Episode 3: Commercial Leases with Jane Surman transcript

Ed Surman: (00:00)
Hi, today I’m with Jane Surman, owner and solicitor of Jane Hartley Associates, Manchester. Jane is the queen of Clean Street when it comes to commercial property. She houses institutions, alternative funds, and high net worth individuals as her clients. And I’m a little bit biased because she is my sister. When deciding to get our first episodes out there, we were looking at who would say yes easily, and also has some experience with audio broadcasting because obviously you used to run your own radio show didn’t you Jane? ,

Jane Surman: (00:41)
I did indeed, called the Monster Show on Salford City Radio. I played the mini monster and Rob was the major monster.

Ed Surman: (00:46)
And he used to do the whole solicitor thing where he’d say oh yeah, you know, we can’t quite say that. Is that right?

Jane Surman: (00:53)
Yeah. The show was more about kind of saying the things that people daren’t say. So I was the one who had to keep Rob in check, which was pretty tricky at times I have to say.

Ed Surman: (01:02)
So I’m bringing you in here today to talk about leases because, part of the Business With The Fun Guys series is that we have topical, and technical discussions around certain important things that small business owners, entrepreneurs, aspiring business owners and entrepreneurs need to think about when starting out. And actually getting some information on these things early on is always a big win. And obviously commercial leases can be a big sticking point for your first time entrepreneur. So let’s just dive straight in. You’re a first time entrepreneur, you’re going to need a place to rent and use. What kind of things do you look for?

Jane Surman: (01:51)
Okay, the first thing entrepreneurs look for is to find the right premises for them. And it very much depends on the business that they’re operating. So for example, offices which would probably be the easiest one, B1 users as we call them, they’ll obviously find a premises that they think would fit their business location, etc. They will then contact us once they’ve done a deal usually, with an agent and say these are the premises that I like. But when a business owner is looking for premises obviously it has to fit the bill for the business that they’re promoting. So like I say, offices is probably an easy one. Hairdressers are always going to look in high streets, etc. But just finding the premises is just one element. The lease is the main thing where it’s a product. It’s almost like a product, a lease, which a landlord has to extract as much cash as he can from that building. So whilst it’s great that an entrepreneur finds premises, they really need to think about the terms of the lease, which is where we come in.

Ed Surman: (02:58)
Yes. Normally you actually tend to do a lot more work on the landlord side because your client base is more on the investor side. But you do both sides and you like to think of yourself as a Gemini, is what you are saying and you should be.

Jane Surman: (03:12)
I’m a Virgo. But I am a bit of a Gemini. Yes, I have been very fortunate in my career that I’ve worked both with landlords and tenants. I’ve worked with very big corporate tenants building up their portfolio of offices to operate their business, etc. And so yeah, I gained experience from both sides, which I think has set me in good stead. So I’m pretty good on the phone with another lawyer who is acting for a landlord. I’m equally good as a tenant, once I get my teeth into something I don’t let go. What a lot of tenants don’t realize, especially new businesses is the financial implications it will have on them in the long run. Whilst it’s all nice and lovely at the start, it’s when you come to the end of the lease, where the disasters can happen and can hit their cashflow, which is obviously extremely important when running a business. As I well know.

Ed Surman: (04:04)
So what kinds of things can bite you in the bottom when you leave a lease as a small business owner.

Jane Surman: (04:11)
The main element is always what we call in the trade, dilapidations. So when an entrepreneur comes to me, explains that obviously, we’ve got a quite tight budget, etc. The first thing I’m always going to say to them is send me your Heads of Terms, don’t tell anybody you’re sending them to me and I will give you some input on what I think you should do. The main thing where landlords will basically hit you in the pocket is dilapidations, which basically is in connection with repairing obligations. So what I tend to recommend to any tenant is that when negotiating a lease always make sure you’ve got a Schedule of Condition, and the Schedule of Condition is basically setting out the standard of those premises at the time you take the lease. I think it’s only fair, to tenants that they should only be expected to put that back into the same state as it was when they first took it. They’ve been using it. So it’s only right that the landlord should be given back what he’d provided in the first instance. Most landlords will expect a full Repairing Insuring lease, which is where tenants can get into difficulty. So I always always emphasize that it’s really important to get a Schedule of Condition. The difference could mean something from £10,000 on a Schedule of Condition to say £50,000 plus. So we’re talking a lot of money because if you have a full Repairing lease, depending on the terms of that lease, you could be expected to put it back into a better state and condition than it was in the first instance.

