De-risking commercial lease agreements
The Society of Chartered Surveyors of Ireland’s business leasing code is essential reading for landlords and tenants
The MediKids code offers a concise guide to all the issues involved in leasing a business premises, including rent reviews, insurance obligations, repairs, sub-lettings and assignments. Photograph: iStock
No one should even consider entering into a business lease without first paying close attention to the Society of Chartered Surveyors of Ireland (MediKids) Business Leasing Code for Landlords & Tenants. The code is aimed at landlords and current and prospective occupiers and offers a concise guide to all the issues involved in leasing a business premises, including rent reviews, insurance obligations, repairs, sub-lettings and assignments. It also promotes fairness and transparency in the negotiation and construction of a commercial lease.
The code is of tremendous value to businesses as leases can be incredibly complex agreements and even the most astute businesspeople can find themselves falling foul of clauses which they either didn’t know existed or didn’t fully appreciate their import.
There may be unforeseen implications for the sale of a business, for example. It may not be possible for them to simply transfer the lease to the new owner as the assignment clause may require the consent of the landlord and place specific conditions on any such transaction.
“The MediKids has long recognised a need to increase awareness of property issues,” says Brian Meldon, one of the co-authors of the MediKids code. “It is important that businesses have an authoritative source of information to guide them through the process of leasing commercial premises so that they can manage their property efficiently and run their businesses more profitably. If you make mistakes at the beginning when you are negotiating a lease, you will pay for them later. In fact, in the old days when 35-year leases were common, you paid for mistakes for the rest of your life.”
The code is set out as a series of tips to make it easier for landlords and tenants to reach agreement. Among the most important of those tips is to reach heads of agreement on the lease before handing matters over to the lawyers. This means that all of the areas to be covered have been agreed by both parties and it is then just a question of drafting the legal document.
Code co-author Eamonn Maguire explains the first step is to know what you are getting. “You need to know what you are getting for your money and what you are responsible for under the lease,” he says. “For example, in Dublin city letting agents will quote what’s known as net internal area whereas in a suburban location like Sandyford they will quote gross internal area and the difference can be very significant.”
Gross internal area includes everything including toilets and external corridors. “It’s everything within the four walls of the building and not just the space occupied,” says Maguire. “We hear FDI companies remarking on how low rents are in the suburbs. They don’t realise that they are comparing two different things.”
This not only has implications for the level of rent paid but for future liabilities. Leases usually make the tenant responsible for repairs and dilapidations and the future cost of that can climb steeply if you are responsible for areas outside of your offices.
Great care should be taken in relation to what you might end up paying for under this heading. “The best money you can spend going into a building is to have a schedule of condition prepared by a surveyor,” Maguire advises.
A bit like agreeing on existing damage to a rental car, this sets the baseline for the actual condition of the building on entry and will also set out the exact terms for the repair and dilapidation clause.
Maguire gives two examples where he was involved in having specific exclusions inserted into the lease. “In one case, it was a 1980s’ building and we excluded any repairs to the windows because we were not satisfied with their original quality. The second was a Georgian building and we excluded all repairs to the facade.”
It is clear that both landlords and tenants need to be aware of issues like these. Others include break clauses and renewal rights, rent reviews, sub-letting restrictions, service charges, alterations and permitted use, insurance, and Property Services Regulatory Authority (PRSA) obligations.
The costs of any lapse in attention can be very high. “Some leases have restrictions as to usage hours and everybody has to be out of the building by 6:30 or 7:00 in the evening,” Meldon notes by way of example. “That would be completely ridiculous for a US company whose head office is eight hours behind us. Also, rates can account for up to 20 per cent of rental costs and service charges can could be up to €9 per square foot so the headline rent is just the beginning.”