Depending on your situation, there can be a wide range of costs when setting up a commercial lease. Professional advisers, such as chartered surveyors and letting agents are likely to be involved in setting up a lease. So, these advisors’ fees should be kept in mind when estimating overall costs. Commercial landlords typically instruct a letting agent to handle the commercial aspects.
Preparation costs
Prospective tenants are likely to incur surveyors’ fees at the outset. It is advisable for tenants to instruct a report from a building surveyor. This will highlight any issues with the building itself, and provide a record of its original condition.
When a landlord and tenant reach an agreement in principle on the main terms of a proposed lease, they often sign a non-legally binding document. This is called the heads of terms and sets out key commercial terms which they intend to include in the lease.
Surveyors, or the parties themselves, might produce an initial draft. But it is advisable to have a legal adviser review the tenancy agreement before signature. Such a service might cost £400–£500 (excluding VAT).
It would be wise to remember that the agreement may include a break clause. This is a line in the lease stipulating that either the landlord, the tenant, or both have the right to terminate the fixed term tenancy at any time without penalty.
Negotiation costs
From there, the landlord’s solicitors will generally prepare a lease for review by the tenant’s solicitors. Each parties' solicitors will then exchange any revisions until a final version is agreed.
Depending on the level of negotiations required, the landlord may incur £1,000 or more in legal fees during this process. However, tenants often meet some or all the landlords’ legal fees. Because of this, more of the financial burden tends to fall on the tenant.
The tenant's financial burden can be reduced through a fixed-price fee arrangement. Legal service providers often offer such arrangements for negotiating commercial leases. An initial report or consultation on the terms of a lease typically costs the tenant about £500, excluding VAT. Such advice will help the tenant understand their legal rights and obligations.
It is also important, however, to check that there are no issues with the landlord’s title to the property. A legal adviser will be able to instruct and advise upon the necessary property searches and reports.
Final costs
Once the tenant pays rent for the first time and any upfront fees, if the searches are clear and the tenant signs the lease, the landlord can counter-sign and register it with the Land Registry.
Tenants are also responsible for the payment of any SDLT (Stamp Duty Land Tax) on commercial leases. This is based on the value of the lease. Typically, it's calculated on the basis of the premium and rental value. If the tenant's lease is long term rather than short term, it will usually incur a more costly SDLT.
Up to £150,000, there is no SDLT liability. But there is a 1% rate payable on leases valued above £150,000, and a 2% rate on leases valued at more than £5 million.
It's important to remember that, as a tenant, there will be service charges on top of the rental payments. They are in place to pass on the cost from a landlord to a tenant to recover some or all the landlord's costs from managing the shared areas of a multi-let commercial site.
For beginning-to-end legal assistance with the leasing process, a tenant’s legal fees are likely to be around £1,500–£2,000, excluding VAT. But incidental expenses, such as Land Registry registration fees and SDLT, also need to be factored in. Tenants must keep in mind that rent reviews during their tenancy might lead to increases in rental payments.