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A commercial lease is an agreement between a landlord and a merchant to lease real estate. Due to the low capital requirements, most businesses rent rather than buy property. One of the main reasons enterprises prefer renting is that a commercial lease can become a hassle to get approved, resulting in delays that can incur costs to an individual or a company.
Commercial property leasing is one of the most important undertakings for any business owner, so getting it right is vital. This is why a step-by-step process will help with the approval process.
1. Negotiation & Agreement on Heads of Terms
When a commercial agent sells the property, the agent is tasked with facilitating inspections and on-site inquiries regarding the property and agreeing on the key points to include in the lease.
Even though the header forms the basis upon which the lease document is ultimately drawn up, it is not legally bound. It is considered an expression of intent by the parties rather than a contractual obligation.
As most U.S. leasing must adhere to government enforced leasing accounting standards, the amount stated in the lease should clearly highlight the GASB 87 effective date to ensure both parties agree with the terms and conditions.
Remember, the timeline for approval varies depending on the project, but it takes about 4 to 6 weeks from the issuance of the condition document to the conclusion of the rental contract.
2. The lease is Drafted, and the Title Information is Prepared
This is the second step that gets you closer to completing this process. The landlord’s attorney will draw up a rental agreement based on the agreed terms and send it over to your attorney.
The attorney representing your landlord will also send title documents, energy performance certificates, and responses to the Commercial Real Estate Standards Enquiry (CPSE). A CPSE is a regular general real estate inquiry made when renting a commercial property.
3. Tenants’ due diligence
Once your attorneys receive the rental documents, they will conduct a due diligence process per your requirements. This includes the property title, planned location, researching whether the property is subject to VAT, contacting all relevant management companies, and evaluating the seller’s response to CPSE.
These answers are often vague, so ask your attorney if you are unsure about anything you don’t understand. Additional requests can be made if necessary.
Your attorney may advise you to conduct additional investigations, depending on the type and location of the property. The attorney will also request a property search to ensure the property’s safety further.
This includes municipal surveys, environmental surveys, water and wastewater surveys, coal mine surveys, and in some cases, public utility surveys. Unless the lease term is concise or you know the property well, looking for a property is always an intelligent decision.
Once the attorney verifies the title and has done all the necessary research, the next step involves making the necessary inquiries. Depending on the landlord’s response, you may need to ask more questions.
Once draft documents are received from the Lender’s attorney, the Renter’s attorney will report specific issues or concerns.
When it comes to negotiating lease agreements, it usually goes back and forth between lawyers, which is why due diligence is the longest phase of a transaction and can last for 2-4 weeks
4. Lease Agreement
After the attorneys are satisfied with the information obtained from due diligence, a lease is negotiated and agreed upon. Attorneys explain their findings, the terms and conditions of the lease, and discuss your requirements.
Moreover, if there are no defects or provisions in the lease, the rental agreement, rental bond, and property tax form are ready for stamp duty. If you pay your rent in advance, your attorney will ensure the rent, security deposit, and other fees, such as the Payment of Insurance or Incidental Expenses, are made on time.
5. Lease Completed
Once you and the landlord sign off on the lease, the lease is final, and the rent that was agreed upon is paid to the landlord’s attorney. Furthermore, it is the attorney’s responsibility to notify you when the tenancy agreement is complete.
Upon completion, you will be granted exclusive ownership of the property, so you must ensure you have received all keys, alarm codes/fobs, and read all utility meters.
Your attorney will handle all post-completion issues, such as paying the stamp duty. A signed portion of the tenancy agreement will be sent to your landlord for safekeeping, and the landlord’s portion will be sent to your attorney, who will either keep it on your behalf or give it to you for custody.
Once the tenancy is complete, the landlord’s representative will be instructed to hand over the keys to the tenant. The tenant is then responsible for the building and is accountable for complying with the terms and conditions of the rental agreement.
The post-completion requirements depend on the length and value of the lease. All lease agreements are verified and submitted to HM Land Registry if the lease is granted for 3 to 7 years.
So that’s how a lease is approved. We understand it’s a lengthy process, but it ultimately pays off. If you have any questions, let us know in the comment box.