified number of years or subject to certain conditions. Time limits will be strictly enforced so you must be fully aware of them if you do want to take advantage of a break clause in your agreement. Other conditions that may be attached could include being up to date on rent payments or repairs or fully redecorating the premises. 

You may also be able to surrender your lease by negotiating with the landlord. It may be that the landlord agrees to accept a number of months (or years) rent upfront in order to release you from your future obligations. Although they lose you as a regular source of income they get a lump-sum and have the premises back so they can find another tenant. Do your research on the local commercial property market so you can point out how easy it will be for them to re-let the premises if they allow you to surrender the lease. However, in this situation, there is no obligation on the landlord to agree and they may hold you to the terms of the lease.

Read the small print

When deciding how long to take on business premises for you must also thoroughly check the terms of your lease to see what rights you have to renew or to assign, sub-let or surrender the premises. Check the landlord’s rights to block any renewal or review your rent too.

Further guidance is available in BDA Advice Leases and licences at www.bda.org/advice and always get independent legal advice on the terms of your lease agreement.

18/06/2019

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