Commercial leases explained

This article will delve into ten essential considerations when entering into a lease agreement.

1. Lease Duration and Break Clauses: Your new commercial lease will have a fixed period which should suit your future plans and ending it early usually requires negotiating a break clause. This may involve a one-time right to terminate, perhaps at the end of a specific year, or a flexible rolling break option usable at various points during the lease term. The landlord may impose conditions for the break clause.
2. Repairing Obligations: In many commercial leases, tenants typically assume the responsibility for maintaining the premises in good repair. If the initial condition of the premises is not good or if you are opting for a short lease, it’s possible to negotiate to limit your obligation to maintaining the premises in no worse condition than its current state. This can be achieved by agreeing upon a schedule of conditions with your landlord, complete with photographs and written details, serving as a benchmark for comparison in the future.
3. Security of Tenure: One important aspect to consider before finalising a commercial lease is whether there is security of tenure. This safeguard ensures that the lease can only be terminated through a strict legal process, providing stability and the right to renew the lease when the term expires. Unless explicitly excluded by, most commercial leases automatically benefit from these legal protections.
4. Rights to transfer the lease to someone else or to sublet the property: As with all aspects of your business, you will want as much flexibility as possible if you no longer want or need to occupy the premises. Most leases allow the tenant to transfer the lease to another business or to sub-let, but only with the landlord’s consent. By law, the landlord must act reasonably but they are allowed to impose conditions setting out when they may refuse consent.
5. Rights to alter the Property: You should make sure you have whatever rights you may need to alter the property to suit your business. The lease will usually prohibit structural alterations, but you should ask for the right to make internal, non-structural alterations.  You may have to get landlord’s consent each time, although they may accept that consent is not necessary as long as you keep the landlord informed.
6. Rent Clauses: Before signing a commercial lease, you should be aware of the rent clauses. Beyond the obvious rental amount, pay attention to the following:

• • Value-Added Tax (VAT) Charge: Check if there is a VAT charge on your rent, as this can impact your overall cost.
  • Rent-Free Period: Identify if there is a rent-free period offered in your lease, providing a temporary relief from rental payments.
  • Rent Review Clause: Examine the rent review clause, specifying when your landlord may reassess the rental amount. In long-term leases, this clause is common. You can negotiate the frequency and format of rent reviews as a commercial tenant. Additionally, you should understand the dispute resolution process in case of disagreements with a rent review.

7. Service Charge: Tenants may have to contribute to the cost of services the landlord provides, on top of paying rent. The extent of the services will depend on the property, and you should check if there are any and if so, ask for the right to challenge service charge items and inspect quotes and receipts.
8. Indemnity Clause: A lease is a contract and if you are in breach of your obligations, the landlord’s main remedy is to sue you for damages. This is time-consuming and expensive, so instead the landlord may want you to give an indemnity. In effect, this means you have to pay for losses and expenses the landlord suffers as a result of your breach of contract, without the landlord having to prove them in court. If the landlord insists on an indemnity, you should at least require the landlord to do all it can to minimise losses and give you an opportunity to put any breach right before you have to pay out.
9. Access rights: Ensure the lease gives you any rights you need to access or use any areas that are not part of your premises and check for any rights the landlord is reserving to come onto the  property let to you. Be  careful about rights to come in to inspect or carry out works and make sure that the lease says that any visits must be at reasonable times and on reasonable notice and that the landlord must minimise any disruption to your business.
10. Obligations at Lease End: The landlord will want you to leave the property in good condition, so it can easily be re-let.  If you have made any alterations during the lease, the starting point is that you will have to remove them. It is worth discussing this when you are negotiating the lease, because you may be able to leave some things in place.

It is crucial to thoroughly review and negotiate your commercial lease. Seeking guidance from a legal professional specialising in commercial property can offer invaluable assistance and accurate advice tailored to your specific situation.

This article is intended for guidance only and does not constitute legal advice – 2024