Lease Terms that Affect Business Property Value

This month we take a look at lease terms that affect business property value. As with most business contracts the “devil is in the detail” 

Many operators will look for the perfect location first and make an offer in terms of rent before looking at the finer details of the contract or lease. Most of the main lease terms will influence the ability of the business premises to trade profitably. They will also have a big influence on the market rent and whether you can sell the business or move to alternative premises. Below are only a few lease terms that affect business property value.

Lease Length

If you are investing in a business and location, you will need time to recoup the initial investment. Commercial leases are getting shorter over time, with the commercial standard of 20 year fully repairing and insuring leases becoming a rarity. If you consider that you may want to sell either the business or the lease (assignment) then a longer-term lease is preferable. Keep in mind that if the potential buyer needs bank finance, banks will usually look for a term in excess of 10 years if lending for the purchase.  

The User Clause

Within commercial leases there is a clause that clearly defines the use that the landlord allows in the property. This is often overlooked for operators looking to trade as café/food businesses when the user clause and potentially planning use is for retail. If you are trading as a café or have a food element it is better to have this defined in the lease. If a potential buyer wants to expand the current food use and the user clause is for retail, they may not be willing to take the risk.  

Break Clauses

Often there will be a break clause in the lease. This is normally an advantage to the tenant when it is a “tenants only” break. For example, you as the operator has a chance to exit the lease and property at a given time. This is normally with 6 months’ notice and the dates will be specific. However sometimes the Landlord requires an option to break also. This effectively shortens the time that you have guaranteed possession of the property, this will be considered by buyers and lenders alike.  

Operating Hours

Much like the user clause above, the landlord might impose restricted trading hours. This will directly effect the trading ability of the site and any potential trade going forward. 

Repairs and Maintenance

The repair obligation can be down to the tenant alone (Fully repairing) or split between internal and external. Or the landlord may wish to retain control and obligation to repair the property. Either way this is probably the most costly element after rent and the extent of your obligation should be considered before entering into the lease. You may wish to attach a Schedule of Condition to the lease to ensure that your obligations are restricted. 

Subletting and Assignment

Restrictions on subletting and assignment can limit a tenant’s ability to adapt to changing business needs, expansion or the ability to sell.  

Signage and Advertising

Restrictions on signage and advertising can impact a tenant’s visibility and ability to attract customers. Tenants should ensure that they have the means to be able to promote their business with external/internal signage. 

There are many more clauses that will affect the business and the above are in no means exhaustive. During the negotiation period the above points should be considered fully and negotiated before agreeing to any contract or lease. They will influence the market rent, so should be considered before making an offer or agreeing on rent. 

If you need further advice on lease terms, need a rent review, valuation, or some professional advice then get in contact with us on [email protected] or 01179 200090.