Financial aspects of a lease
Following some repairs to the roof, the board wants to know if the associated costs can be recovered from the landlord. You’ve been asked to review the lease and report back on anything you find. What might you discover?
Recovering costs
A property lease is an agreement between you and your landlord allowing you to use the premises. It will usually be in writing and cover the rent, space occupied, length of lease, your obligations and rights and those of your landlord. Leases tend to be complex documents, which is why it’s important to familiarise yourself with the terms so that you can make suitable provisions in the accounts for any future lease commitments.
Who pays for repairs? Your lease will state who is responsible for carrying out any repairs and maintenance. If you lease the whole building, you will probably be entering into a full (or tenant) repairing lease, which means you will be responsible for looking after the entire building including major items such as the roof, walls and foundations. If it’s not a full repairing lease, then you’ll need to read the terms carefully to see what the landlord is responsible for.
Missed rent review
The lease should also specify when the annual rent your company pays should be reviewed - usually at three or five-year intervals. Then if you can’t reach an agreement with the landlord, most leases will include dispute resolution arrangements, usually involving the appointment of an arbitrator or independent expert who will settle the matter.
Tip. Establish if the company has missed any rent review points. If you think the rent should have gone up, recommend that the company make a provision in its management accounts each month. For example, if you are paying £4,500 per quarter and commercial agents expect a 10% increase to be reasonable, then you would provide £4,500 x 4 = £18,000 x 10% = £1,800 a year or £150 a month. Remember, you don’t need to pay this amount - it’s just provided for in case the landlord eventually asks for it. The monthly journal for this would be:
| £ | |
| Debit: Rent (P&L cost) | 150 |
| Credit: Accruals (B/S) | 150 |
Out-of-date guarantor
The landlord may have originally insisted that a couple of directors act as guarantors for the rent and other obligations under the lease.
Problem. If your lease has been going for some time, you might discover during your review that one or more of the original guarantors is no longer with the company. What should you do then?
Tip. Recommend to the board that they pass a resolution stating that the company will indemnify the former director should the guarantee be called upon by the landlord (see The next step). This will be cheaper than incurring legal fees in getting the lease changed.
Who’s holding the deposit? A deposit is usually asked for at the beginning of a lease and is often held “in escrow” by the landlord’s solicitors. If you haven’t yet done so, write to the solicitors asking them to confirm how much they hold and the terms under which they look after it. As this is a company asset, check that it’s shown on your balance sheet as a debtor. If not, it was probably written off as rent and will need to be written back.
For a sample board resolution indemnifying an earlier guarantor, visit http://financialcontroller.indicator.co.uk(FC 02.10.09).
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