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Before you sign the lease…

Written By: Property Team

Houston we have a problem! To avoid such words after having signed an agreement to lease it is important that tenants get advice before signing the agreement.  Once an agreement has been signed it is binding and therefore difficult to negotiate any amendments.

Here are some tips that tenants should consider before entering into an agreement to lease:

Rent Reviews
Rent reviews play an important part in any lease. Look to limit exposure to large rent hikes. Reviews are undertaken through a market review or increased in line with CPI. A tenant should look to impose a cap on any increase e.g. no increase in rent should be greater than 2%.
Rent disputes are resolved by valuers and arbitration. To avoid these costs tenants may consider having CPI increases or fixed rent increases. However, the risk is that these increases will leap ahead of the market. It is often advisable to have a mixture of CPI reviews and market reviews.

Outgoings
Another large expense is outgoings. Outgoings are expenses that are incurred through the running of the premises and include such things as insurance, rates, utilities and service or maintenance contracts. The landlord will usually pay these costs and seek reimbursement from the tenant. Outgoings are often payable in addition to rent.
Tenants should review the list of outgoings carefully and undertake an inspection of the premises and the building services to ascertain whether they are in good repair. If anything needs fixing, the costs will often be passed on to the tenant as part of the outgoings.

Reinstatement Obligations
Tenants who are excited about taking on new premises often forget about their obligations when the lease ends. This oversight can be costly.
Leases often require a tenant to reinstate the premises to its original condition, which can be expensive. This can be resolved by the insertion of a clause in the agreement outlining that the landlord agrees that the tenant shall not be required to reinstate the premises at the expiry of the lease.

Guarantees
It is common for landlords to require a guarantee of some sort; either a personal guarantee from the directors or a bank guarantee.  Guarantors should be wary that if the lease is assigned their liability will continue until the next rent renewal. Accordingly we often recommend that any guarantee given, whether personal or bank, be limited to a certain period ranging between three and 12 months depending on the lease term.  This is something that needs to be inserted into the agreement to lease and is something that landlords commonly concede.

Lease incentives
Tenants should negotiate some form of incentive into a new lease but it can be tricky to know what is acceptable. It is important to remember the agent is working for the landlord and is therefore unlikely to advise a tenant as to how much they should be seeking or what form it should take. Examples of incentives are a rent free period or fit out contribution. Experienced property lawyers will know what is acceptable in the market and will be able to provide guidance.
Tenants should obtain tax advice as some incentives will be regarded as income and therefore might not be as valuable as they first seem.

These are just a few examples of where an experienced property lawyer can save a tenant money, and future headaches.