March 15, 2023
According to the famous axiom, the three most important rules in business are location, location and location. This holds true whether you are in the retail, restaurant, manufacturing, or almost any other line of business. Most companies will find it either impractical or inefficient to purchase property in the right location, so almost all end-up leasing commercial space to meet their business needs.
Normally, a commercial property lease will run between three and 25 years and will comprise one of the largest operating expenses of running a business. As a result, the choice of where, on what terms, and for how long to lease commercial property is one of the most significant decisions a company will make. It is therefore critical to think strategically about your long-term business plan before signing a lease, taking into account both the current and future needs of the business, including such matters as access to customers, employees, distribution routes, and the like.
Choosing the right property is therefore a tricky proposition. If you sign a long-term lease for more commercial space than you presently need and your business does not “grow into” the space as expected, then the burden of the lease payments could collapse the entire business. However, if you sign a short-term lease and/or the lease property that is insufficient to meet the future needs of your business, you may end up having to move and, as result, paying multiple agent fees, moving and other expenses—not to mention confusing your customers by changing location. In addition, you may also have spent a considerable amount on fitting out the unsuitable property.
In searching for an acceptable property in your price range, first identify the best general location and then analyse each property with respect to price, terms, and specific location. In doing so, check the rents on comparable properties in the area, determine what improvements would be necessary on the desired property, and analyse such matters as customer traffic flow and ease of access. It is also important to make sure that the property can be used for the purposes you intend, so check with the local authority to make sure that suitable planning permission is in place.
Once you have identified the right location at an acceptable price, care must be taken in negotiating the terms and conditions of the lease. Remember that renting commercial property is in effect a “Buyer Beware” proposition. It will be assumed that you are sophisticated enough to understand the provisions of the lease, and if not will retain a professional to advise you. If the monthly rent seems much lower than for comparable properties, look closely at the details of the agreement, because the deal may in fact be too good to be true.
For example, commercial leases are often “full repairing and insuring”, which means that the tenant is responsible for the full maintenance and insurance of the property. As a result, an unwary tenant could get stuck with having to make expensive repairs to the building, the cost of which far outweighs whatever was saved on the reduced rental price. Therefore, you need to have an expert thoroughly inspect the property before signing the lease—the same as you would as when purchasing the property.
Similar care must be taken with respect to other lease terms, which if the tenant is not careful could negate the perceived value of the property to the company’s business. A commercial property lease typically includes the following provisions:
The term of the lease can be more complicated than it initially appears. In the first instance, you should assume that you will not be able to get out of the lease until the term is complete, and once it is complete you will have to renew the lease or vacate the premises. This assumption will help you think clearly about your business needs and negotiate an appropriate term that balances the need for both stability and flexibility.
That being said, the lease may contain both a break clause and provisions for continuing the lease after the term has expired. A break clause gives the tenant the option to terminate the lease after a stated period of time. Due to the difficulty of making business projections for longer than 3-5 years, if your lease runs longer than this you should seriously consider negotiating a break clause in case your business needs change over time. This also limits the downside if the business fails.
Although commercial (as opposed to residential) tenants are not well protected by government regulations, they are provided the statutory right to prevent eviction at the end of the lease term. This right can be very important, because an established location can be as important as a brand name for retailers and restaurants, and the cost of moving any business can be extremely burdensome. In Ireland under the Landlord and Tenant Act 1980 a right of renewal may arise if (i) commercial premises are occupied by the same party continuously for a period of 5 years or more, (ii) the property was continuously in the occupation of the same party for 20 years or more, or (iii) improvements were made by the tenant that account for not less than one half of the letting value of the property. However, many landlords attempt to carve this statutory protection out of the Lease Agreement, so if you want the statutory right to continue to rent the property following the expiration of the term, such a provision must be negotiated out of the agreement.
Many long-term Lease Agreements contain automatic “rent reviews” at certain intervals, upon which the rent is increased based on designated factors. It is very important to understand these factors and the impact they could have on the rent. A failure to do so could be the difference between a profit and loss for your business.
If your company is small or just starting out, it is very likely that the landlord will ask the key shareholders and directors to personally guarantee the rent. This will put such individuals at substantial personal risk and should be reviewed carefully. The request for a guarantee may also make terms such as a break clause more critical to the Lease Agreement.
In Ireland, landlords are permitted to place restrictions on a tenants’ ability to assign or sub-let a lease, but by law cannot unreasonably withhold their consent to such a transaction. There is no statutory definition of the term “unreasonable”, however, and the reasonableness of any refusal to grant consent will depend on the particular facts and circumstances involved. Therefore in order to avoid a dispute, a tenant may want to list certain situations where consent to an assignment or sub-let would not be required.
Any lease for a term of more than one year must be in writing signed by the landlord. Where either party to the lease is a company, typically there will be a requirement for the lease to be executed under seal. The executed lease should then be submitted to the Revenue Commissioners for stamping and depending on the length of the term, registered in the Registry of Deeds or Land Registry.
Consistently recognised by the Legal 500, Martin is a solicitor with over 20 years' of business law experience.
CEO, DocuDraft
Consistently recognised by the Legal 500, Martin is a solicitor with over 20 years' of business law experience.
