This guidance is aimed at businesses who are not regularly engaged in acquiring business premises or who may not have within their organisation expertise in this area.
Heads of Terms
- Whether you have negotiated a business letting yourself or with agents acting for the landlord, you will have concluded some heads of terms with the proposed landlord. Unless you have used an acquisition agent/surveyor, it is unlikely you will have had professional assistance in negotiating the heads of terms. Solicitors do not negotiate on behalf of tenants directly either with landlords or their agents, as we are not qualified to deal with rent, for that you need a surveyor, but we are always happy to advise prospective tenants on general issues that arise in the negotiation of heads of terms. The terms of break clauses can cause problems for example.
- At the heads of terms stage, it is wise to start planning a timetable and working out what items might lie on the critical path. You may need to co-ordinate your move to new premises with your departure from existing premises; you may need to fit-out the premises for your particular use and will need to brief a designer or a fitting out contractor and listen to what they say about lead times for obtaining materials and getting work done; the acquisition of the premises may be part of an expansion of the business where other elements, such as staff recruitment, or bank finance, need to be put in place, and the heads of terms may themselves impose time limits or targets for getting the transaction completed.
- When planning your timetable and working out what items might lie on the critical path you will also be forming your budget. This will include fit-out costs, moving costs, marketing costs and also professional fees, such as surveyor’s or designer’s costs. Legal costs are another element. Usually, we are able to quote a fixed fee, subject to variation if, for example, there is a significant change to the heads of terms or a difficult problem with the seller’s/ landlord’s title. We can also tell you at an early stage the searches we recommend, their cost and likely time to obtain, There are usually some lesser costs such as fees for getting documents from and doing searches at Companies House and the Land Registry. We can calculate the likely SDLT liability and tell you the Land Registry fee.
- You are likely to be very busy on a number of matters but unfortunately, whilst we aim to take as much off your shoulders as we can the legal process cannot be completed promptly and effectively without attention from the client and often a significant commitment of time and effort, particularly if the transaction runs into difficulties.
- There are a number of things for you to look out for when viewing business premises which are important to know in their own right so you can judge their suitability and which it is important that we know so that we can make the right enquiries or agree the right provisions in the documentation. After completing and moving in that you may find you have no idea where the water stopcock might be, which will not have been at the front of your mind at the outset. We have developed a list of items to look out for on inspection which may be of use [ATTACH LINK HERE]. Note that generally, since our job is concerned with what is in writing, solicitors will not usually visit premises themselves, unless perhaps there is a query about a boundary or a right of way for example where the documents, including any plans, do not seem to provide the answer.
- Our primary task is to gather together the information and to negotiate the documentation which will enable you to take an informed decision on whether or not to proceed and, if you do proceed, what risks and responsibilities you are taking on. Some of those, in our view, may be unusual or onerous. Whilst we are doing our work, we are aware that other pieces of the project will be falling into place and landlord and tenant need to know how the legal aspect is progressing and in particular whether it is likely to result in a delay that was not planned for at the outset.
- The heads of terms will indicate what documentation will be required. Generally, this is prepared by the landlord’s/seller’s solicitors, who will need certain information from their client, and copies of the property deeds, before they can complete the first stage; producing draft documents for the tenant’s solicitor’s approval. If you are taking a new lease from a landlord then, typically, draft documentation for approval will include a lease; perhaps a contract for the grant of that lease; if there is security required, then a rent deposit deed or guarantee and if you are planning a fit-out that involves alterations to the premises, then a licence permitting those alterations. If the landlord is himself a tenant of the premises, or of the building of which they form part, then your lease will be an underlease and the head landlord’s consent will be required. It is likely the head landlord will need to see the references that your landlord’s agents will be seeking to obtain on you – indeed the head landord may want more – and, if he is content, he will instruct his solicitors, at the cost of his tenant, to produce a draft document permitting the underletting.
