A commercial lease is a legally binding contract made between a landlord and a business tenant which sets out the terms, conditions and rights of each party relating to the use and occupation of commercial property (such as shops, offices, restaurants, or warehouses).
If you operate your business out of a commercial property, you need to be aware of the rights you have and the obligations you must meet under the terms of the lease. These terms can have significant financial implications for your business as they set out its legal obligations and how it can operate from the property.
Seeking legal advice before signing a commercial lease
Before looking at some of the most important terms to be aware of as a commercial tenant, it is worth highlighting how vital it is to obtain advice from a surveyor to agree the heads of terms before the lease is signed.
The most important terms to look out for in a commercial lease
1. Rent and rent review
How much rent your business will have to pay, as well as when it is paid. Depending on the length of the term of the lease, it is common for commercial leases to also include ‘rent review’ provisions, which allow the landlord to increase your rent at certain intervals (usually every 3-5 years).
Some aspects of rent review to consider include:
- Is it ‘upward-only’? If so, the rent will only ever increase, even if market conditions decline.
- Is it tied to an indicator like market value or inflation? Rent review provisions may just specify a fixed increase to the rent. But, often, rent review clauses can link the rent review sum to inflation, using the Retail Price Index or Consumer Price Index. Alternatively, it might be based on the amount of rent the landlord could get for the property on the open market at the time of the review.
- How does the lease handle disagreements over rent review? Rent review can be a common cause of dispute between tenants and landlords. The lease should make provisions for how disagreements are handled. You should check whether the terms of the lease allow for an independent party to review rental increases, as this can help with achieving acceptable outcomes in any disagreements.
2. Lease duration and break clauses
Leases operate for fixed terms. Break clauses can be included, particularly in fixed term leases, to allow for the lease to end before the term expires. Depending on the lease, the break clause may allow you (as tenant), the landlord, or both parties to exercise this right in certain situations. However, with any break clause, it is crucial to read the wording carefully. Failing to adhere to strict requirements can make the clause ineffective.
3. Right to remain
Commercial leases allow tenants a statutory right to renew. This can be useful to preserve your options in continuing to lease the property. However, this right can be specifically contracted out in a commercial lease, and some landlords will want to do so. It is important to be aware of your position in this respect and to take advice before signing any head of terms.
4. Repair and maintenance
Most commercial leases will provide that the tenant has obligations to repair and maintain the property. Many landlords will insist that a property is leased on an ‘FRI basis’ – this means Full Repairing and Insuring. This will also impose an obligation on the tenant to contribute to the insurance costs of the premises.
As a tenant, it is important to understand your repair liability and whether the lease requires you to put the property into a good state of repair. If the property is currently in a poor condition, you could be obliged to carry out the initial renovations to bring the property up to an acceptable standard. This could be a significant and unexpected cost.
Some prudent steps to take with respect to repair obligations are:
- Conducting a thorough inspection of the property before signing the lease.
- Recording the condition of the property before the start of the lease and agreeing that the repair obligation can be limited so that you only have to give the property back in the same state as is recorded.
- Gaining a clear understanding of the extent of your repair and maintenance obligations. For example, whether your obligations cover the property’s exterior including the roof, structures and services.
5. Permitted use and alterations
A commercial lease might include restrictions on permitted use of the property. Naturally, for the property to be a good fit for your business, this permitted use must align with what you want to use the property for. It’s therefore important to check what planning use is permitted before entering into the lease.
The lease will cover what alterations you can make to the premises, and these too may affect your plans. For example, if your business will need particular equipment installing and/or any exterior or structural alterations made, it is critical to ensure the lease terms will allow for them. Generally, significant alterations will require the landlord’s consent, which may not be guaranteed further down the line.
6. Assignment and sub-letting rights
The lease should also cover whether you can pass on some or all of your tenancy rights and obligations to another party. If assigning (or transferring the lease), or subletting are permitted by the lease, they will normally require the landlord’s consent so they have some control over who occupies the premises. These provisions may affect the extent to which your business is committed to the tenancy.
Expert legal support from Bridge McFarland
There are many other commercial lease terms that can affect your business, but a lot of their importance will depend on your circumstances and requirements. Getting specialist legal support from Bridge McFarland ensures you receive tailored advice for your unique situation, and with your business objectives firmly in focus.
We can help you at every step of the way with leasing a commercial property: whether you have just started to consider it, you are ready to begin negotiations with a landlord, or you would like advice about an existing commercial lease. Our expert commercial property solicitors have assisted a wide range of businesses, from small start-ups to large national companies.
Contact us to discuss how we can help your business.
