If you’re entering into a new commercial lease on your premises, whether it’s for a business relocation or a renegotiation on your current building, the question often arises: how long is the lease? Herein lies an innocent mistake I see a lot of business owners making: asking the agent how long the lease is, rather than asking themselves “how long should my lease be to best support my business?” The truth is: the landlord is always (generally) going to go for the longest they can get away with, but as a business owner you are in a position to offer a proposal that includes a lease length that works for your business. So how do you answer that all-important question and uncover the right lease length for your business? The answer lies in your business plan.
Back in the 1980s, it was much more typical to have a 25-year lease without a break clause – that’s the way the market operated. So if things changed in your business and you needed to get out of a lease, your only option was alienation, where you pass on part or all of your premises to someone else but remain as guarantor. Over a length of time like 25 years, you can imagine some of the chains of people I found, making use of their alienation clause to sublet to someone, who sublet to someone else, ad infinitum!
These days, typical lease terms are much shorter. In my work, I tend to see a 5-year lease with a break after 3 years, most commonly. With a shorter lease, a break clause and alienation clause, business owners have many more alternatives open to them, should their business circumstances and thus their requirements for premises change.
I always say, the length of your commercial premises lease should align with how far into the future you can see the size and shape of your business. Depending on your industry, you might be reasonably sure of stability for the next 10 years, or conversely, if you are in a market that is going through rapid change, you may only be confident of how things will look for the next 12 months. The key is to ensure your business has what it needs right now and that any lease you take on allows you flexibility at different points in the future where you think change could occur.
Here are some factors to consider:
- Certainty vs uncertainty e.g. market changes, global finance markets, and industry movements. How much change can you envisage and what impact could that have?
- The convenience economy – the sad fact is that customers are increasingly less likely to be loyal to a chosen brand and are obsessed with the idea of getting a better deal. How much of this can you mitigate?
- Risk – how much risk is inherent in your industry, product and/or service? How can you mitigate your risk, for example via building multiple income streams rather than just one or two
- Growth – how rapidly is your business going to grow? What will influence that growth?
If you are relocating or taking on a new commercial business premises, please book in a free informal chat or drop me an email – I’d love to help you find the right premises on the right commercial terms for your business or just help you with the way you think about and see premises as part of the overall business.
