Entering into a commercial lease can be daunting for a business owner not used to the process, says our Head of Property Salv Sole. Here, Salv sets out the eight main stages you can expect to follow.
1. Negotiation and Agreement on Heads of Terms
Where a property is marketed by commercial agents, they will be expected not just to facilitate inspections and respond to general enquiries but also to seek to agree the key points for inclusion in the lease (commonly referred to as the ‘heads of terms’). It’s important to note that while the heads of terms will form the basis on which any lease documentation is prepared, these are non-legally binding. To that extent, they should be viewed as a statement of the intention of the parties rather than any form of contractual commitment.
2. Instruction of Solicitors
Once the heads of terms are agreed the agent will circulate these to both parties and their solicitors which is the signal for the legal process to begin. You should expect it to take at least a month and up to two months from the issue of heads of terms to completion of the lease.
3. AML and Client Care Details
Once solicitors are instructed, in line with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the Money Laundering Regulations 2017) the solicitors will then need to undertake certain anti-money laundering (AML) checks, including verification of identity.
The solicitor will not be able to progress matters without holding the required ID and having undertaken the associated checks and it is important therefore that clients are aware of this requirement and are able to provide the information required promptly.
In addition to AML requirements, the client should also receive confirmation on the firm’s terms of business and client care letter confirming its practices and charges for the transaction.
4. Tenant Solicitor Confirms Instruction and Requests Draft Papers
Once all AML requirements have been satisfied, the tenant’s solicitor will confirm instruction to the landlord’s solicitor and formally request draft papers (commonly to include copy title to evidence the landlord’s ownership of the land and capacity to grant the lease) together with replies to pre-contract enquiries (known as CPSEs) and draft lease documentation for review.
At this time the tenant’s solicitor will also liaise with the tenant as regards specific searches the tenant may require or specific concerns or issues to be explored. In terms of searches generally, these broadly consist of: local authority, environmental, water and drainage, chancel repair and highways (although additional searches may be relevant depending on the location of the property).
While there is no legal requirement for searches to be undertaken, these are always recommended to ensure a tenant is proceeding with a full and comprehensive understanding of any external considerations / issues which may exist and with eyes wide open as regards the same.
5. Due Diligence and Lease Negotiations
Once draft papers etc. are received from the landlord’s solicitor, the tenant’s solicitor will then review these and liaise with the tenant as regards the same including reporting on specific issues or concerns revealed by responses to pre-contract enquiries or searches.
With regards to negotiation of the lease documentation, commonly this goes back and forth between solicitors on a number of occasions, taking two to three weeks to iron through to a format acceptable to both parties.
6. Report on Lease
Once the terms of the lease and associated documentation have been agreed, the tenant’s solicitor will generally prepare a report on the key terms of the lease for the tenant’s approval/records. While this should not necessarily raise anything new or of which is a surprise to the tenant, this will act as a useful summary of the overall terms and as a useful aide-memoire for the tenant moving forward as regards its core obligations under the lease.
7. Completion
Once documents are finalised, these will be circulated for signature by all parties. Once duly executed and returned to the solicitors (and the tenant has lodged any required monies (i.e. advance payments of rent or rental deposit etc.), the matter will proceed to completion – generally over a short telephone call between the parties solicitors whereby the lease is agreed as completed and dated.
On completion of the lease, the landlord’s agent will be instructed to release the keys to the tenant who will then take possession of the premises and will be liable to comply with the terms of the lease.
8. Post Completion Formalities
While requirements post completion vary depending on the length and value of the lease, commonly these include the registration of the lease at HM Land Registry (where the lease is granted for a term exceeding seven years) or noting of the lease and registering of any easements thereunder (where the lease is granted for a term between three and seven years), and preparation and submission of a stamp duty land tax (SDLT) return (and payment of any associated liability).
If you are thinking of entering a commercial lease, contact Salv Sole on 0208 979 1131 or at s.sole@kww.co.uk
