Pre-Lease due Diligence
Taking on a lease for your business’s premises is a big financial commitment. You need to make sure you understand all the terms of the lease before you sign on the dotted line, to avoid incurring costs you were not expecting or were unprepared for.
Knowing the condition of the property and its maintenance requirements is an essential part of any pre-lease due diligence to mitigate that risk, which makes using the right surveyor to carry out a thorough survey invaluable.
Here, in this Q&A, we give you a detailed overview of everything you need to consider before you commit to your lease, and what you can expect both during and at the end of your lease.
You need to appoint a solicitor. They will ensure that the lease proposed by the landlord does not contain any unusual or unnecessarily onerous lease clauses. However, they do not visit the property and their responsibility does not include advice on the condition of the premises.
Although you might think that a property looks to be in good condition, it is crucial that you also appoint a qualified and competent surveyor.
Your surveyor will inspect the property on your behalf, to identify its overall condition and suitability for your requirements. Before their inspection, they will discuss your requirements with you so that your survey is tailored to your needs.
Yes, definitely. Instructing an experienced qualified surveyor to inspect the building and produce a commercial building survey report before you sign the lease will confirm if the building has any ‘hidden surprises’ which might make it unsuitable for your needs, and will normally flag elements of the building which are problems that need attention now, or may become problems during the term of your lease.
Potential repair costs may become significant and undertaking major repairs to the building could affect your ability to operate your business, so make sure that you budget for these costs when considering whether premises are right for you.
The survey will also usually highlight potential breaches of statutory requirements, fire safety or other hazards.
A dilapidations cost assessment will forecast the costs which you are likely to be responsible for, both during and at the end of the lease.
Depending on the condition of the property, it could also be useful for your surveyor to prepare a photographic schedule of condition to protect you from a dilapidations claim at the end of your lease. Watch this video for an example.
With this information, you may be able to negotiate with the landlord to either ensure they put these items into repair before your occupation, or negotiate a reduced or rent-free period equivalent to the cost of undertaking the works.
Workplaces are covered by a range of legislation, much of which is enacted under the Health and Safety at Work Act 1974, although other legislation applies too. This means that you will need to prepare documentation such as a fire risk assessment, disability audits, and general risk assessments.
You should ensure that any services, such as electricity and gas, have been properly tested and are safe. Most business do not have this expertise in-house and it will be your responsibility to commission third-party advice.
What do I need to think about when fitting-out leasehold premises?
You will need to make sure that the premises are suitable for your operational requirements and represent your company’s brand.
When you have received a satisfactory survey report, you will need to consider how you need the property to be laid out and finished. A good surveyor or architect can help you with space planning if necessary.
Careful fit-out planning can help you to reduce lease end costs.
Always keep in mind whether your fit-out will need to be removed at lease end, which could prove costly.
This is particularly important if your lease does not have an automatic right of renewal. This type of lease is known as being ‘outside the 54 Act’.
If you do not have a right to renewal, you should consider your fit-out to be temporary, lasting only for the duration of the lease. This might cause problems if, for example, you are looking to open a restaurant, as these types of fit-out can be very expensive.
A surveyor will help with space planning, which could reduce lease end costs.
They will prepare a very specific schedule of works, to ensure what you want is exactly what is built. They will tender the works, draw up a contract after advising on contractual requirements, such as timing of payments and necessary insurances, and oversee the construction phase.
This project management will help to identify cost savings, drive value for money and ensure that you are paying only for completed works.
Your surveyor will help you to plan your works in a safe manner and ensure Building Regulations compliance across a range of legislation.
There can be significant penalties if legislation is breached in a construction project, including unlimited fines and imprisonment if things go wrong as a result of poor planning.
Most tenants do not have in-house expertise to address regulatory issues and so, with the serious implications involved if legislation is breached, we recommend professional representation to plan and oversee your fit-out.
You will need to consider and budget for a range of costs, which are likely to include:
Also, think about whether you will want to complete refurbishment works during your lease, after your initial fit-out.
