Discussing Lease with Landlords - Commercial Lease or Pop Up Shop?

[mrka]

Hi.

I am in discussions with managers of a shopping centre about taking on a new lease for a clothing retail venture. They are willing to cut me a very good deal as it's a buyers market out there and shops are being left empty.
I have ran a clothing store for 4 years prior, closing in 2014.
I have a much stronger idea that I believe will do well in todays retail climate.

After 6 months of trading on the local markets it's time to move on and up.
I am in talks with said managers of a local shopping centre who are keen to get me in asap, I met one of the managers when I had my old clothing store and back then he wanted me to relocate.

Here is the issue. I have requested the use of a specific unit as it best fits my needs and it's been left in such a good state that there would be no refit costs, but the managers have asked if I wanted another empty unit which would require substantial refit costs and time.

The managers have said the unit I want is also of interest to another party and they are still deciding, and that if I wanted to take on this unit it would have to be on a month rolling break clause, so they could take it back at any point.

These are the terms I have proposed..

1 year lease.
6 month break clause.
First 6 months rent free.
Final 6 months rent paid at an agreed £3000 up front on month 6. (I think the asking price for this unit is £20k per annum).
Business rates, service charges and utilities paid for by me.
After 12 months a full commercial lease to be discussed.

I am telling them I can add more to their shopping centre in the way of new footfall and also making the place look more attractive to new businesses.

So I want to know, if they can ask me to go on a month rolling break clause, I would also be in the right to be on a month rolling break clause, and what about business rates, could I sign up as a 'pop up shop' and avoid busines rates (which are coming in at about £8000 per annum on this unit).

I just want a good financial standing for my first year of business as it's tough out there!

 

[Kev2017]

You would have to speak to the local council about the rates. You and the landlord are not tied in if there's a rolling month break clause but that seems to protect them a lot more than you. Can you push to meet half way and have a three month break clause?

 

[mrka]

Yes I will speak with them about the 3 months lease, though considering my current demands they seem to be hard on their deal.
About the pop up shop, is there any legal set up or 'pop up' status that would allow me to avoid concil tax?

 

[mrka]

Business Rates (not council tax)!

 

[Supercoach]

1 year lease.
6 month break clause.
First 6 months rent free.
Final 6 months rent paid at an agreed £3000 up front on month 6. (I think the asking price for this unit is £20k per annum).
Business rates, service charges and utilities paid for by me.
After 12 months a full commercial lease to be discussed.

Why not discuss and agree a full commercial lease now? You can have a one year break clause so that's no riskier than the above and it puts you in a stronger position.
The only reason they want a rolling break clause is to get you out PDQ if they can get higher rent but it cannot suit you (surely?) to have this constantly hanging over you.
The landlord you want is one who seeks a long-term, regular, reliable, easy to deal with tenant.
These landlords (and they do exist) do not try to squeeze every last bit of rental income out of a property because they accept that good tenants are worth taking slightly less rent from for an easier life.

 

[rach88]

Pop up shops are not exempt from business rates.

If a unit is occupied (and paying rates) for 43 days and then vacated, this triggers a new entitlement to empty rates relief (3 months, for retail units) for the landlord. So, some landlords will give pop up shops who want to occupy for 43 days a preferential deal because their occupation (and subsequent vacation) will trigger another rate-free period.

 

[mrka]

Pop up shops are not exempt from business rates.

If a unit is occupied (and paying rates) for 43 days and then vacated, this triggers a new entitlement to empty rates relief (3 months, for retail units) for the landlord. So, some landlords will give pop up shops who want to occupy for 43 days a preferential deal because their occupation (and subsequent vacation) will trigger another rate-free period.

I have been thinking about askig the managers / landlords if we can first work on a pop up basis, to give me an idea if this will work, there si risk everywhere and this place is not exempt. My first clothes shop I had the optimism of a child but guess I am a little wiser now.

As mentioned one of the managers come to me so it's not like I am nagging them.

Could I have some thoughts on these 2 options.

I set up as a LTD company and go forth with the 1 year lease (6 months free rent).

or

Ask the managers if we can work on a 43 day trial period (pop up) and then renegotiate after that.

The business rates come to £8,000 and service charge comes to £6100 for the 2018 year, so that's without rent and insurance etc.

Would I be best asking for a pop up basis? And as you have said that is usually a 43 day rate free period?

 

[rach88]

No - you have to pay rates for the 43 days!

The reason landlords sometimes like pop up shops is that if you occupy the shop for 43 days (and pay rates) and then leave, the landlord can claim three months rate-free. This arrangement only works if you leave after the 43 days! It does not sound like it would be appropriate here?

 

[mrka]

No - you have to pay rates for the 43 days!

The reason landlords sometimes like pop up shops is that if you occupy the shop for 43 days (and pay rates) and then leave, the landlord can claim three months rate-free. This arrangement only works if you leave after the 43 days! It does not sound like it would be appropriate here?

What if I took the pop up on in my name then after 43 days sign the lease as a LTD company?

One of the managers did tell me on the phone that normal arrangement for the pop up is to pay an agreed sum.

