Depending on your situation, there can be a wide range of costs when setting up a commercial lease. Professional advisers, such as chartered surveyors and letting agents, are likely to be involved in setting up a lease, so their fees should be kept in mind when estimating the overall cost. Commercial landlords typically instruct a letting agent to handle the commercial aspects.
Preparation costs
Prospective tenants are likely to incur surveyors’ fees at the outset. If you’re a tenant, it’s advisable to obtain a report from a building surveyor. This will highlight any issues with the building itself and provide a record of its original condition.
When a landlord and tenant reach an agreement in principle on the main terms of a proposed lease, they often sign a non-legally binding document called heads of terms. This sets out the key commercial terms they intend to include in the lease.
Surveyors, or the parties themselves, might produce an initial draft. However, it is advisable to have a legal adviser review the tenancy agreement before signature. This service might cost £400–£500, excluding VAT.
An agreement may include a break clause, so make sure to account for that. This is a clause in the lease stating that either the landlord, the tenant, or both have the right to terminate the fixed-term tenancy at any time without penalty.
Negotiation costs
From there, the landlord’s solicitors will generally prepare a lease for review by the tenant’s solicitors. Each party’s solicitors will then exchange revisions until a final version is agreed.
The landlord may have to pay over £1,000 in legal fees, depending on how much negotiation is needed. However, tenants often meet some or all of the landlord’s legal fees. Because of this, more of the financial burden tends to fall on the tenant.
The tenant’s financial burden can be reduced through a fixed-price fee arrangement. Legal service providers often offer such arrangements for negotiating commercial property leases. An initial report or consultation on the terms of a lease typically costs the tenant about £500, excluding VAT. This advice will help the tenant understand their legal rights and obligations.
Check that there are no issues with the landlord’s title to the property. A legal adviser will be able to instruct and advise on the necessary property searches and reports.
Final costs
Once the tenant has paid the relevant fees and rent, and the searches are clear, the lease can be signed and registered with the Land Registry.
Tenants are also responsible for paying any SDLT (Stamp Duty Land Tax) on commercial leases. This is based on the value of the lease and is typically calculated using the premium and rental value. If the tenant’s lease is long term rather than short term, it will usually incur a higher SDLT cost.
On anything up to £150,000, there is no SDLT liability. However, there is a 1% rate payable on leases valued above £150,000, and a 2% rate on leases valued at more than £5 million.
As a tenant, it’s important to remember that there will be service charges on top of rental payments. These expenses transfer the responsibility of managing shared areas in a commercial site from the landlord to the tenant, allowing the landlord to recover their costs.
For beginning-to-end legal assistance with the leasing process, a tenant’s legal fees are likely to be around £1,500–£2,000, excluding VAT. Incidental expenses, such as Land Registry registration fees and SDLT, also need to be factored in. Tenants must keep in mind that rent reviews during their tenancy might lead to increases in rental payments.
Additional legal fees and costs
Understanding the full spectrum of legal expenses is vital when entering a commercial lease.
Beyond the basic legal fees for lease agreements, there are often additional costs that tenants and landlords must consider. These can include fees for amending clauses, negotiating specific terms, or dealing with complex legal issues that may arise.
On average, these additional legal fees can range from £300 to £800, excluding VAT, depending on the complexity and length of negotiations.
For tenants, it is particularly important to factor in these potential costs to avoid unexpected expenses. Engaging a legal professional early in the process can provide a clearer picture of the total legal costs involved.
Insurance and maintenance obligations
Insurance and maintenance responsibilities are critical aspects of a commercial lease that both landlords and tenants must understand.
Typically, the landlord insures the building, but the tenant may be responsible for insuring their contents and any improvements they make. The cost of building insurance is often passed on to the tenant through service charges.
Additionally, tenants should be aware of their maintenance obligations under the lease terms. These can include internal repairs and, in some cases, contributions towards external maintenance and repairs.
Understanding these obligations upfront can help tenants budget for the ongoing costs associated with the leased property.
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