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Dealing with landlords

Forget fancy decor and German kitchens, if there’s one thing that it pays to get right when setting up your bar or restaurant, it’s the lease. Henrietta Clancy looks at how to avoid the common legal pitfalls and learn to love your landlord

The service industry is awash, it seems, with cautionary tales of bloodthirsty landlords eager to suck their tenants dry, with prices that rise, clauses that spring into appearance and tie-ins that place harsh constraints on profits. It’s a veritable minefield out there. Lurking behind every bar, pub and restaurant door there’s a bewildered tenant clutching onto his lease, weeping with the sheer confusion of it all…

Well, not quite, but leases are full of headache-inducing jargon and small print, and notoriously hard to get to grips with. The good news is that a little bit of preparatory reading can ensure that you’re in complete control before you agree to the terms of a new lease, meaning that there should be fewer surprises in the long run. The idiosyncrasies of commercial leases are plentiful, and as such, each must be treated as an individual case, but there are a few general areas that anyone entering into a lease for the first time should look out for.

A PREMIUM TO PAY

Thierry Tomasin, owner of Angelus, was relatively inexperienced when he embarked on a search for a restaurant in Mayfair four years ago. Without the aid of lawyers he found a property, made an offer and set to work organising the start-up. Two days before signing, the landlord spontaneously put the (already high) premium up by £150,000. He was forced to pull out and all of his plans crumbled. Lesson one, then – apart from the fact that verbal agreements aren’t worth the paper they’re not written on – is about premiums. A premium is a sum of money that is paid to the landlord as a condition of being allowed to have a tenancy in the first place. It is a one off payment that is decided upon before the lease is signed – presumably in the months beforehand, while the negotiations are taking place – and paid immediately after.

Keith Miller, a property lawyer at Joelson Wilson, calls Tomasin’s situation ‘very unlucky and a reflection of the market at that time’, and notes that it isn’t something that happens often. Bad luck aside, things have changed since Tomasin was, as he puts it, ‘presumed to be Richard Branson’. Since the economic downturn, landlords have realised that premiums – most prevalent in desirable areas – have had to be scrapped because people looking to start up a restaurant, pub or bar simply cannot afford to lay that money down in advance of shelling out to get a new venture on its feet.

In fact, things have flipped right round. In order to find tenants to fill their properties, some landlords are now paying their tenants initially. Tenants are being offered rent-free periods at the beginning of their leases, as well as inducements – an allowance towards fitting out a new establishment.

Two other things that will affect cost in the long run are charges for services and dilapidation – these too, are costs that can be capped if you negotiate these terms. With service charge caps, landlords are agreeing to limit service charges to a certain rate per square foot, albeit a rate that is often indexed annually. (This can happen despite the fact that existing tenants in a building may not have the same benefit; the landlord picks up the tab for the difference.) Having a cap on dilapidation charges means that at the end of a term tenants can’t be presented with substantial claims that they haven’t budgeted for.

'The idiosyncrasies of commercial leases are plentiful'

ALTERATIONS

For most people, the first thing they want to do when they move into a property is start personalising the place: be that making structural changes, gutting the interior or concentrating on the exterior and putting signage up. For this reason, it’s imperative that you establish what your rights are concerning alterations very early on. Although in most cases anything that’s not structural shouldn’t need approval, some landlords put incredibly strict constraints on what can be altered – this is especially true of leases that were set up around 30 years ago, in a more landlord-friendly era.

Martin Lam experienced some particularly harsh constraints when he took over an existing lease – written in the 1980s – when he set up Ransome’s Dock. The lease specified the explicit exclusion of any type of signage as the landlord thought it to be untidy looking. Although this was okay for the surrounding businesses, most of which are offices, as a restaurant this was obviously a problem. After spending an extra £3,000-£4,000 in solicitors fees – with which they negotiated the wording of the lease – Lam was able to use a sign to advertise his restaurant, albeit with precise instructions on its colour, size and restriction.

'Landlords are like children – what works for one might not work for another'

CALL THE LAW

Whether you can tackle things yourself or whether you should call upon the assistance of a specialist in the field depends on both you and the lease. In many instances legal assistance is not necessary. After the increased-premium setback, Tomasin was able to sit down with his new landlord without lawyers and secure a five-year stable rate with the first six months rent-free. He was, and still is,
very happy with the situation.

However Lam had to use solicitors, and for quite a while. Having the wording changed on his pre-existing lease required innate knowledge of commercial property law, and the nuances of law generally, that he couldn’t have possessed. He does however make the point that lawyers often need to be given strict instructions about how far you’re prepared to go financially, as legal costs can escalate quite easily while they’re preoccupied with winning a case.

