Taking on a Commercial Lease
If you are a tenant looking to lease new business premises there are numerous issues to consider, not least your legal rights and responsibilities. Some of the most frequently asked questions relating to commercial leases are set out below.
What is a commercial lease?
A commercial lease is a legally binding document setting out the contractual relationship between a landlord and business tenant. This will be the principal document governing the occupation of your new premises.
In exchange for monetary payment the commercial lease gives you, the tenant, the right to use the property for the purposes of your business, profession or commercial activity. The lease will also set out your legal obligations and duties, together with those of your landlord, for the duration of the lease term.
Who are the parties to a commercial lease?
The parties to a commercial lease are the landlord and the tenant, sometimes referred to as the lessor and lessee.
In some cases the landlord may ask you for a guarantor or surety, in this way making a third party responsible for any financial losses resulting from non-payment of rent or breach of the lease.
What provisions does a commercial lease typically include?
In addition to setting out the parties to the lease, the term of the tenancy and the amount of rent payable, the provisions of a commercial lease will typically include:
- permitted use of the premises
- provisions for alterations
- repairing obligations
- insurance provisions
- rent review provisions
- provisions dealing with the tenant’s interest in the lease
- provisions for termination of the tenancy
- provisions for lease renewal.
Prior to entering into a commercial lease you will need to ensure that the proposed terms suit your business requirements, both now and for the future. All aspects of a lease will remain negotiable until exchange of contracts.
For what purpose can I use the leased premises?
A commercial lease will typically outline the business purposes for which a property can be used. This is known as a ‘permitted use of premises’ clause, often by reference to a planning class, for example A1 Shops or B1 Business.
As such, you will only be permitted to use your business premises for the purpose(s) specified in the lease. In the event that you wish to use the premises differently, you must first obtain the written consent of your landlord. It is therefore important to ensure that any specified uses satisfy your business needs prior to entering into a binding agreement.
Can I carry out alterations to the property?
A commercial lease will normally control the type of alterations you can carry out as a tenant. Generally you will be prohibited from carrying out any structural or exterior alterations.
To carry out non-structural internal alterations you will most likely need your landlord’s written consent. You may also be contractually required to reinstate the premises to their original condition at the end of the lease term.
Who is responsible for repairing and maintaining the premises?
Many commercial leases will make you as the tenant responsible for keeping the leased premises in good repair and decoration. Under an FRI lease, ie; ‘full repairing and insuring’ lease, all maintenance, repair and insurance costs would fall to you, including structural repairs.
It is therefore important to limit your liability to remedy any disrepair by obtaining a survey prior to entering into any agreement. In this way you can ensure that you only lease premises in a good state of repair, or have leverage to negotiate more favourable terms under the commercial lease.
Will I be responsible for the buildings insurance?
Provision should be made within a commercial lease as to who will be responsible for arranging and paying for buildings insurance. Typically the landlord will put an insurance policy in place and seek to recover the cost of the premium from you as the tenant.
Irrespective of who arranges any insurance cover, you should ensure that it provides for loss of rent to the landlord, as well as your own losses from business interruption, caused by problems to the building.
Can my rent be increased under a commercial lease?
Many commercial leases, especially longer leases, will contain a rent review clause. This is a mechanism to adjust the rent periodically throughout the term of the lease.
The lease will need to specify at what intervals the rent review will take place and how any potential increase will be calculated. This may be to assess the rent in line with the current open market rental value, or alternatively to link the new rent to the Retail Price Index. An ‘upward only’ clause means that even if the market rent has fallen, your rent will remain at the same level.
Will I be able to sub-let part or all of the premises?
A commercial lease may completely preclude you from sub-letting either part or all of the premises, or at the very least will restrict your ability to sub-let without your landlord’s consent. Typically your landlord will also impose conditions before consent will be given.
Whilst sub-letting can provide some flexibility should your business requirements change, you will remain contractually liable to your landlord under the existing commercial lease for the remainder of the term.
Can I assign my rights under a commercial lease?
If you wish to transfer your commercial lease to a third party at some point in the future, for example if you sell your business as a going concern, you will again need to obtain your landlord’s consent.
If a lease is assigned without consent, your landlord may refuse to recognise the new tenant and continue to hold you responsible for rent and all other contractual obligations under the lease.
Can I end a commercial lease early?
A commercial lease is generally granted for a fixed term. However, there are some circumstances where you can end the lease early, either by prior agreement with your landlord or your landlord subsequently agreeing to release you from your obligations.
The terms of your commercial lease will determine your contractual right to terminate your lease prior to expiry of the fixed term. These may include subletting the premises (although you will remain contractually liable for the lease term), assigning the lease to a third party, or exercising your right to terminate the lease under a break clause.
Will a ‘break clause’ be beneficial to me?
A commercial lease may include a provision known as a ‘break clause’. This gives both you and your landlord the option to end the lease early by giving notice. This is common in longer leases where an option to terminate the lease prior to expiry of the fixed term is provided for after a specified number of years.
A ‘break clause’ can be beneficial if you wish to end your commercial tenancy early without finding a subtenant or assignee, although this flexibility may be reflected in a higher rent. You should also be wary of any ‘break clause’ in favour of your landlord where the commercial lease could be terminated early to the detriment of your business.
Can a commercial lease be renewed?
Under the provisions of the Landlord and Tenant Act 1954 you have a statutory right to request a new tenancy when your existing commercial lease expires. This is known as security of tenure, ie; the right to remain in occupation.
In the event that agreement cannot be reached then you would need to make an application to the court. There are limited grounds upon which your application can be opposed, the most common being that your landlord wants to occupy or redevelop the premises. A request for a new commercial lease may also be rejected if you are in substantial breach of your repairing, rental or other contractual obligations.
In circumstances where the court refuses the grant of a new tenancy, you may still be entitled to statutory compensation.
Should I be concerned about any ‘contract out’ clause?
Prior to entering into a commercial lease it is possible for both parties to agree to contract out of the provisions of the Landlord and Tenant Act 1954. As such, when your commercial lease comes to an end you will no longer have the statutory right to renew your tenancy. This may be likely where a landlord is looking to develop the property in the future or the lease is only short-term.
The right to renew a commercial lease is a valuable tenant right providing security of tenure. As such, you should think carefully before agreeing to the lease being excluded from the 1954 Act.
Should I seek legal advice?
The law governing commercial leases can be complex, not least the strict statutory provisions relating to notices, both prior to entering into an agreement and thereafter.
It is important that you seek professional legal advice regarding your rights and responsibilities before signing a commercial lease. It is a legally binding document with potentially far-reaching implications for your business, both now and in the future.
A specialist property lawyer can provide legal and practical advice on all aspects of the law relating to commercial leasehold property and can help negotiate acceptable terms to suit your business needs.