How to lease a shop
For many businesses large or small, new or established, a core necessity may be premises.
Does the company need a warehouse to store goods before sending to customers, an office to house workers and management, a pub or restaurant to serve the public, or a workshop to centralise specialists and equipment? And of course for a retailer, a shop is not simply somewhere from which to sell stock but it is the visual embodiment of the brand and should be designed (inside and out) to resonate with whichever target market the business has in mind.
The vast majority of retailers and traders do not tie up capital in buying their own property, but instead they rent it. They are tenants in a commercial lease. And while this is different from owning outright, it is a method of possession that is stuffed full of rules and risks, and can be, in some ways as expensive as buying.
The main thing to remember is a traditional Scottish legal phrase – Full Insuring and Repairing Lease.
This is pretty much the whole story for lawyers – but can be a source of considerable surprise to those wanting to lease a shop for retail or other service-based industries such as cafe-owners, fast-food outlets, beauticians, estate agents, dry-cleaners, opticians etc.
The top five issues around leases are:
- What duties are imposed on a commercial tenant of premises?
- What costs are incurred in a lease?
- Can a tenant terminate a lease early?
- What are dilapidations?
- Is the tenant free to use the premises as they see fit?
Some of these themes are linked so rather than answer all of the questions individually, below is an explanation of the main themes that retailers need to understand.
It is generally accepted that the leasing of commercial property in Scotland (and similarly in the rest of the UK) is very landlord-oriented. The lease document, which defines the relationship between landlord and tenant, is likely to be dozens of pages long, tightly worded, and will cover every conceivable eventuality, from the building falling down, to a fire, to the calculation of future rent, liability for rates, repair obligations, the right of the landlord to inspect every so often, even down to the colours the interior is to be painted every 5 years – and lots more. You get the picture.
The urgent point to make is this – once a retailer signs up to a commercial lease, he/she/they are then on the hook for pretty much everything.
The main thing that catches many tenants out is the repair aspect of the lease – full repairing does what it says on the tin. The tenant legally has to keep the shop or retail outlet in a good state of repair no matter what – and, crucially, this is so, even if they were in poor order before the lease began. The worst case scenario is that the tenant signs up for less-than-salubrious premises, but has to give back a shiny first-class unit at the end of the lease.
The full insuring element is also key. Yes, the landlord arranges full cover for the property, to protect against all likely problems, but it is the tenant that pays the premiums.
Often under pressure to find a location for their business, unwary tenants rarely take legal advice. Instead, they sign on the back page of a protracted lease without reading the document, often trusting the landlord or agent’s (vague) assurances that all will be fine. But as this is a commercial contract there is no cooling-off period as there would be with a consumer deal.
The responsibilities of tenancy kick in immediately and permanently.
Over the term of the lease the tenant may be hit with repair bills, landlord restrictions, unexpected costs including legal and surveyor fees (the lease may oblige the tenant to pay all ongoing costs) - and at the very end, a bill for terminal repairs - known notoriously as dilapidations – which is in the tens of thousands of pounds to get the property into that first class state of repair they signed up to.
Most small retailers will want to put their own stamp on a property to entice customers but they are likely to do very little in the way of changing the premises other than perhaps some shelving, storage and signage. However, other business owners may need to make more significant changes such as hairdresser installing a reception area, bespoke backwash furniture & plumbing, and multiple workspaces with adequate power. Similarly, in the event of a food retailer taking a tenancy, this may also include fitting out a commercial kitchen at great expense and significant impact on the premises. Because of the way a commercial lease is written, getting out of a premises can be almost as expensive as moving in!
All of this reads like a horror story. Indeed it can be. But there is a way of avoiding most of the problems, or at least knowing in advance what they will be, and thus making an informed choice as to what to take on, or whether to bow out without liability.
The key is expert advice. A solicitor who is experienced in commercial property law and practice should get to see the draft (i.e. unsigned) lease and any related documents first. The lawyer may suggest calling in a commercial surveyor for input too. These professionals have two functions:
The first is to advise the retailer what the lease means, in detail. This is not a patronising description – everyone has their skill set, and while a client may be a superb baker, fashion buyer, or tattooist, they are not expected to be expert in the complex world of leases. The landlord is an expert, and has their own priorities that are very different from the tenant’s, so the client needs support and advice as to what everything means and what the risks, costs and liability will be going forward if the lease is signed.
The second function is one of negotiation. Between the solicitor and the surveyor, changes and revisals to the terms of the draft lease can be put forward – limitations on repair charges, standardised rent increase ceilings in future years, adding in an option to terminate the lease early (if such an option is not included, the tenant will have no right to call a halt to the lease until its full contracted period of years is over and thus will be liable for rent and repairs for the full lease), making the landlord liable for their own legal costs, and more.
Once the lease is signed it binds both parties, so now – i.e. the period when the retailer is still free to walk away – is the time to strike the best bargain possible.
It cannot be stressed enough that a commercial premises lease is a very onerous document and has many traps for the unwary. A well-negotiated lease can provide the platform for profitable trade, expansion and business development. A lease entered into without care and caution is a huge risk and likely to be very costly. Consulting a solicitor in good time is essential prevention – because if the lease on a shop or retail premises is signed without advice, there is no cure.