I guess I am just erring on the side of caution. I keep asking why don't I just do what everyone else does and tries to work from home or online where risks are minimal. There's always that worry of being sat in an empty shop, plus this is not in a city, it's a University town in yorkshire. population of around 160,000 people with an apparant 20,000 students (about 5,000 of them aged between 18 and 21).

 

[rach88]

What if I took the pop up on in my name then after 43 days sign the lease as a LTD company?

No, this would not work. The three months empty property relief relies on the property being empty! If you are occupying it, this relief would not apply! And remember, it is not you that would benefit from the relief, but the landlord. The idea is that if they have a unit which has been empty for a long time, and no prospect of getting a tenant, they may be willing to let you occupy for 43 days at a low rent as they will benefit from three months rate free once you move out and the property is empty again.

However, this is not to say that doing a pop up shop is a bad idea. You could try doing this over Christmas for a set price as the agent mentioned, as a trial run? You will have to pay business rates though.

If you decide to commit to a unit for a longer period I would also suggest that you might want to look at taking a longer lease but with tenant-only break clauses after say 1 year, 3 years. You are going to invest time and money in establishing a business in this location and want to make sure that the landlord cannot simply give you 1 month's notice to leave. Otherwise you will lose anything that you put into your fit out as well as goodwill.

Also, I suspect a 1 year lease at a rent of £3,000 will not be very attractive to the landlord if they are quoting £20,000.

So, I would suggest
- a longer lease, perhaps 10 years, with tenant break clauses. The breaks should be conditional only on the payment of rent and giving up occupation.
- if you can, the lease to be in a Ltd company name with no personal guarantee. If you can get them to accept a rent deposit instead of a personal guarantee you at least know how much you are putting at risk. Do you have any assets, or own your own home?
- limit your repairing liability in the lease by reference to a schedule of condition.
- ask for the lease to be within the protection of the Landlord and Tenant Act 1954 (security of tenure)
- use a solicitor to check the lease and advise you, before you sign anything.

 

[mrka]

No, this would not work. The three months empty property relief relies on the property being empty! If you are occupying it, this relief would not apply! And remember, it is not you that would benefit from the relief, but the landlord. The idea is that if they have a unit which has been empty for a long time, and no prospect of getting a tenant, they may be willing to let you occupy for 43 days at a low rent as they will benefit from three months rate free once you move out and the property is empty again.

However, this is not to say that doing a pop up shop is a bad idea. You could try doing this over Christmas for a set price as the agent mentioned, as a trial run? You will have to pay business rates though.

If you decide to commit to a unit for a longer period I would also suggest that you might want to look at taking a longer lease but with tenant-only break clauses after say 1 year, 3 years. You are going to invest time and money in establishing a business in this location and want to make sure that the landlord cannot simply give you 1 month's notice to leave. Otherwise you will lose anything that you put into your fit out as well as goodwill.

Also, I suspect a 1 year lease at a rent of £3,000 will not be very attractive to the landlord if they are quoting £20,000.

So, I would suggest
- a longer lease, perhaps 10 years, with tenant break clauses. The breaks should be conditional only on the payment of rent and giving up occupation.
- if you can, the lease to be in a Ltd company name with no personal guarantee. If you can get them to accept a rent deposit instead of a personal guarantee you at least know how much you are putting at risk. Do you have any assets, or own your own home?
- limit your repairing liability in the lease by reference to a schedule of condition.
- ask for the lease to be within the protection of the Landlord and Tenant Act 1954 (security of tenure)
- use a solicitor to check the lease and advise you, before you sign anything.

Thanks for advice.

Regarding:

'1 year lease at a rent of £3,000 will not be very attractive to the landlord if they are quoting £20,000'

Well at the moment they are crying out for new businesses to take up leases, there are a lot of empty shops in there at the moment, I would say perhaps 70% occupied. There is so much risk and people are fighting to open up bricks and mortar shops anymore.

'Do you have any assets, or own your own home?'

No assets at the moment other than car reallty.

'Perhaps 10 years, with tenant break clauses.'

Way too long even with break clauses.

We have been going back and forth now for some time and it might seem I keep changing the goal posts, I am just worried that the reality is I open up and my expectations are not met. I suppose you could say I have done my market research as I have been selling this product at the market for 8 months, and it's just not enjoybale loading my van with 10 large bags of stock at 6am and back again in the afternoon when some days are not as lucrative as would like.

 

[rach88]

You can always try, they can only say no!

The reason I asked about assets as if you do have assets (or plan on having any in the future!), a personal guarantee is a bad idea.

The reason I suggested a longer lease (with tenant only break clauses) is that security of tenure is particularly important for retail businesses. You will invest money in the fit out of the unit and you will also build up goodwill. This is obviously a valuable asset. If you have a short lease contracted out of the Landlord and Tenant Act 1954 you have no right to renew your lease and risk losing your good will and money invested in the shop. You are not committing more by taking a 5 year lease with annual break clauses than by taking a simple one year lease - assuming those break clauses have been checked by a solicitor to ensure any conditions on them are not unduly onerous.

