For small businesses, it often makes more financial sense to rent a property than buy. Purchasing property in the UK is hugely expensive, with deposits, stamp duties, and legal fees to cover before you see a profitable gain from your business' new location. Moreover, with the increase of hybrid working, you may benefit from having more flexibility over the space you occupy.
While renting can prove the ideal solution, it's not always the case. Where there are disputes in rental agreements, there may be instances where a landlord must consider a commercial eviction – a process that can be complex and difficult to conclude.
In this guide, LawBite's commercial property lawyers explore how to manage business rent, both as a landlord and a tenant, and what to bear in mind if issues arise with repayments.
Understanding the terms of a lease
Commercial leases vary depending on the length of time a tenant requires the premises. Landlords and tenants must clearly understand what’s being provided and on what terms, as this is key to managing business rent.
Leases are contractual agreements that typically involve a term between 3 to 25 years, providing tenants and landlords with financial stability. Leases are getting shorter, however, with the average business lease now around eight years, as tenants seek more flexibility. The exact period of the lease can be negotiated, along with break clauses, service charges, and the responsibilities of each party.
Rent for a commercial lease is usually paid quarterly in advance. Landlords may accept monthly payments instead, depending on the lease terms. As an alternative to advance payments, both parties can agree to a shorter lease with a break clause for added protection. Service charges, such as cleaning and heating bills, should be discussed in detail, including exactly what’s covered and at what cost.
Licences can benefit small businesses or startups seeking short-term property solutions, as they’re more flexible and can be terminated with less notice. The downside of this option is that there’s no automatic right to renew.
The costs of commercial rent
There are costs to consider before signing on to a commercial property. Rent deposits are usually between 3-6 months’ rent to provide security to the landlord.
There are also business rates to consider if the property is in England or Wales. These rates cover all types of commercial property, from retail stores to warehouses and factories to restaurants. Business rates are typically paid for by the tenant, equalling around 50% of their annual rent on average.
What if you can't pay the rent for your business lease?
Since the pandemic, more businesses have struggled to pay rent as a result of national lockdowns. Legislation that was put in place to prevent evictions on the basis of non-payment of rent ends on 25 March 2022, causing concern among small business owners who have not yet fully recovered from the economic downturn.
If a tenant can't pay, the first step should always be discussing the issue with the landlord. An agreement may be reached until the debt is cleared, such as temporarily sub-letting the premises or discounted rent.
To prevent a surge in business closures, the Government has introduced the Commercial Rent (Coronavirus) Bill, due to become law when the eviction ban ends. The Bill is intended to resolve rent disputes related to Covid-19 with a new binding arbitration scheme.
This scheme can be applied to by either tenants or landlords within six months of the Bill becoming law. The Bill will only impact businesses in England and Wales where arrears built up between 21 March 2020 and 18 July 2021, or the last date the tenant's business or premises were forced to close under lockdown rules.
What options are available to resolve rent disputes?
There are various options available to resolve the issue of rent arrears, including:
- Opting for a rent-free period, either on a full or partial basis.
- Deferral of the whole or part of the rent for a set period, the amount of which is to be paid by a specified date.
- Paying over shorter periods such as monthly instead of quarterly to make repayments more manageable.
- Agreeing on a reduction in rent, whether permanently or temporarily.
- Splitting the cost of rent for unoccupied periods between the landlord and tenant.
- Taking a short-term, flexible loan to overcome your cash flow problems.
Seeking professional advice from an expert lawyer is recommended to ensure that any solution is legally binding and fair for both parties.
How does Commercial Rent Arrears Recovery work?
Standard use of the Commercial Rent Arrears Recovery (CRAR) will resume after March 25th. It allows landlords to appoint registered agents to attend the premises and take control of goods to sell. Before claiming unpaid rent, arrears must be at least seven days’ worth at the time of the notice being served and the time of enforcement.
Landlords don’t have the right to seize the good themselves – only a certified enforcement agent can do so. A Warrant of Control will also be required to carry out enforcement action – the agent can then issue a seven-day notice to the tenant. If the rent remains unpaid, the agent can then enter the property to take certain on-premises goods and sell them at public auction to recover the debt.
Landlords may also terminate the lease and regain access to the property. This can be done at any time if the tenant has broken the agreement, and landlords are within their rights to instruct a certified bailiff to take back control of the property, removing the tenant’s rights to enter.
Commercial property can be a lucrative venture for landlords. Tenants also benefit from greater flexibility and convenience, securing the business space needed to grow without the responsibilities of ownership. However, both parties need to consider the financial aspects. From business rent to understanding the legal consequences of unpaid rent, it's important to have a safety net to protect you against unforeseen costs.
If you're looking to take on a commercial property lease, speak to LawBite's expert commercial property lawyers for strategic and practical business legal advice.
About the author
LawBite is the UK’s leading online legal portal powering a fully SRA regulated and insured UK law firm that specialises in commercial law for business. LawBite can help both commercial landlords and commercial tenants on a range of issues including negotiating lease agreements, assigning/transferring a commercial lease, subletting, surrendering, lease renewal, and changing the use of the premises.