Corporate Finance Associates Blog

The Following article was first published on newbusiness.co.uk and can be found in it’s entirety here.

Top tips for renegotiating your lease

Your lease expires later this year.  You know or suspect that you are paying too much rent or that there are better deals to be had elsewhere.  Either you want to stay put, as location is key to your success, or relocating would be a hassle and expense which you could simply do without.

Your chances of negotiating a lower rent and/or more favourable lease terms will be greatly enhanced if you go to your landlord well informed and armed with a list of alternative premises and comparables.  You could seek advice from a local, experienced surveyor and/or if you have good relationships with nearby occupiers, see if they will discuss their lease terms with you.  The more empty property your landlord has, the better still the deal you could strike.  From April, landlords will pay business rates on all vacant properties with a rateable value of more than £2,600, so voids will be even more costly for landlords.

Whilst the initial yearly rent and length of term are likely to be the first points which you and the landlord focus on, your liability can be reduced in many other ways.

Term 

If location and goodwill matter, a longer lease will be better, preferably with the protection of the security of tenure provisions of the Landlord and Tenant Act 1954.  If your existing lease is not protected, you may wish to request that your new lease is, giving a legal entitlement to a new lease after that one expires (subject to certain statutory exceptions).  Note that stamp duty land tax (SDLT) varies according to the length of term and amount of yearly rent.  If you agree a ten year lease with a break at year three, you will be liable for SDLT on the full ten year term.  To reduce SDLT, consider a shorter lease term, with an option to renew.

Break clauses  

A tenant right to break is an easier way out of the lease than assigning or underletting and may also be crucial after a rent review, if the rent increases above a level you can afford.  Resist all pre-conditions to exercising a break right, other than the payment of all yearly rent and the giving of vacant possession.  Courts continue to interpret even minor breaches of break conditions very strictly.  Ideally, you will have the right to break on a rolling basis, failing which try to agree regular break dates.  It is important to know that unless your lease contains an express right to repayment of any rents and other sums which you have paid in advance for the period after the break date, the landlord is not obliged to pay them back. 

Payment of rent monthly

To assist your cash flow, ask to pay rent monthly. Landlords have become more amenable to this, particularly if coupled with an agreement to pay electronically, rather than by cheque.

An initial rent-free period, reduced rent period or one-off inducement payment

It may be easier to sell this idea to the landlord if, for example, you are planning improvements to the premises or it may simply agree to avoid an empty property.  You could also consider seeking a further rent-free as a reward for not exercising a break right further down the lease term. 

Rent review

Landlords still favour the upwards only review but there is no harm asking your landlord to consider an upwards/downwards review to open market rent, especially if it can never fall below the initial annual rent.   Failing which, think about fixed increases, increases linked to a specified index (eg. the Retail Prices Index) or turnover-based increases.   Where an upwards only rent review is agreed, ensure that the value of your business is disregarded at review, also improvements which you have carried out during the term of the previous lease (as well as those during the new lease term). 

Assigning, underletting and sharing occupation

The ability to deal with the premises should be subject to as few conditions as possible.  Authorised guarantee agreements should only be required where reasonable, preferably not at all where your assignee is of greater financial strength than you.  On underlettings, agree only that the underlease rent should not be less than market rent.  References to the higher of market rent and the rent passing under your lease could prevent an underletting in a falling market.   Ask to group share without consent.

Repair and reinstatement

Your repair obligations (including any contribution towards repair costs via a service charge – see below) should always be appropriate to the length of your term and the condition of the premises at the start of the lease.  The only way to fully protect yourself is to agree to keep the premises in no worse condition than at the beginning of the lease, documented by way of a schedule of condition. If the landlord will not agree to this, you must carefully review the repair wording in the lease as this is a contentious area.  There are certain obvious precautions – like avoiding references to rebuilding and renewing, which clearly go beyond repair.  Reinstatement of alterations carried out during the term should only be required by the landlord where reasonable and the landlord should notify you of its requirements for reinstatement well before the lease expires. 

Service charge and insurance contributions

You will know previous levels of service charge paid by you but you must check whether any major new works are planned or some costly item of expenditure is imminent.  Where possible, negotiate a cap to limit liability.  Your service charge contribution may be calculated as a fixed percentage of total expenditure, which provides certainty and simplicity but may leave you exposed to items you do not benefit from – eg. a lift the other side of the building – or footing the bill for unlet space.  References to fair/reasonable/proper proportions offer more flexibility but more scope for dispute.  However service charge is arrived at (other methods include floor area and rateable value calculations), it is increasingly common and sensible for a tenant to identify items it won’t contribute towards the cost of – eg. future redevelopment and the replacement and rebuilding of items which are not beyond economic repair, as well as the costs referred to above.   As for insurance contributions, these may also be considerable.  Check that there is a rent suspension if the premises are damaged by an insured risk (and preferably an uninsured one too).   Also that if the landlord insures against loss of annual rent and service charge, the rent suspension covers both.  Ensure also that you are able to terminate the lease if the premises have not been reinstated by the time the rent cesser period expires.

