Taking on a lease of a commercial property can be a daunting task for you and your business. Below is a 6-step guide that will help you to understand the various stages of the process, what is happening as the transaction progresses and what to expect from your solicitor.
1. Heads of Terms agreed between parties/agents
The Heads of Terms set out the main points of the transaction, and although usually stated to be “subject to contract” and not legally binding, they are the basis of the legal drafting and should be accurate. Heads of Terms are typically prepared by the agents who arrange the transaction. Not all deals have agents or formal heads of terms, but your solicitor will still need this basic information so that they know what has been agreed with the landlord.
Now is the time the parties consider whether the tenant must provide a guarantor, the rent payable and any rent deposit, whether the property is VAT elected, the length of term, the extent of the property being leased, rent reviews, break options, service charges (for common areas), insurance, the intended use of the property, and whether any rights need to be reserved or retained.
Solicitors are usually instructed after Heads of Terms are agreed.
2. Solicitors instructed
Heads of Terms will be sent to the appointed solicitors for each party.
You will need to formally appoint your solicitor. Your solicitor will usually send you his or her terms of business, ask for your identification documents and any money on account i.e. for property searches and HM Land Registry documents. Your solicitor will discuss with you at this point what you intend to use the property for and whether any works need to be carried out to the property in order for you to be able to use the property for that purpose.
3. Lease drafted and title information prepared
The landlord’s solicitor will draft the lease (based on the agreed Heads of Terms) and send it to your solicitor. The landlord’s solicitor will also send the title documents, the energy performance certificate and replies to Commercial Property Standard Enquiries (CPSEs). CPSEs are the standard general property enquiries raised on a lease of a commercial property.
4. Tenant’s due diligence
Once your solicitor has received the lease papers, they will carry out a process of due diligence in accordance with your requirements. This will include investigating the title, the planning position of the property, whether the property is VAT elected, making enquiries with any relevant management company and assessing the seller’s replies to the CPSEs. These are often answered in quite a vague way, so if you are not clear about something, ask your solicitor. Additional enquiries can be raised if necessary.
Your solicitor will also request the property searches (if you decide to have these carried out) and these will include a local authority search, an environmental search, water and drainage search, a coal mining search and possibly a utilities search. Your solicitor may also advise that additional searches are carried out depending on the nature of the property and its location. Unless it is a very short-term lease or you are fully aware of the property already, it is always a prudent choice to carry out searches.
Once your solicitor has reviewed the title and conducted any necessary searches, they will usually raise any necessary enquiries with your solicitor. Depending on the answers given on behalf of the landlord, more enquiries may need to be raised.
Due diligence can be the longest stage of the transaction, possibly lasting a few weeks. Timing depends on the speed of replies from the landlord’s solicitor and also the turnaround time of the search providers.
5. Lease agreed and reporting
Once your solicitor is happy with the information gleaned from the due diligence, the lease will be negotiated and agreed. The lease may go back and forth between solicitors until both parties are happy with the document. One point which will be heavily negotiated is your repairing obligation and your solicitor may ask you to prepare a schedule of condition, documenting the state of the property.
Your solicitor will report to you on the due diligence process and their findings and on the terms of the lease. Your solicitor will discuss with you in detail your requirements of the property, whether there are any defects of which you should be aware and on any specific provisions in the lease. You will also sign the lease, and rent deposit deed and the stamp duty land tax form where applicable. If rent is payable in advance, your solicitor will request the first rent instalment, rent deposit and any other apportionments i.e. insurance payments or service charge payments from you.
6. Lease completed
Once you and the landlord have signed your respective parts of the lease, the lease can complete and the rent will be paid over to the landlord’s solicitor. Your solicitor will tell you when the lease has completed. Upon completion, you will be entitled to exclusive possession of the property, so you should ensure you have received all keys and alarm codes/fobs, and you should read all utility meters.
Your solicitor will now deal with any post-completion matters such as registering the lease at HM Land Registry and paying any Stamp Duty Land Tax which is due.
If you are not sure about registration, BHW has produced an article dealing with some commonly asked questions about registration of leases.
Your signed part of the lease will be sent to the landlord to hold and the landlord’s part will be sent to your solicitor, who will either hold it on your behalf or give it to you for safekeeping.
For more information or advice with regards to taking on a lease of a commercial property, contact commercial property Associate Solicitor Eleanor Rattay on 0116 281 6224 or email firstname.lastname@example.org.