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negotiating the lease terms with your landlord

Heads of Terms can take any format and simply put is a very simple schedule of the agreement between an estate agent/landlord and a potential tenant. The estate agent/landlord may well have Heads of Terms already drafted and available for you to consider. Note that if you are waiting more than a few days to receive a Heads of Terms schedule from an estate agent/landlord this may indicate their lack of interest in you as a tenant. You may need to be very pushy.

Soft play structures and soft play frames may be perceived as difficult to dispose of by landlords so they do like to make sure that prospective tenants have what it takes to manage a profitable business. Also, this is why, very often, landlords ask for guarantees and large deposits.

House of Play as the UK’s leading soft play manufacturers are well known in the industry and landlords often get great comfort knowing that you project is supported by our Company.

If you are offered a Heads of Terms schedule, remember that everything is negotiable and that you should respond with a written counter offer. Sample letters and Heads of Terms templates are available from House of Play for you to use, if you choose. Note that most clients prefer House of Play to undertake negotiations on their behalf.

Remember that in all negotiations most agreements are made somewhere between the starting position of the two negotiating parties. Always ask for double or half what you really want! Do NOT be shy in asking for what you want!

Also remember that the longer the building has been unoccupied the stronger is your position. Asking for a long lease also strengthens your bargaining position although regular tenant only ‘breaks’ will weaken it. You really do just have to work out what you ideally want and negotiate hard for it, maximising benefit and minimising your liability wherever possible.

Decide name of proposed lessee. This is likely to be a trading vehicle with limited liability. Note that at this stage it is not necessary to set your Company up. Just make sure that the estate agent/Landlord are aware that the lessee will be a limited liability trading entity. It may also help your cause if your mention that your project has the support of the UK’s leading soft play supplier and refer them to our website where they can see the level of support your project has access to.

Regarding the term of lease, you need to agree how long a lease you are going to take. This is likely to be in multiples of three or five years. In deciding this, you need to consider a number of factors.

WHAT TO CONSIDER WHEN NEGOTING TERMS FOR YOUR SOFT PLAY BUSINESS

Regarding the term of lease, you need to agree how long a lease you are going to take. This is likely to be in multiples of three or five years. In deciding this, you need to consider a number of factors.

  • Is there stamp duty chargeable and if so, how much? Note that there is a stamp duty calculator on the HMRC website.

  • How long do you want to trade your Company and do you want the opportunity to sell it as a going concern at the end of this period? If you are going to develop a project that has the best indoor soft play equipment in the UK you may want to benefit from the ‘good will’ developed through trading and sell the business as a going concern.

  • Is the lease one that will sit within the security of tenure provisions of the Landlords and Tenants Act 1954? If so, there are certain protections offered to the tenant in regard to extending the lease.

  • Agree the rent payable, usually per square foot. This is crucial as once agreed it will form part of your fixed costs (plus any rent increases) for the duration of your tenancy. It is very important to try and negotiate hard on this. See example below.

  • Example: If a landlord wants £8 per square foot and you are able to negotiate this down, say, to £7.50 per square foot, on a 10000 square foot building over a ten-year lease period this would save you £50000 excluding rent reviews!

  • Agree rent payment dates, usually monthly or quarterly in advance. Monthly is always better as it improves your cash flow but most landlords want quarterly payments. See if you can negotiate monthly payments for the first twelve months.

  • Agree rent reviews periods, usually every three or five years. Ensure there is a benchmark for rent reviews. Generally, this is market rent. Other benchmarks can be used, for example the RPI – retail price index, CPI – consumer price index. It is always good to have a caveat or, perhaps, a ‘cap and collar’ arrangement so there is some control over rent reviews.

  • It is likely that any lease will be FRI (full repairing and insuring). It is crucial, therefore, that there is an agreement for you to produce a Schedule of Condition for the building with an agreement that the landlord is responsible for making good any defects identified, and/or to exclude any specific dilapidations from the Full Repairing element of the lease.

  • Most leases will include a ‘making good’ clause which will require you to reinstate the property to its pre-lease condition, subject to fair wear and tear. It is important, therefore, to employ a soft play manufacturer that can design and install soft play structures and soft play frames that are as demountable as possible to reduce removal costs.

  • Regarding buildings insurance, usually the landlord arranges this and charges the cost back to the tenant. You need to know when this will need to be paid, as part of the rent or separately, monthly, quarterly or annually ahead.

  • Check any service charges that may apply, scope of works and prices. Service charges are usually levied to cover communal areas.

  • Try and agree a healthy rent-free period. Remember that to develop a project with the best indoor soft play equipment in the UK you are likely to take between 8 and 13 weeks from occupying the premises to opening to the public during which time you will have no revenue so you do not really want any outgoings!

  • Ideally you will negotiate a minimum 3-month rent-free period, but do not be shy about asking for more and always ask for at least twice what you really want.

  • Any deposit required should be negotiated as low as possible. Ideally, you do not really want to pay a deposit, particularly if you are part funding the project through a financier. Any deposit you pay will reduce your available capital for project development and your required borrowings will increase by that amount. However, it is rare for estate agents/landlords not to require a deposit.

  • Try and ensure that any deposit is as low as possible. The last thing you need is your cash tied up as a bond for the landlord to have peace of mind! In any event, ensure that any deposit monies are to be held in an Escrow account, interest bearing in your favour and, ideally, repaid following 3 years trading without default.

  • Regarding Landlords Works, the more they agree to take on the lower your capital costs will be. Some landlords will do nothing, some everything. It would be a good idea to make up a list of all the works required in the building and see how much of these the landlord will take on or pay for.

  • Remember that whoever occupies the building it will need to be lit, heated, have appropriate emergency lighting, automatic fire detection and be compliant with the EA (Equalities Act).

  • Ensure that the lease is transferable, which will improve your position if you ever want to sell the business as a going concern.

  • Negotiate tenant only break clauses in your favour. For example, on a nine-year lease you could request breaks at years three and six. On a ten-year lease, you could request a break at year five. This reduces your liability although it will also reduce your negotiating power with the agent/landlord.

  • It is likely that the agent/landlord will request personal/directors guarantees (or a guarantor) since this project is your first venture into this industry (perhaps any industry). It is important for you to understand the protection offered to you by trading in a limited liability Company or partnership and that the signing of a personal/directors guarantee may remove this protection.

  • This means that in the event your business fails to pay the rents as and when they fall due, the landlord has recourse to you personally. Personal/directors guarantees should be avoided, if possible. If you cannot avoid them fully understand the implications and the extent of your personal liability AND consult a solicitor!

  • It is sensible to have crunched some numbers via a business plan to ensure that the commitments made in the Heads of Terms are commercially sensible.

Once your Heads of Terms are agreed the formal approach to the LPA can be drafted, if you decide to proceed. Note that House of Play are the only soft play supplier that has been guiding customers through the necessary planning permissions process for over 20 years.

Ensure that Heads of Terms are subject to contract and/or subject to lease and, of course, subject to necessary third-party approvals.

Certainly, you must not sign ANY lease without consulting a solicitor.

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