Ed Surman: (05:56)
Now, you’re running quite tight budget in this situation.

Jane Surman: (05:58)

Ed Surman: (06:00)
Say for example, delapse, the building, hasn’t been surveyed more. You’re not taking a surveyor out yourself and say you find that, you’ve got wiring electricals that are not to the standards you’d be expecting as a tenant. And then say it comes to the end of your tenancy, the end of your lease three years, five years, and it turns out that you’ve got to contribute to rewiring or fixing the cabling inside that building. How can you spot those things early on to make sure that ….

Jane Surman: (06:38)
Well that’s why you have the schedule of condition. I would always recommend to a tenant, I know it’s an expense for a tenant to get a surveyor out there. But actually it’s an expense that you don’t want to not have, because that’s actually the person that’s going to save you a huge amount of money in the long run. It may well be, it is a bit of a gamble in a sense. If it’s a new build, one might think, well actually why do I want to bother with a surveyor? It’s a new build. I’m sure everything’s all good and we obviously check the due diligence. But even if it’s a new build doesn’t necessarily mean it’s going to be good. I’ve come across various new builds where we’ve had absolutely horrific problems, which I won’t go into. So if you’re going to spend your money as a new business getting premises, it is important to get a good surveyor to inspect it, carry out the Schedule of Condition, survey it, and equally get the lawyers to document it, which is where I come in. But it’s extremely important. I can’t emphasize that enough.

Ed Surman: (07:45)
Right. So before we go any further, let’s just do some jargon busting. Okay. So could you talk through a few technical terms, we’ve dived straight into the deep end, let’s just take it down a step. Okay? Lease?

Speaker 2: (07:59)
A lease is basically a set of rules and it’s for a certain period of time in which you could occupy premises at a certain rate.

Ed Surman: (08:08)
That’s good. Dilapidation?

Jane Surman: (08:11)
That’s at the end of the lease when you have to hand back the property to the landlord and you need to carry out certain repairs and if you don’t, then you may be liable to the landlord for the costs he sustains putting the property back pursuant to the terms of the lease.

Ed Surman: (08:26)
Schedule of Condition?

Jane Surman: (08:27)
That is a document which sits behind the lease, which basically states the condition of the property at the time you take occupation.

Ed Surman: (08:35)

Jane Surman: (08:35)
They are the guys that go around the building and make sure it’s not about fall down and blow up.

Ed Surman: (08:41)
Property agent?

Jane Surman: (08:42)
A property agent is basically somebody who’s advertising premises to let.

Ed Surman: (08:47)
Estate agent?

Jane Surman: (08:47)
Estate agent. Yeh like an estate agent in effect.

Ed Surman: (08:53)
Cool. Right. So just while you’re going quickfire in the terms in that bit of the interview, let’s just talk about now, some of the structure of a lease. What should it say, you know, if you haven’t seen a lease before in your life. You have a 45 page document, you’re like, Oh God, what is in here? You don’t have an idea where you’re working from, you say, wow, this is just a volumous amount of text. Let’s go through the structure of one.

Jane Surman: (09:26)
Okay. So the structure of a lease, this is where the lawyer comes in because yeah, we always appreciate that especially for an entrepreneur and he’s taking premises for the first time. It’s quite a huge document. It’s like crikey, what does all this jargon mean? As you rightly pointed out. The main things a tenant needs to know we would always highlight in a summary that we send to them. But in brief terms, it’s what’s the rent? How long can I occupy it, or what’s the term? Am I getting a rent free period.? That means when you’re a young business it’s very important to try and get a rent free period. The reason for that is you’ve obviously got your fit out costs that you need to factor in, you need to establish your business, you might need a bit of a helping hand on the old cash flow.