Alterations and signage 

Applications for consent to alter or erect signage can be costly and time-consuming.   Ideally, your landlord will agree that internal, non-structural alterations can be carried out without its consent, unless they might affect services or systems in the remainder of the building.  If relevant, you should also ask that no consent be required for professionally prepared trade signage which doesn’t obscure more than X% of the windows of the premises. As a fall-back, consent in either case should not be unreasonably withheld or delayed.  Most landlords will agree to tenants erecting, moving and removing internal, non-structural partitioning without consent. 

To summarise

The more of the above points you can agree with the landlord, the easier it will be to run your business with minimum interruption, to hand back or deal with your lease should your circumstances change and to avoid nasty financial shocks over and above the level of agreed yearly rent.   Agree them as far in advance as possible, particularly if you do not have a protected lease as your entitlement to remain at the premises ends immediately the lease does.  Make a written record of all agreed points so as to minimise arguments, delays and additional costs when the lease negotiations commence.

Thanks to Emma Pereira, Howard Kennedy for her permission to reproduce it.

The following information was provided by one of our partners as their interpretation of the main points of the March 2010 Pre-Election budget.

The Chancellor has now set out his fiscal stall prior to the expected general election in May. As forecast there is a modicum of electioneering in the speech!

This report focuses on some of the tax changes we can now expect. We will also have further changes to deal with after the election.

PERSONAL TAX ANNOUNCEMENTS

Changes to Stamp Duty Land Tax (SDLT)

First time buyer’s concession

One of the more politically charged announcements today was the introduction of a new relief for first time home buyers which will exempt them from Stamp Duty on a property purchase up to £250,000 – this is effective for transactions taking place on or after 25 March 2010 and before 25 March 2012. This additional relief is partly funded next year by the increase in SDLT on more expensive property sales.

To qualify all of the following conditions will need to be met:

1. The individual or individuals jointly purchase a major interest in land which is wholly residential, and

2. The consideration is more than £125,000 but not more than £250,000, and

3. The individual(s) intends to occupy the property as his/her or their only or main residence and has or have not previously purchased such an interest or its equivalent anywhere in the world.

New rate of Stamp Duty for expensive properties

From 6 April 2011 a new 5% SDLT rate will be applied to residential property sales where consideration exceeds £1m.

Income tax rates and thresholds

The changes to tax rates and thresholds announced in the pre-budget report last year have been confirmed, including the advent of the 50% income tax rate for tax payers with taxable earnings in excess of £150,000 per annum.

A reminder of 2010-11 position is set out below:

• the basic rate will remain at 20%;
• and higher rate will remain at 40%;
• the additional rate will be set at 50%;
• the basic rate limit will remain at £37,400;
• the starting rate limit for savings will remain at £2,440;
• the personal allowances will remain at their 2009-10 amounts.

From 2010-11 the additional 50% rate will apply to taxable income above £150,000.

From 2010-11 the amount of the personal allowance will be gradually withdrawn for all individuals (regardless of age) with “adjusted net incomes” above £100,000. The rate of reduction is £1 for every £2 above the income limit.

NIC rates and thresholds

Apart from minor adjustments to the Lower Earnings Limit for 2010-11, NIC rates and thresholds remain as in 2009-10.

The previously announced combined increase of 1% in the main rates of NIC will be effective for 2011-12.

Pensions

The restriction of tax relief for tax payers earning in excess of £150,000 per annum is confirmed. This will take effect from 6 April 2011.

The Registered Pensions Scheme 2010-11 Lifetime Allowance of £1.8 million and Annual Allowance of £255,000 will continue to apply at these levels for a further five tax years, i.e. up to and including the tax year 2015-16.

Furnished Holiday Let Property

As previously announced the special tax concessions offered to owners of qualifying Holiday Let Property will cease from 6 April 2010. From this date, income from such property will be taxed in the same way as income from other property rental businesses.

Inheritance Tax

The current Nil Rate Band of £325,000 will be frozen at this level for all tax years up to 2014-15.

Company Car Tax changes

A new 10% car benefit rate will be introduced on 6 April 2012 for all company cars with emissions up to 99g/km.

Additionally, from 6 April 2010 to 5 April 2015 there are two further changes to the chargeable benefit in kind for company cars and vans with zero emissions or emissions up to 75g/km. These are:

• the first change is full relief from the chargeable benefit in kind on company cars and vans which cannot produce more than 0g/km CO2 engine emissions under any circumstances when driven.
• the second change reduces the chargeable benefit in kind on company cars which have an approved CO2 emissions figure of exactly 75g/km or less, to 5% of list price.