- If you are taking the transfer of an existing lease, then your seller/assignor will need his landlord’s consent and, again, the landlord needs to approve you and instruct solicitors to prepare a licence documents permitting the transfer. The other documents mentioned above may be relevant as well, though the lease itself will not be up for negotiation, since it should have been negotiated at the time it was granted. Nevertheless, on studying it, we may find something there that is unacceptable, in which case we will advise that the lease needs to be varied, which is something the head landlord is not bound to agree to.
Questions and answers
- Whilst there is a certain degree of standardisation in the terms of commercial property documentation, it is rare to find with lettings that themselves have been negotiated that the documentation is treated on a similar basis. That is not to say that a landlord’s solicitor will accept most, or even a few, of the amendments we propose on behalf of a tenant, but the approach does differ from, say, taking a room in a business centre, where you are expected to sign up on the standard terms or look elsewhere. The negotiation process can be swift and smooth or slow and difficult. Solicitors need to protect their client’s position but without losing sight of the commercial objectives.
- Apart from approving the documentation, we must also check the landlord/seller’s title to grant/transfer the lease. Apart from needing consent from his landlord, consent from a mortgage lender might be needed. We also check whether there is anything on the title, such as a restriction on the use of the premises that might affect you or other obstacles that will cause delay or even prevent the proposed deal going ahead.
- Another part of the job is to carry out relevant searches of public records and other accessible sources of information and to raise enquiries of the seller’s/landlord’s solicitors on a number of matters concerning the property. Someone selling residential premises, or their agent, is required to produce a Home Information Pack (“HIP”). At present, there is no legal requirement for someone selling or letting business premises to produce a commercial HIP (what you might call a CHIP). Nevertheless, some sellers/landlords like to be well-prepared and delivering to the tenant’s solicitor, early on, adequate answers to likely questions will always help get the deal done. However, many sellers/landlords are slow to deal with this part of the process which, admittedly, is tedious.
- There is an industry standard set of enquiries solicitors are used to working with. They include general enquiries about matters such as boundary features, party wall matters, rights enjoyed by the premises over other property and vice versa, planning consents, compliance with other statutory and regulatory requirements, building problems, environmental matters, disputes, notices given or received, details of buildings insurance, management, service charge collection and anticipated major works. The forms were designed originally for large developments in the City, but have percolated throughout the market because unfortunately the issues they raise generally apply as much to smaller buildings as they do to a large office block, albeit involving much less detail. Getting the answers prepared is one of the most time-consuming aspects of any commercial property deal, and requires a collaborative effort of landlord, their solicitor and, often, the agent.
- The searches we would recommend and apply for will vary from one transaction to another but usually would include a local search and enquiries of the local authority, a search of the drainage and water supply records and possibly a desktop environmental study. Sometimes, but rarely, a seller/landlord has already done these himself, which saves time and cost. Searches are going to cost up to a few hundred pounds. Local searches can reveal matters such as planning laws breaches that are going to affect whether you can proceed. A drainage search might show the public sewer is reached only via a length of private drain maintainable not at utility company expense but at the cost of those it serves. An environmental study may show a previous use of the land which might present a serious contamination risk.
Completing the deal
- Once the documentation is in an agreed form and searches and enquiries are completed, the transaction moves towards the stage at which the parties commit to it. Sometimes, depending on the structure of the transaction and the needs of the parties, there is a gap between exchanging and completing, as there is with house buying, but often the deal goes straight to completion. The documents are prepared for signing by the parties, a completion statement is prepared and approved, you put us in funds to complete the transaction and it is then formally completed. It is likely that it is only at that stage that you get the keys, though sometimes they will be available from exchange, where there is an exchange of contracts, to allow preliminary fit-out work, telecoms cable laying or similar.
- After completion, there may be Stamp Duty land Tax for you to pay, which we will process on your behalf, and finally, whether it is the transfer of an existing lease or the grant of a new lease, it will probably need perfecting by being registered at the Land Registry.
If you would like further information, please contact Roger Wilkinson or Richard Hemingway.