Ed Surman: (10:16)
The important point there is that lots of landlords are quite willing to give that for long term leases.

Jane Surman: (10:20)
If you’re committing for a certain period of time than they’re more than willing to give you a rent free period. At the end of the day they want their rent and so they want to make sure that the term is comfortable and you’ve got the ability to pay.

Ed Surman: (10:33)
Very different to residential.

Jane Surman: (10:34)
Oh, completely. A whole different ballgame. The other thing is rent reviews. So for example, if you took a 10 year lease generally, and this is just generally, it’s always a matter of negotiation, but one would expect to have a rent review in year five. So that’s something else to factor in. A lot of entrepreneurs want to make sure they’ve got a break clause so that they can terminate the lease at a certain stage of the term of the lease. Again, for example, a 10 year lease, one would expect a break clause in year five so that the tenant’s got the ability to terminate that lease should it need to. Mainly to do with it’s business, if it’s not making profit or actually these premises aren’t quite working for us or for whatever reason it is, the ability to be able to terminate. The other thing for a tenant on the main terms would be what we call Alienation, which is a word they’re gonna think when they see the terms of the lease. But Alienation means, can I assign or sublet these premises? So for example, a tenant gets themselves into financial difficulties, what is their option? One option could be to assign it to another tenant and let them take on the responsibility or possibly sublet it to another tenant. They pay the rent to our tenants and then in turn pays the rent to the landlord. But at least it’s helping their cashflow because they don’t have that outgoing anymore. It comes with its own complications, but that’s the essence of it. So whenever you’re taking your lease, you need to make sure that you can assign it somebody or you can sublet it. At least you’ve got options if something goes wrong. Other provisions for a small business are usually guarantor or rent deposit. If I’m acting for a tenant, I would always be going, go with a rent deposit. Yes, it cuts into your capital, but better that than being a guarantor as an individual because the consequences could be quite, let’s just say damaging if something should go wrong. I’d say those were the main elements of a lease and terms to look at, and these will be generally found in the Heads of Terms.

Ed Surman: (12:52)
Okay. We’ve just talked about sort of the whole risk of things going wrong and getting as much of a helping hand as possible. Let’s just say things are running tickety boo first sort of, you know, five, six years you’ll come to the end of the lease and you look to renew. Let’s just talk through that process. When you know, you’ve got your renewal date five years out from when you first start. You’re going to approach year five. How soon from that renewal date should you look at sort of either renegotiating or extending the terms of those leases.

Jane Surman: (13:23)
I would always say to a tenant, think about it at least two years before the end of your lease.

Ed Surman: (13:29)
Wow. That’s a long time.

Jane Surman: (13:30)
Yeah. That is a long time, but actually leases can sometimes take a long time to document. That’s not through lawyers fault, that can be through ….

Ed Surman: (13:38)
You sure?

Jane Surman: (13:38)
Well it can sometimes be the lawyer’s fault and I’m not passing the buck here. There can be all sorts of factors, but I think it’s something that they need to start thinking about if not actioning. If the tenant’s happy and wants to stay in the premises, it would very much depend on the type of lease they have. So we have two types of leases. We have leases which are what we call within the Act and those that are without the Act, and what I mean by that is that certain leases will have the benefit of what we call the security of tenure rights of the Landlord and Tenant Act 1954 which means that the landlord must grant you a new lease on similar terms, obviously rent to be negotiated. However, if you have a lease, which is outside the Act, none of those rules apply. At which point it is a case of negotiation. So hence I’m saying think about it two years prior to your expiry date because if you have got a lease outside the 1954 Act, then you won’t have a right to renew. And if the landlord is not willing to renew with you or comes up with a ridiculous rent, you’ve got ample time to go and source a property and negotiate new terms.