Tax Credits

A number of changes to tax credits were announced including:

1. From April 2012 an increase in the child element of £4 per week for 1 and 2 year olds.

2. From April 2010 awards for fixed period childcare costs (such as claims of a few weeks during the school holidays) will be averaged and paid over that fixed period rather than averaged over a year. This will enable families to receive all the financial support towards their childcare costs they are entitled to receive for these periods when they need it.

3. From 6 April 2011, people aged 60 and over will qualify for Working Tax Credits if they work at least 16 hours a week.

4. As announced at the 2009 Pre-Budget Report and confirmed at Budget on 24 March 2010, from 6 April 2010:

• the Child element in Child Tax Credit will increase by £20 above earnings indexation to £2300 per year. An increase of £65 per year overall;
• the disabled elements of Child Tax Credit will increase by 1.5%;
• the elements of the Working Tax Credit (except the childcare element) will increase by 1.5%;
• maximum amounts for child care, family and baby element for Child Tax Credit, the income disregard, the first and second tax credit threshold and the withdrawal rates remain unchanged; and
• the income threshold for those on child tax credit only rises to £16,190.

From 12 April 2010:

• Child Benefit rates and Guardians Allowance will increase by 1.5%.

BUSINESS TAX ANNOUNCEMENTS

Annual Investment Allowance

At present it is possible to write off the full cost of up to £50,000 of capital expenditure on qualifying assets. This limit is doubled from 1 April 2010 (for corporation tax) and 6 April 2010 (for income tax) to £100,000.

First Year Allowance

The temporary first year allowance of 40% ceases to apply on 1 April 2010 (corporation tax) and 5 April 2010 (income tax).

Tax incentive for British Video Games industry

The Government is to seek State Aid Approval to introduce a new tax relief for the UK video games industry. Consultations on the shape of the new relief will begin later this year.

Losses – carry back

Corporation tax

The temporary extension of trading loss carry-back from one to three years for losses up to £50,000 continues for company losses arising in accounting periods ending between 24/11/08 and 23/11/10.

Income Tax

The temporary extension of trading loss carry-back from one to three years for losses up to £50,000 continues for the 2008-09 and 2009-10 tax years for unincorporated businesses; consequently this relief for income tax purposes will cease 5th April 2010.

Corporation Tax Rates

For the Financial Year commencing 1 April 2011, the small profits rate of corporation tax remains at 21%.

For the Financial Year commencing 1 April 2011 the main rates of corporation tax are set at 28%.

VAT increased registration and deregistration limits

The taxable turnover threshold, that determines whether you should be registered for VAT, will increase from £68,000 to £70,000 from 1 April 2010. The taxable turnover threshold that determines whether you could apply for deregistration will be increased from £66,000 to £68,000 on the same date.

Business Payment Support Service

This service which allows you to negotiate extended payment of your tax dues, including VAT, Corporation Tax, Income Tax and NICs and PAYE, is to continue.

HMRC will require businesses seeking Time To Pay (TTP) arrangements for arrears of £1m or more, to provide an Independent Business Review (IBR) in support of their request. It is expected that the new requirement will be implemented from April 2010 and HMRC will informally consult on how this will work.

There will be no change for other businesses.

Capital Gains Tax

There was speculation prior to the Budget that the CGT rate would be increased to close the gap between the present 18% capital gains tax rate and the more punitive income tax rates which peak, from 6 April 2010, at 50%.

Surprisingly there is to be no increase and as an unexpected bonus the lifetime limit of gains that can be covered by Entrepreneurs’ Relief is to be doubled, from £1m to £2m.

The present annual exempt amount for individuals of £10,100 is unchanged for 2010-11.

Anti-avoidance legislation

There are the usual spate of complex issues which are coming under HMRC scrutiny – this includes closer exchange of information with certain off-shore tax havens that have benefited a particular high profile individual recently!

One of the more relevant areas of proposed legislation is with regard to Employee Benefit Trusts and similar arrangements. HMRC consider these as being used to disguise payments of remuneration with a consequent loss of tax and National Insurance. They have declared their intention to introduce anti-avoidance legislation to take effect from 6 April 2011.

Fuel Duty

The expected increase of 2.76p per litre in fuel duty that was due to be implemented on 1 April 2010 is now to be phased in as follows:

• 1 April 2010 increase of 1p per litre

• 1 October 2010 increase of 1p per litre

• 1 January 2011 increase of 0.76p per litre

This Budget sets out the action the Government is taking to promote long-term sustainable growth.

These changes will may well affect you and your business, if they do don’t hesitate to contact us for further clarification how this could affect you.