Costs of agreeing a commercial lease

In Business Property

It is advisable, for both landlords and tenants, to obtain professional legal advice when setting up a new lease. The lease is a legally-binding contract which sets out the terms on which the tenant may occupy the landlord’s property, and so it is essential that it is appropriate for the parties’ needs and circumstances.

Other professional advisers, such as surveyors and letting agents are also likely to be involved in setting up a lease, and so these advisers’ fees should be borne in mind when estimating overall costs. Landlords typically instruct a letting agent or other intermediary a commission to handle the commercial aspects.

Prospective tenants are likely to incur surveyors’ fees at the outset. It is advisable for tenants to instruct a report from a building surveyor, highlighting any issues with the building itself, and providing a record of its original condition.

When a landlord and tenant reach agreement in principle on the main terms of a proposed lease, they often sign an initial, non-legally binding document, called the heads of terms. This document 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 this document before signature. Such a service might cost £400–£500 (excluding VAT).

Thereafter, the landlord’s solicitors will generally prepare a lease for review by the tenant’s solicitors, and the 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 of the landlords’ legal fees, so more of the financial burden tends to fall on the tenant.

This financial burden can be reduced through a fixed-price fee arrangement. Legal service providers often offer such arrangements for negotiating commercial leases. If the tenant simply requires an initial report or consultation on the terms of the proposed lease, this typically costs approximately £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. If these searches are clear, and the tenant signs the lease, it will then (once the tenant has paid any upfront fees such as a deposit and the first rent payment), be counter-signed by the landlord and registered with the Land Registry.

Tenants are also responsible for the payment of any SDLT (Stamp Duty Land Tax) on commercial leases, based on the value of the lease (calculated on the basis of the premium and rental value). 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.

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.
  

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