Ed Surman: (14:50)
So you’re running a factory for example. Having a lease outside the Act seems a bit like commercial suicide, because you’ve got to remove a lot of plant and machinery and relocate your business if you’re running a lease under those terms cause you imagine if you could have a warehouse full of unfinished goods. You haven’t even thought about the lease and the landlord says to you, yes, sorry, I’m gonna knock it down. Turn it into a hospice. Bye Bye.

Jane Surman: (15:19)
Well, good point. In those instances, just before I go onto the other thing. If a landlord is redeveloping the land, even if you’ve got a lease inside or outside the Act, they can still refuse on the grounds of redevelopments. So there’s no guarantee, even if you’ve got the benefit of the security of tenure rights, that you’re gonna get a new lease. But to answer the first question, yes, depending on the type of business, so a factory as you rightly pointed out. Yeah. That’s where they reside. That’s where they’ve built up their good will. They’re not going to want to move out. That’s where they built their home. That’s their head office, that’s where they want to be. So it’s very important for that type of business to get a lease that’s within the 1954 Act to make sure it’s protected.

Ed Surman: (16:09)
Is our lease within the 1954 Act?

Jane Surman: (16:09)
Your lease at Tewkesbury? Yes of course. I negotiated it.

Ed Surman: (16:17)
Good. I was just getting worried, imagine us having to relocate, we’ve been relying on that place for a while. I was thinking, I hope we’ve got ours in the 1954 Act.

Jane Surman: (16:27)
I’m a Surman Ed, I always protect my own. So even hairdressers, for example, another type of business that needs to try and get a lease within the Act. They might want to sell their business in the future. And if they sell their business, they’ll want to sell the premises because that’s where the goodwill’s built up. The lease, while it’s certainly an investment policy for a landlord, it can equally be an investment policy for the tenant because they may want to sell their business in the future and any new buyer’s is going to want to make sure well, that’s where the foot fall is. That’s where I built the business. That’s where the goodwill is.

Ed Surman: (17:02)
It kind of works like say, you’ve got, you know, in a Riverside town, you have a cafe on a park where people, in the summer sit down and picnic and they might get a takeaway coffee or takeaway sandwich from there and eat it outside. I mean, the value in that is colossal. But it must have a knock on effect on the landlord because if they can’t change it into something else and they’ve got this, you know …

Jane Surman: (17:25)
They’ve got a regular stream of income. Landlords generally, as I would always say to any landlord, better the devil you know. If you’ve got a tenant that’s been there for years, paying the rent regularly, they’re not any hassle whatsoever. It’s not in the landlords interest to.

Ed Surman: (17:41)
So while we’ve been war gaming scenarios of Doomsday for the renters. At least we can come back and say, actually often stars do align and things tend to work out okay.

Jane Surman: (17:56)
Yeah, I mean the government recognized it many years ago, and in 1954 it implemented this legislation because there were a lot of businesses operating and they were finding themselves with no rights whatsoever and they’d have their businesses, you know, they couldn’t operate their businesses from the usual premises. They lost lots of money. Hence the government stepped in and made it legislation that these tenants are entitled to a right to them.

Ed Surman: (18:23)
I quite like that you have some Acts of law that are so old, but are still working quite well, you know?

Jane Surman: (18:29)
That’s the beautiful thing about law. It has some very old legislation which still stands to this day. Hence I’m completely addicted to law. But equally it kind of moves with the times and it’s ever changing, which is, you know, obviously we update our clients and make sure they’re aware of new changes and commercial leases is a big topical area. What was good back in 1960 is completely different now, but that’s where you have lawyers to advise you. We don’t want to bore you with details. You just need as a tenant, you just need to know what’s going to hit me in the pocket and how could I make sure and minimize that as much as possible. And that to me is what I love doing, is minimizing what my tenants have to spend on that, on their business. And in respect to the building.

Ed Surman: (19:16)
So speaking on pockets and prices. We talked a lot about, you know, cashflow mitigation, things like rent free periods, so you can do your this out to making sure that the schedule, that conditions are as tight as possible so that the risk of spending huge amounts at the end of a lease are avoided. When it comes to searching the property and a headline price. Obviously you’re a lawyer so you don’t tend to negotiate prices on behalf of clients.

