CHECK OUT YOUR BUSINESS LEASE

Your accountant probably does not include your lease as an asset on your Balance Sheet. Yet your lease is probably one of your most valuable assets. For some businesses, for example a shop in a shopping complex, the premises are the business. The goodwill of the business is intimately bound up with the premises. Yet it is amazing how many otherwise level- headed business people do not have a lease. The landlord can ask them to vacate the premises at a month's notice.

There have been a number of recent well-reported cases where persons have rented petrol stations from oil companies. Over many years, the operator had built up the business. Yet he had neglected to obtain a written lease. The oil company then asked him to vacate the premises and simply installed another tenant the next day to run the petrol station. No compensation for the value of the business was paid to the previous tenant. There have been similar tales of woe with regard to hotel leases.

The lesson to be learnt is that it is absolutely essential to have a written lease. Do not rely on the verbal assurances of the landlord that "everything will be all right" or that "we renew leases as a matter of course". On the other hand, if some of the conditions in a lease appear excessively onerous, do not rely on the verbal assurance of the landlord that such conditions would never be enforced and are there only for the landlord's protection.

Let us suppose that you have found business premises that you like and you are now negotiating with the landlord regarding the lease. What are the matters to which you should pay attention?

First, obtain a copy of the lease. Read it carefully. If you cannot understand any terms, consult your lawyer.

Next, carry out a search at the Land Titles Office or have your lawyer do it for you. The search will show you who the registered owner of the premises is, whether there is a mortgage on the premises and, if so, who the mortgagee is. The search will also show the exact boundaries of the premises. If your search shows that the person who is proposing to rent the property to you is not the head-lessor, then you should obtain the consent of the head-lessor before going ahead. Likewise, if your search shows that the property is mortgaged, you should obtain the consent of the mortgagee before going ahead.

Next, go along to your Planning Authority offices and see what the zoning for the premises is. For example, if the zoning is residential, you will not be allowed to carry on a business there. If the zoning is business, you will not be allowed to carry on light industry there etc.

Next, you must examine the rent arrangements. How much is the rent? How is it calculated? Is it based on a percentage of sales? This is sometimes the case for shops in a shopping complex. How often is the rent reviewed? How is any increase calculated? It is based on the CPI increase? Is there a provision for a "market-value" review on a periodic basis? For example, a not unusual provision is that the rent increase be based on the CPI for the first three years and that there be a market-value review at the end of each three year period. If there is a market-value review, who determines market-value? Preferably, market-value should be determined by a firm of professional valuers.

What is the initial period of the lease? What are the options for renewal at the end of that period? If you expect the business to be successful and you intend to put in your own fixtures and fittings and to do a lot of advertising, then you need a five year lease. You also need an automatic right to renew the lease for another five years at expiration. The minimum lease you should take should be three years with option to renew for another three years. However, there is a downside to a fixed lease. If the business fails or you want to move to other premises, then you will have to continue paying the rent until the landlord finds another tenant at the same rental.

What powers will you have to sell, assign or sublet the lease? These three terms mean much the same thing. Basically, they mean that you can sell the business, including the lease, as a going concern. Unless there is a written term in the lease stating that you can assign the lease without the consent of the landlord, then you will not be able to assign the lease without his consent. Obviously, if the landlord refuses consent under such circumstances, you will not be able to sell the business. Often, leases contain a term that the landlord's consent must be obtained but that the landlord must not "unreasonably withhold consent". Such a clause could give rise to expensive litigation in Court. In any case, if you were selling the business, the buyer would probably have lost interest before the Court action could be heard. Therefore, look carefully at this provision and try to have a clause inserted in the lease that you can assign the whole or part of the lease without the landlord's consent. To get around this problem, you should consider forming a company to hold the lease and run the business. Then when you sell, the buyer can buy the shares in the company rather than buying the business. As the lease will still be in the name of the company and will not have changed hands, the consent of the landlord will not be necessary.

