Jonathon Hand, founder of The Lease Negotiator, shares essential advice for business owners navigating the complexities of commercial leases.
From hidden costs and restrictive clauses to unclear repair obligations and tricky break conditions, Jonathon highlights the key red flags to watch for and offers practical tips to protect your business. Before signing on the dotted line, this guide is a must-read for ensuring your lease works for, not against, your success.
A commercial lease agreement is likely to be one of the most crucial documents you ever sign as a business owner, but rushing the process or signing on the dotted line without thoroughly understanding the paperwork could prove to be a costly mistake.
All too often, businesses find themselves tripped up by hidden costs, left at the mercy of rent hikes, or even facing costly consequences, through lease terms they were unaware of the full implications of.
To help ensure your business secures a space that meets its needs without unexpected surprises, here are some of the main red flags to watch out for before signing a commercial lease agreement.
1. Hidden costs
If a deal seems almost too good to be true, it’s important to scrutinise the lease for any hidden costs. Beyond the upfront rent and deposit, there could be additional expenses you haven’t anticipated, such as SDLT (Stamp Duty Land Tax), service charges, building insurance, and utility costs.
Remember to also consider the maintenance responsibilities of the property, especially if the building is old and in need of repair.
It’s crucial to understand what is included in the rent and what you will be expected to pay separately, as these additional costs could significantly impact your budget.
2. Excessive rent review clauses
While it’s common to expect some rent increases over time, some leases include excessive rent review clauses that allow landlords to raise rent at set intervals or based on certain triggers.
If these clauses are too frequent or unreasonable, they can put a strain on your finances, so be sure to review the terms carefully and check they are in line with market conditions and your long-term financial planning.
3. Restrictive use clauses
Restrictive use clauses can set limits on the types of business activities that can take place at the property. Whether you plan to expand, partner with other businesses, or adjust your operations down the line, it’s important to make sure the lease allows for future growth.
Overly restrictive use clauses can prevent you from adapting to changes in your business needs, so be sure the terms fit both your current operations and any potential future plans.
4. Limited lease renewal options
A lease without clear renewal options or with unfavourable renewal terms can put your business in a difficult position. For example, if your lease expires without an option to extend, you could be forced to move unexpectedly or face a significantly higher rent.
To avoid disruptions and unforeseen costs, ensure the lease includes favourable terms for renewing or extending it at market rates, rather than risking relocation or being locked out of your property.
5. Unclear maintenance and repairing duties
Disputes over who is responsible for repairs and maintenance can quickly become a financial burden if the lease is vague on these duties.
Whether it’s structural maintenance, upkeep of the air conditioning system, or emergency repairs, make sure the lease clearly defines who is responsible for each aspect.
The terms should be fair and transparent, ensuring you won’t be left holding the bag for expensive repairs that fall outside your responsibilities.
6. Not enough rights to sublet or pass on the lease
As your business grows, you may want the flexibility to sublet part of your space or assign the lease to another company. Therefore, make sure the lease includes provisions that allow for subletting or transferring it to another party if needed.
Some leases either restrict subletting entirely or impose strict conditions, which could limit your flexibility and add unnecessary financial strain.
7. A heavily conditioned break clause
To maintain a high degree of flexibility, as a tenant you might want to negotiate a break clause within the terms of the lease. This will allow for the lease to be terminated early, if required. As a business, pay particular attention to the conditions that the landlord wants to impose for the break to be valid. Some of these conditions can be used by a landlord to query the validity of the break.
Final thoughts
While these are some of the most common red flags found in lease agreements between businesses and their landlords, there are sadly many other ways that company owners have found themselves at the mercy of an agreement they signed without any expert oversight.
Rushing to sign the paperwork without noticing these warning signs – or perhaps even spotting and overlooking them in a bid to secure a property that seems like the perfect fit – could be a costly error.
So, no matter how eager you are to begin growing your business in a new location, it’s always worth taking the time to have the agreement properly reviewed.
In the property world, red flags can often be addressed or even removed entirely through careful negotiation. This allows you to focus on what truly matters — building your business — without the worry of unexpected challenges derailing your success.