 

[mrka]

You can always try, they can only say no!

The reason I asked about assets as if you do have assets (or plan on having any in the future!), a personal guarantee is a bad idea.

The reason I suggested a longer lease (with tenant only break clauses) is that security of tenure is particularly important for retail businesses. You will invest money in the fit out of the unit and you will also build up goodwill. This is obviously a valuable asset. If you have a short lease contracted out of the Landlord and Tenant Act 1954 you have no right to renew your lease and risk losing your good will and money invested in the shop. You are not committing more by taking a 5 year lease with annual break clauses than by taking a simple one year lease - assuming those break clauses have been checked by a solicitor to ensure any conditions on them are not unduly onerous.

Out of interest, if i was to go for the 1 year lease with 6 month break clause, would a LTD company be a good idea, I know there are more costs involved.

Let's just say this didn't work, and I have racked up x amount in rates and utilities, is there any way I could protect myself?

 

[Chris Ashdown]

If you go for a short term lease the time taken for setting up and getting recognised by the public will take up a few months and you also have the stock to pay for, a 400-500 square foot shop takes a lot of stock to make it look professional

They may look at independent stores as a high risk so have little need to play around letting to you when they might get a plc taking on the unit on a 10 year no break lease with a name to bring in the customers. don't forget the management have costs with the leases etc that will be passed on to you along with service and insurance plus most will demand 24/7 opening from centre open to centre closing

 

[mrka]

If you go for a short term lease the time taken for setting up and getting recognised by the public will take up a few months and you also have the stock to pay for, a 400-500 square foot shop takes a lot of stock to make it look professional

They may look at independent stores as a high risk so have little need to play around letting to you when they might get a plc taking on the unit on a 10 year no break lease with a name to bring in the customers. don't forget the management have costs with the leases etc that will be passed on to you along with service and insurance plus most will demand 24/7 opening from centre open to centre closing

Filling the shop isn't an issue. I have good suppliers who can provide me with unlimited stock with mark ups of 400% to 800%. I just need to get in the unit and off these markets. But I understand it's going to take a lot of work marketing the place.

I am still unsure how to proceed and they are expecting an answer tomorrow.

 

[rach88]

Let's just say this didn't work, and I have racked up x amount in rates and utilities, is there any way I could protect myself?

The only way to protect yourself completely is to put it all through a Ltd company and not give any personal guarantees.

 

[mrka]

The only way to protect yourself completely is to put it all through a Ltd company and not give any personal guarantees.

Yes, it's easy enough to set up a LTD comapny online, would I just present them with comapny name, my name (acting under LTD company), company number and registered address?

Is there any legal / technical term I need to make them aware of in order to protect myself?

 

[rach88]

Present who with the company name?

You would need to make sure that any contracts you make e.g. for the utilities and with suppliers are in the limited company's name. Also make sure that the business rates is in the Ltd company name. I.e. when you call up the council, just tell them that the Ltd company has moved into the shop.

The main hurdle will be convincing the landlords to allow you to put the lease in the name of a newly incorporated limited company without giving a personal guarantee. They may well not go along with that as it puts them in a vulnerable position. They may accept a rent deposit in place of a personal guarantee.

 

[mrka]

Present who with the company name?

You would need to make sure that any contracts you make e.g. for the utilities and with suppliers are in the limited company's name. Also make sure that the business rates is in the Ltd company name. I.e. when you call up the council, just tell them that the Ltd company has moved into the shop.

The main hurdle will be convincing the landlords to allow you to put the lease in the name of a newly incorporated limited company without giving a personal guarantee. They may well not go along with that as it puts them in a vulnerable position. They may accept a rent deposit in place of a personal guarantee.

Thanks for advice... so if I go down the 1 year lease with 6 months break clause I should make sure everything is in the LTD companies name, and make sure the landlords are ok without a personal guarantee?

Will local councils accept a newly formed LTD company as bill payer for rates? (and utilities)?

 

[Chris Ashdown]

They may want a deposit plus the first months money

You will really need to fully investigate what you will be required to pay for setting up a shop and other costs like insurance both building and your own companies

Try and find out why the shops have remained empty and if you want to stay after the first year what the rent and service charge be, its no use establishing yourself in the first year will low rent and a rent free period when they double it for the new lease at the end of the year which may well be 10 year with no break clause at double rent. that's why you will need a solicitor as leases can be a minefield to the experienced yet alone a novice

 

[Susan Pettitt]

I am trying to find a weekend property to lease. Harder than i first thought, but i dont want to risk anything so i decided to try opening up at weekends and still work in the week. I know it wont work in the long term but it does cut out risk.

 

[Chris Ashdown]

There is no such thing as a weekend property you have to have them 7 days a week, if you then choose to only open on the weekend that's up to you and the landlord who if its in a popular area will most likely want you to be open all week to make the area more attractive and hence higher rental costs, places shut most of the week gives out a run down look and may lead others to do the same

If you don't want to risk anything you are not in the right frame of mind to running a shop, everything you buy to sell is a risk about if it will sell or after a few months go to back of store room to be forgotten