COVID-19 and commercial leases
by Austin Lafferty.
As the hospitality sector continues its fragile recovery from Covid-19, many business owners will be considering whether their current premises meet their post-pandemic needs.
The more fortunate businesses may have seen unprecedented growth and therefore need a larger business unit; others may have chartered a different course and need somewhere smaller or perhaps may not be in need of their existing premises at all.
It’s worth taking a moment to get to grips with some of the key terminologies in commercial lease agreements as one of the biggest mistakes many business owners make is in assuming that a commercial lease is similar to a residential lease.
It’s really not.
However, in the rush to get their name above the door, many businesses in the hospitality sector are too quick to sign a lease and can be rather shocked when they realise the magnitude of their responsibilities at a later date.
Length of contract and early get out clause
As the pandemic has demonstrated, no one really knows what’s around the corner.
Signing up for a long term lease may give a hotel bar or restaurant owner peace of mind in some ways or preferential rental charges, but when the unthinkable happens and business dries up, being tied in isn’t always good.
With most leases, once established, neither side can end the contract before the agreed timeframe without the other’s consent unless they have an early termination or break option.
However, even then, this clause can often only be applied if the tenant is not in breach of any of the terms of the lease.
Just one late payment or refusal to carry out a repair may mean the landlord does not have to accept early termination.
If no termination notice is served within the specific ‘period of notice for termination’, then the lease will continue for a period of one year under what is known as ‘tacit relocation’.
Therefore don’t think you can just walk away on the last day of the agreement – prior notice, to the appropriate persons, in the correct format, is required.
Repairs, maintenance and responsibility
The landlord will insure the premises, but the business pays for the upkeep – sometimes this will include the exterior of the property too.
However, before taking possession of a property, the tenant should consider a building survey to confirm that the rental and other financial considerations being asked or demanded by the landlord are fair, and also highlight any defects.
If perhaps a previous tenant didn’t properly remove their branding or left the premises in disrepair, the new tenant could find that they have to pay out to leave the premises in good condition when they come to leave.
In addition to the survey, it can also pay to take add a photographic schedule of condition to the lease.
The item is a set of photographs of every part of the premises which acts as a visual record of its state before the lease starts.
The tenant’s obligation is thus limited to returning the premises to the landlord at the end of the lease in no worse condition than shown in the schedule of condition.
And finally, at the end of the lease, a landlord will issue a schedule of dilapidations which is a list of repairs that are the tenant’s responsibility.
A pre-possession survey and photographic schedule of condition are a tenant’s best assistance or defence in seeking to negotiate a limitation on the dilapidations.
Rates are often overlooked when new business owners are looking to take on a new premises, as are the tenant’s responsibility for items such as health and safety, asbestos control, fire safety, public liability insurance, gas and electrical certification.
And then there is Stamp Duty (or Land and Buildings Transaction Tax as it’s called in Scotland) as well.
Whether you’re looking to start a new fast food restaurant, capitalise on the shift to food delivery and takeaway, or looking to relocate a more established business, it’s vitally important to understand your commercial lease agreement.
The odds are that the landlord has a legal team working on their behalf and so it’s often beneficial and, in the long term, good value for money, for the tenant to seek advice too.
Not doing so, could put a big hole in the pocket of any business owner at the point of serving notice, if not before.
Given the previous two years, that’s something that the hospitality sector can ill afford.
Austin Lafferty of Austin Lafferty Solicitors
Austin Lafferty is a Scottish law firm founded by Austin Laffery himself – a past President of the Law Society, Scotland. For over 30 years Austin Lafferty’s highly respected team of lawyers and solicitors have been supporting tenants in negotiating fair and robust commercial lease agreements.
*Please note that there are differences in the legalities of commercial leases across the UK, we would always recommend seeking local counsel before entering a commercial lease agreement.