Understanding rent

Unlike with residential tenancies, there is very little legislation to support commercial tenants. A license offers very little security and can be terminated by a landlord with appropriate notice. In these situations, the final decision will very much depend upon the negotiating skills of senior management.

If you have a lease, then your landlord will have to follow a protocol if they wish to terminate the agreement under the Landlord and Tenant Act 1954. Tenants have the right to apply to the court to decide the final terms of the lease – including rent – if necessary. However, many landlords will exclude tenants from this protection by issuing a document that could be titled ‘Health Warning’ and may state that it is excluding sections 24 to 28 of the Landlord and Tenant Act 1954.

It is quite usual for the re-negotiation of business rental agreements – whether they be license agreements or tenancy agreements – to take a considerable length of time. Besides efforts to time manage the landlord, early years settings should be mindful of:

• Paperwork – Providers should be sent legal documents which will need to be filled in carefully. This may include ‘Heads of Terms’ or ‘Memorandum of Understanding”, which are not legally binding, unless they expressly state that they are, but set out the facts of the proposed tenancy agreement. The final agreement will be drafted later so it is important to get these finalised as quickly as possible. Management will need to read these very carefully.
  
  
• Plans – Look at any plans offered, such as of the garden or play area, and make sure that there is a clear understanding of where the boundaries appear. Are there communal areas? Seek clarification if needed and create a paper trail.
  

• Utilities – Irrespective of whether you have a lease or a license, if a setting is contributing towards utility bills it is imperative that there is a clear framework for how the landlord will apportion these bills. Consider if other occupiers use the same building at other times – for example, another group that uses the space in the evening and heats the building.

• Repair – Be mindful of clauses that suggest you are liable for the cost of structural repairs. If these can be avoided then it is advisable that you do – they can leave providers exposed to significant costs. If settings are forced to accept a repairing covenant, then a full structural survey should be undertaken to enable an agreement on the existing state of the building.

• Insurance – Consider whose responsibility it is to insure the building and if the cost is apportioned, is that calculation fair? If in any doubt, you should get legal advice.

• Business rates – These may appear in a license or tenancy and can be levied against an early years provider in some circumstances. The charitable status of a provider does not automatically grant rate relief and so you should seek specialist advice if you are ensure of your status.

When negotiating with a landlord, particularly if they are asking for a rent increase or termination, the most important things to consider are:

• If applicable, highlight your setting’s charitable status and remind your landlord of the limitations on your income due to funding rates.
  
  
• Emphasize the benefit of your setting to the local community and the potential impact if you were to close.
  

• Do not automatically agree to allowing your landlord to examine your finances. If this is necessary to reassure them, it would be reasonable to offer a summary of your circumstances, preferably at a face-to-face meeting.

• Try to obtain insurance that will cover legal expenses in the event of a dispute with a landlord.