Bringing commercial property up-to-date - factors to consider

Many people see an opportunity in buying a house at a reduced price as it needs refurbishment or complete renovation.

Equally, in the commercial sphere, there is scope for tenants to take secondary or tertiary office space that needs updating if they are willing to put in the work.

Not only can the rent per square foot be cheaper, but the landlord can also make significant contributions to the work needed to bring the office space up-to-scratch.

Particular legal points to note are as follows:

• Who pays for what? If the space needs refurbishment, the tenant should ask for a rent-free period equivalent to the length of time it takes to carry out the works. It may also be possible to ask the landlord either for a financial contribution or an additional rent-free period to deal with the structure of the work space, which ordinarily ought to be the landlord’s responsibility. That way, the tenant is not paying rent for the period he is carrying out works when he cannot use the premises for its commercial purpose. He can upgrade the premises at the landlord’s cost.

• Repair: If the office space is taken in poor repair, it is critical to ensure that the lease agreement does not require the tenant to put it or keep it in a perfect state of repair and condition. The condition of the premises ought to be recorded in what is called a ‘schedule of condition’ which is simply a photographic or written survey report that records the existing disrepair. The importance of this is that when the tenant leaves the property he doesn’t want the landlord to demand that he returns the property in a better condition than it was in before he took it on.

• Documentation: These critical points need to be included either in the lease document or a licence for works, which gives the tenant permission to carry out the refurbishment works and sets out the rights and responsibilities of both parties. Further it is critical that the improved state of the premises is not taken into account on any rent review in the lease if the works have been paid for by the tenant. Otherwise the rent would be inflated upon review to take into account the fact that the premises are in a substantially better state and condition than they were in at the beginning of the lease before the tenant’s works.

Commercial property partner Alasdair Garbutt deals with a wide range of work in relation to sales & acquisitions, development transactions, landlord and tenant and property management matters. He has particular expertise in property investments, property management, clawback, overage, options, business leases and development and security documents.