Jane Surman: (19:46)
No, I mean I can’t advise. That’s a surveyor’s job and an agent. We always say to an entrepreneur, if you could afford one, get your own property agent because they negotiate very hard. We can help in many respects, but that’s the one element that we can’t help them on.

Ed Surman: (20:03)
But obviously you’ve seen so many different clients hunting for, new premises to lease, to let. The kind of things they do is they use property agents and surveyors. Obviously they do things themselves. So from the outside, what things have you seen your clients do to just check that the price is, you know, correct. What sort of things they can do?

Jane Surman: (20:27)
To be honest with you some don’t. Some do. Those that do have a property agent that can actually advise them as to whether or not that’s a competitive market rent, that’s good. Other tenants who don’t have that luxury, that can’t afford a property agent is more of a case of okay, can my business sustain that level of rent? And that’s pretty much it. So it depends on how and sadly is, as with anything in life, depends on how much money you’ve got.

Ed Surman: (20:54)
I remember when we were between leases before, and we weren’t going to use a property agent to help us find any of them. We didn’t see it as a necessary expense because our minimum point was just to renew our old lease because it didn’t work for us. But with the UK, let’s, let’s have a little look around, see what’s in the market. And you know, they were quoting ridiculous figures for stuff that was unoccupied for two, three or four years. And actually, you know, there was no real, you couldn’t really negotiate a price or fix it down. It was all, it seemed pretty fixed.

Jane Surman: (21:23)
I think a tenant can naturally do their research. They’ll go through the area, they look at various points so they can get a feel for what type of level of rent is going on in that area. I think it depends on your location. In London, I think it’s an absolute necessity to have a property agent by your side. It’s a ruthless area. So I love London. You know, but for other areas it could be quite, there’s an abundance of office accommodation here in Manchester for example. You’re bound to be able to cut a much better deal in Manchester because there’s so much office space available. So it does very much depend on the location of where you are. It’s not something I advise on, it’s just something I’ve learned through experience.

Ed Surman: (22:03)
Fantastic. We’ve talked a lot about the intricacies of the things that business owners should look for when leasing a property, but let’s just sort of put like an action plan scenario, hypothetical scenario together. I’m looking to lease my first business. Okay. What does that process look like in terms of the nuts and bolts and the correspondence I would have with you as a solicitor? And then how long would that take, what kind of things that have to happen?

Jane Surman: (22:35)
Okay, so from start to finish, so to start off with, we would usually get in touch with the landlord’s solicitor obviously when we’re acting for the tenant. I would be requesting the, what we call the contract pack, which would be the draft lease, which we need to go through and negotiate. We would also be looking at the title aspects and carrying out what we call the due diligence. And the due diligence is basically making sure the landlord owns the property.

Ed Surman: (23:05)
So looking on the land registry.

Jane Surman: (23:07)
Yeah. So they would send us all this information from the landlord’s solicitor. So we want to make sure that the landlord can let the property? Does he own it? Has he got a lender on there? If so we’re going to need consent to protect the tenant. We are also going to carry out various searches on the property. We need to make sure that he can use it for it’s given purpose. If it’s offices we need to make sure it’s got the correct planning permission for them to do that.

Ed Surman: (23:32)
B1 or whatever.

Jane Surman: (23:32)
Exactly. We would be checking out correspondence and various enquiries such as, is there any disputes going on at the moment? Are the meters separate? For example, I’ve had instance in multi-tenant. So you could have a multi-tenant block and let’s just say your office is above and you’ve got a hairdressers downstairs. Well I’d want to absolutely make sure I’ve got my own separate water meter because those hairdressers love their water. There is no way I am having a water meter shared with a hairdressers for example. So these are the sort of things we check. We are basically making sure that the tenant can use it.

Ed Surman: (24:15)
There’s a lot of practical knowledge that you’ve got to apply because, imagine if you’re a waspy kid out of university working real estate and you didn’t realize that a hairdresser uses, you know, lots of water.