Will Beckett of Underdog Group thinks that the less experience you have, the more you should get lawyers to share their expertise. Beckett is keen to stress that every situation is different too. Landlords, he says, are like children – the approach that works for one might not work for another; some landlords he deals with directly, some exclusively through solicitors.

Jo Eames of Peach Pubs recommends not cutting corners. The purpose of having a lawyer is to understand what you’re getting yourself into, and if you’re not entirely knowledgeable about the business, then they’re a good idea. Luckily, a previous career as a property lawyer has put her in good stead. ‘I might not particularly like it,’ she says, ‘but I do understand it.’

All the information is there, written in ink. It’s just a case of really reading it, and really understanding what it means both now and in the future should certain situations arise.

10 things to look out for on leases according to Keith Miller, property lawyer at 

Joelson Wilson

1 The length of the term
You need a term that is sufficiently long to justify your initial investment in the premises – your fit-out and other set-up costs – but there is a downside to having too long a term. One is Stamp Duty Land Tax, which is charged at a high rate on a lease, and the longer the term, the higher the tax. This doesn’t change even if there is a break clause (see below) which the tenant exercises. The other obvious downside is the inability to get out of a long fixed-term lease if the business does not succeed.

2 Break clauses
If you do negotiate a break clause, make sure that its conditions do not disadvantage you. For instance, some landlords require a penalty to be paid to compensate them for early termination. Or the clause as written into the lease might say that, if the tenant has not, for example, kept the premises in good repair, his break notice will be invalid and the lease will continue. The only fair conditions should be that you have paid the rent and you should give up occupation to the landlord by the day when the notice expires.

3 Costs
Never agree to pay the landlords’ legal fees. This was made unlawful in 1963, but people seem
to forget! Nor should their surveyors’ fees be for your account.

4 Restrictions on use
Your lease will specify the ‘permitted use’ for the premises, such as a bar, a public house or a nightclub. Try not to agree any wording which is too restrictive, for example ‘only as a wine bar’. Beware also of restricted opening hours, either in the lease, under planning or in your premises licence.5 Disposal
Particularly if you have a long lease, you must have the right to sell (‘assign’) your lease or sublet, and the right to do this should not be restricted unreasonably. An assignee should not be required to provide an unreasonable level of security to the landlord, for instance ‘a rent deposit equivalent to at least 12 months’ rent’. You should be aware that, if you assign, you will continue to be responsible for the buyer/assignee’s performance of the lease obligations. The document which contains those responsibilities is called an ‘authorised guarantee agreement’, commonly known as an ‘AGA’.

6 Personal guarantees
You should avoid giving personal guarantees, unless you trade under your own name, in which case you will be liable personally as the tenant. If your trading company has only recently been formed, the landlord will be keen to have as much security as possible for payment of the rent, so will put pressure on you to give a personal guarantee or (see above) a large rent deposit.

7 Repairs
Most leases say that the tenant should be responsible for all repairs (‘an FRI lease’ is the terminology – full repairing and insuring). You must resist this, not least because you may be taking over premises that are in poor condition following the last tenant’s departure. Tell the landlord that there must be a ‘schedule of condition’, recording the state of the premises at the start of the lease and you should not be liable for keeping the premises in any better condition. The schedule can be just a photographic record with explanatory notes. In any event, you ought to have a structural survey carried out.

8 Alterations
Make sure that you will have the right to make internal alterations. The landlord may retain the right to approve them, but that should be subject to approval not being unreasonably withheld or delayed. Ideally, internal non-structural partitions should not require consent at all. Do not commit to the lease before getting consent.

9 Rights to be granted
Unless you are taking self-contained or lock-up premises, make sure you are able to enjoy all rights that you need, such as for access, emergency escape, toilets, signage and services for utilities. If the lease does not include the shop-front, you will need the right to put up your nameboard.

10 Rent payments
Rent is usually collected quarterly in advance, so, if you prefer to pay monthly, make that clear from the start, as it is quite a radical departure for some landlords. Remember that rent is due on the dates stated in the lease whether demanded or not, so you must pay even if you receive no invoice. Usually there is a period of grace before you are liable to pay interest on late payments (but not always) and before the lease becomes liable to forfeiture. Most landlords expect payment by direct debit or standing order.

For services and advice on commercial property law, contact Keith Miller on 020 7580 5721 or KM@joelsonwilson.com

Editorial feature from Imbibe Magazine – November/December 2010

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