A short lease is not always a low-risk lease

Taking a lease is not just about finding the right space. How the lease is structured will affect cost, flexibility and risk throughout the term.

Once granted, a lease is binding unless there is a clear right to break or some other agreed exit. The rent is only part of the picture. Service charge, insurance, repair liability and rent review can make a deal materially more expensive than it first appears.

The agreed term should reflect how long you are likely to need the space. A shorter lease may feel like the safer option, but it can be a poor fit if you are spending heavily on fit-out or need a degree of continuity. Equally, a longer term may improve the rent or incentive package, while making it harder to adapt if the business’s operational needs change.

Key considerations before you commit

One way of building flexibility into the lease is to negotiate a break right. That can be useful, but a break clause is only as good as the conditions attached to it. If the right to break depends on vacant possession, payment of all sums due or strict compliance with the lease, it needs to be looked at carefully. A break right that looks flexible on paper can be much harder to use in practice.

You should also be clear whether the lease is protected by the Landlord and Tenant Act 1954. If it is, you may have a statutory right to renew at the end of the term. If it is contracted out, you should assume you may have to leave when the lease expires. That can be perfectly acceptable, but it should be a conscious commercial decision rather than something discovered too late.

A lower rent does not necessarily mean a better deal. If you focus only on rent, it is easy to miss the true cost of the lease.

Service charge is often where tenants get caught out. A rent figure may look manageable, but if the lease allows the landlord to recover a broad range of costs relating to the building and there is no meaningful cap, the total cost of occupation can be very different from what you first budgeted for.

These points are usually best dealt with at heads of terms stage. At that stage, you should know how long you want the space for, how much flexibility you may need, and whether renewal rights are important. Leaving those points until the lease draft arrives is often too late.

If you would like to discuss a proposed lease or heads of terms, please get in touch with Jordan McMullan. Jordan is a solicitor in our Commercial Property team, advising occupiers on lease structure, flexibility and risk.

Bracher Rawlins LLP is based in London.