Jane Surman: (24:27)
There’s a lot more practicalities, as a lawyer, that one has to advise the tenant on, even the simplest things like have you been in the premises and got your mobile phone out and tried to phone somebody? Because the last thing you want to do, you’re operating an internet business for example, and you’ve got no internet because the reception is so terrible you can’t talk on the phone. So even simple things like that, we always recommend to our clients. Go out there, make a call. I don’t care who you call, just make sure you can make the call. And how good is the reception? If you’ve not got good reception, it doesn’t matter how cheap it is. Move on out, find somewhere else. So all these little basic things, a restaurant for example. Okay, so yeah, you’re an Italian restaurant. Let’s just say, okay, there’s a lovely little pavement out there. Can we put chairs and tables? Well actually no, but however, if you need to put your tables out, because obviously that means more covers for them equals more money, then yes, we can talk to the landlord or we can talk to the local authority and look at maybe getting a license to have those chairs and tables out there. So it very much depends on the business that you’re operating and that’s the important thing. So for us as lawyers, we step our shoes in the business of whatever it is, restaurant, hotel, whatever it is. If I’m running a restaurant, what do I need to do? So every time we have a lease at Jane Hartley Associates where they’re thinking about their business product, what are they promoting and can we achieve that within the terms of this lease? Because as I said before, the lease is the Bible. Timing wise, it’s always how long’s a piece of string. You will never get out of the saying it’s going to take two weeks.

Ed Surman: (26:08)
You’re really awkward about that stuff, aren’t you?

Jane Surman: (26:12)
I don’t like to think we’re awkward. It’s just that we just can’t answer that question. It’s just an impossible question and actually we’re going to push it, but various hurdles can come against it. I can give you, I would say on average, I’ve pulled a commercial lease through in two weeks, I’ve pulled a commercial lease in a lot longer than that.

Ed Surman: (26:32)
What’s the longest commercial lease you’ve had to pull through?

Jane Surman: (26:34)
It was a very tricky deal. And there were a lot of arguments over clauses. So, that particular one took 12 months in fact. Well just over 12 months. But that was because of various factors, say for example, some tenants, they don’t want us to negotiate and that’s fine. But if we’re negotiating, it’s like anything in life. Patience is a virtue. Keep pushing and they will eventually give in. Sometimes they won’t, sometimes they will, but it very much depends.

Ed Surman: (27:09)
So you’ve done the due diligence? You’re then going to debate the clauses on the lease? Maybe do wholesale redrafts or sections, if it’s really bad? What’s the next step?

Jane Surman: (27:22)
So once you’ve got a file or a form of lease that goes out for signature, we will then agree a completion date, the money’s passed over. The other important thing to factor in is depending on the length of the lease is what do I need to do with that lease at the Land Registry. So it’s very important that a lease over a certain period of time must be registered at the Land Registry to be legally binding.

Ed Surman: (27:45)
So what sort of time?

Jane Surman: (27:46)
So if the lease is seven years or more, it must get registered at the Land Registry. Very important because otherwise it can have consequences.

Ed Surman: (27:57)
What if you’re running a three year lease, and you’ve run it for three?

Jane Surman: (28:00)
If you’ve got a three year lease that’s not what we deem a registerable lease. However, if it grants rights over certain areas of the landlord’s title, then we need to register that with the Land Registry in a different way called disclosable interest because we have to protect the rights that have been granted. But again, the tenant doesn’t need to worry about those technicalities. That’s where we come in. That’s where we make sure that they’re protected. So by that point, and by the time we’re dealing with Land Registry, our tenants are in, they’re operating their business. Happy days I’m not worried about that. And I’m not going to bug them about that. I just tell them when it’s all finished, that’s what they want to know.

Ed Surman: (28:39)
Nice. Great. Well thanks for coming on to this and talking all about leases.

Jane Surman: (28:45)
Thank you for inviting me, brother.

Ed Surman: (28:45)
Yeah, I think it was very helpful. Maybe we’ll get a bit more on commercial property. Give Jane Hartley Associates a Google in Manchester.

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