If the landlord refuses to renew the lease or if you decide not to renew the lease, what provisions are there in the lease to compensate you for Improvements made, Goodwill etc.? The basic rule is that any fixtures installed by you become the landlord's property. However, if the fixtures can be removed without damage to the property before the lease expires, it is common for landlords to allow this. But what about fixtures that cannot be removed? Suppose you had new carpet laid before the lease expired. Would you be compensated and how? Such matters should be set out in the lease.

If the landlord refuses to renew the lease, nevertheless, in some cases, the same business will continue trading under the same name and at the same premises but with a different tenant. This is common for petrol stations and hotels. This may also be the case where the lease is part of a franchise arrangement. If you have spent many years building up the business and making a success of it, will you be compensated for the Goodwill you have built up? If there is no provision in the lease stating that you will be compensated, then, in general, you will not be entitled to any compensation. If you anticipate a situation like this arising, then it would be desirable to have a clause in the lease stating that you must be compensated for the Goodwill. The Goodwill should be independently valued by an outside firm of accountants. For what purposes will you be allowed to use the premises?

How often will the premises be repainted?

Ascertain what other outgoings you will have to pay. Who will pay for insurance? The landlord will want the premises insured against fire. On the other hand, you will want the stock insured against fire.

Who will pay for repairs? On a short-term lease, the landlord usually does but on a long-term lease, the tenant often pays for running repairs.

Who will pay for Council and water rates and Land tax?

Will you have to pay a security deposit?

If there is a calamity such as a fire, will you get a rent-free period while the premises are being refurbished?

In the case of a dispute with the landlord, are there any provisions for arbitration? Settling any disputes in Court can be a very expensive and long-drawn-out business. It would be far preferable to have any disputes resolved by an independent arbitrator such as a person appointed by the local Real Estate Institute.

After signing the lease, what matters should you pay attention to?

Make sure you register your lease at the Land Titles Office. Very often, leases are not registered. This leaves the lessee at risk. If you do not wish to handle the registration yourself, your lawyer can do it on your behalf. In any case, make sure the lease is registered. If you wish to handle the registration yourself, you must first obtain the consent of the landlord's mortgagee, if any. You must next obtain the Land Certificate from your landlord. Then you go along to the Land Registry, produce the Land Certificate, complete a form and pay a registration fee. The lease is then noted on the landlord's Certificate of Title. This means that if he tries to sell the property to anybody, the prospective purchaser will be aware of your lease and be bound by it if he proceeds. If the lease is for more than three years (including the option to renew) and is unregistered, then the purchaser could 1) refuse to renew the lease, 2) raise the rent as he pleases and 3) terminate the lease. If you have been foolish enough not to have your lease registered, then if you see your landlord putting up "For Sale" signs on the premises, you should take immediate steps to have the lease registered. As an interim measure, have a caveat registered to protect your interests.

When the time comes to renew your lease, make sure that you exercise the option. A typical provision is that the right to exercise the option must be availed of during the final three months of the existing lease. If renewing, contact your landlord and tell him that you want a new lease prepared. Do not just do nothing and end up by becoming a tenant-at-will who can be evicted at one month's notice.

What are the taxation implications of leases? If you are running a business, all outgoings of an income nature are deductible. These include the rent, rates, repairs (but not improvements), legal costs of lease preparation etc. Depreciation can be claimed on any fixtures and fittings and equipment. However, any premium paid for the grant of a lease is not deductible. If part of the premises are used for private purposes, then only a proportion of the outgoings is deductible.

There may be a liability to capital gains tax when the business, including the lease, is sold. The sale price will have to be split over the tangible assets and intangible assets. Tangible assets include stock, equipment, fittings etc. Intangible assets include Goodwill, lease etc. Normally, a nil value is assigned to the lease. The balance of the sale price is assigned to Goodwill. This is the most desirable course of action to take as only 50% of the profit on sale of Goodwill is subject to capital gains tax. On the other hand, 100% of the profit on the sale of a lease is subject to capital gains tax.

DISCLAIMER: See disclaimer on home page.

Copyright 1994.



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