Taking the risk out of lease agreements

A property lease probably appears very straightforward to most people. You view the premises, agree a rent, decide on the length of the lease and hey presto, you’re done. But nothing could be further from the truth.

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 importance.

Take the example of an individual who sells their business. 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.

“If you make mistakes at the beginning when you are negotiating a lease you will pay for them later,” says Brian Meldon, one of the co-authors of the SCSI code. “In fact, in the old days when 35-year leases were common, you paid for mistakes for the rest of your life.”

He explains the code is set out as a series of tips to make it easier for landlords and tenants to reach agreement. And 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.

Meldon’s co-author Eamonn Maguire notes that 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.”

He explains that 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 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.

Care also has to 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.

Condition

This not only sets the baseline for the actual condition of the building on entry, a bit like agreeing on existing damage to a rental car, but 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 façade.”

These are just a few of the areas of which both landlords and tenants need to be aware. 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.

Failure to scrutinise any one of these could be very costly indeed, as Meldon points out. “Some leases have restrictions as to usage hours and everybody has to be out of the building by 6.30 or 7pm. 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 could be up to €9 per square foot so the headline rent is just the beginning.”