It depends on the terms of your lease, however, you will usually be responsible for some repairs and redecoration during the term of your lease. These may be limited to the internal parts of the building or may also include the external parts, such as the roof, windows and exterior walls of the building.
Usually, you will also be required to keep any of the landlords’ fixtures regularly tested and serviced including, for example:
If you fail to address statutory requirements, you are likely to be in breach of your lease terms.
You may also have to contribute towards maintenance and repair of any communal areas such as access roads or car parks.
You could also be responsible for paying business rates, utilities and insurance costs, including shop-front insurance if applicable.
If you do not keep the property in good repair, you could become liable for additional legal and surveyor fees if the landlord takes action to address the disrepair.
Understanding the specific requirements of the lease is essential as you may become responsible to put parts of the building into repair even though they may already be in poor condition.
What happens at the end of my lease?
Most landlords will usually stipulate that the building is handed back in at least the same condition it was before the lease, and that you have undertaken the repairs and redecoration you agreed to do. You may also be required to remove any alterations you have made and reinstate the premises to how it was at the beginning of the lease.
Normally, the landlord’s surveyor will inspect the property shortly before or after the lease ends and prepare a schedule of dilapidations. This schedule will list any items of disrepair, the repairs which are required and their expected costs.
If the schedule is served before the end of the lease, you may choose to undertake those works or, alternatively, agree a financial payment to the landlord so that they can take care of them after you leave. If the lease has already ended, you will normally have to negotiate a financial payment or appoint a surveyor to do this on your behalf.
When a lease comes to an end, particularly if you are not handing back the property on the final contractual day of the lease, you might incur some legal fees, for example to ensure that any notices to terminate the lease are compliant with legislation and the lease requirements – this is particularly important if enacting a break clause.
If you have not kept the property in the condition required by the lease, you are likely to be liable for surveyor fees and legal fees to prepare and serve a schedule of dilapidations.
You will also be required to pay for work needed to remedy disrepair. Dilapidations costs commonly run to £10,000s or even £100,000s. This is why it is important to engage a surveyor at the start of the lease, as they can help you to significantly reduce your exposure to such lease end costs.
For longer leases, you might also need to lodge paperwork with Land Registry, for a small fee.
Working with a surveyor to inspect your premises before you take on a lease, and to oversee your fit-out project, can help to save costs overall, by advising on any issues before you commit, and by recommending how best to design the fit-out to suit your budget.
They can help to significantly reduce your exposure to lease end costs.
They will also save you a significant amount of time by dealing with the contract administration and fit-out project management on your behalf, allowing you to focus on your core business; giving you back the time to do what you do best.
Also, it’s important to remember that, without the help of a surveyor, you could end up in breach of statutory requirements, which could be very costly if enforcement action is taken.
You should get in touch with Harrison Clarke. We have used our wealth of experience in commercial property to offer a unique pre-lease due diligence ‘Leaseholder Survey’.
This combined building survey and dilapidations cost assessment reports on your lease obligations, the current condition of the premises and the potential costs of repair. We also highlight any statutory and legal compliance issues, and set out possible mitigation strategies to reduce the likelihood and cost of lease-end dilapidations claims.
Our report is presented using an easy-to-understand format, and focuses on any negative items which we feel may affect your occupation. We have found that this approach offers a more cost-effective approach, being about 30% cheaper thanone third to one half of the cost of if you arranged arranging a separate full building survey and dilapidations cost assessment.
Where buildings are of a more complex nature, or you are occupying a building for a longer term, we also offer commercial building survey or dilapidations cost assessment services.
Please contact our team of friendly and highly competent surveyors, who will be delighted to help you.
Call 023 8155 0051
Email: info@harrisonclarke.co
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Tim set up Harrison Clarke Chartered Surveyors in July 2017 following a series of public and private sector surveying roles, having previously worked for the University of Cambridge, Rund Partnership, Goadsby, and CBRE.
Tim has degrees in building surveying, construction project management, and business administration.
