For the success of your business, your commercial lease must match your requirements and expectations. Having a full understanding of your rights and responsibilities before entering into a lease will put you in a stronger position going forward and prevent any nasty surprises down the line.
Here, our commercial property solicitors offer guidance on the key issues you should consider before entering into a commercial lease.
What is a commercial lease?
A commercial lease is a contract between a landlord and a commercial tenant. The lease gives the tenant the right to use the property for an agreed business activity for a specified period in exchange for rent. A commercial lease also sets out the tenant and landlord's rights and responsibilities for the duration of the lease.
Is a commercial lease different for a residential property lease?
While commercial and residential leases share some traits, there are some differences between the two. One of the most important differences is the way that the courts view them. Commercial leases are usually understood as contracts between two experienced and knowledgeable businesspeople. As a result, the parties are free to negotiate terms to suit their circumstances, and there are fewer statutory protections for commercial tenants compared to residential property tenants.
In practical terms, this means that the parties to a commercial lease typically have more bargaining power. The courts will be less likely to set aside a commercial lease if one of them subsequently decides the terms of the lease are unfair. As such, obtaining legal advice before entering into a commercial lease is recommended.
Is a commercial lease your best option?
It is important to know that a commercial lease isn't the only option when it comes to renting premises for carrying out your business. But one of the main benefits of a commercial lease is that it offers security. Signing a lease that lasts for several years affords you stability and the certainty of knowing that you can operate your business from the same premises for the foreseeable future.
Lease or licence?
If you are looking for more flexibility, a licence might be a better option. A licence gives the tenant the right to use the property for a short period, typically up to one year. This might be more appropriate if you need premises for a one-off job or just for a shorter time-frame .
Another option is subletting a commercial property. This means that you take on the property in place of the existing tenant. You will take on the tenant’s rights and responsibilities, but your obligations will be to the tenant rather than the landlord. Typically, this type of agreement will be for a shorter period and will similarly give you a higher degree of flexibility.
Make sure you know the full cost of the lease before signing
While all commercial tenants will expect to pay the agreed rent, bills and other charges, it is essential to be aware that there may be additional costs as well. Many commercial leases will be a full repairing and insuring lease (commonly referred to as an FRI lease). This means that as well as having an obligation to keep the premises in good condition and trade legally, you will be responsible for carrying out any repairs. Additionally, while the landlord will arrange insurance, you will have to pay the premiums.
Commercial property surveys
To make sure you know what you're getting into, it is advisable to have a survey of the property carried out before you sign the lease. This will identify any defects or disrepair to the property and allow you to assess whether the rent the landlord is asking for is fair. A survey will also give you a clear idea of the condition of the property before taking up the lease. This is important because you will likely be required to return the property to the landlord in the same condition when the lease comes to an end.
Rent review provisions are one of the most crucial parts of a commercial lease. A rent review clause sets out when your rent will be reviewed, the method used to do this, the assumptions that will be made when the premises are valued for the purposes of a rent review and how any disputes will be dealt with. The methods commonly used for calculating rent reviews include:
- Revaluation in the open market: this is the most common form of rent review and is calculated on the market rate at the time of the review;
- Index-linked: rent is linked to an index, such as the retail price index;
- Fixed increase: each review is fixed at the outset of the lease;
- Turnover/profit rents: rent increases are linked to the tenant’s profit;
- Premium rents: in exchange for fewer rent reviews, the tenant agrees to pay a premium on the current market rent.
You should be aware that rent reviews are traditionally 'upwards only', meaning that your rent can only either stay the same or increase when it comes time for a rent review. If the rental value or your turnover have gone down, you will likely still be required to pay the previous level of rent.
Bringing the lease to an end
A lease with a fixed end date provides clarity and certainty, specifying the precise date the lease will come to an end. Similarly, a lease for a fixed number of weeks, months or years sets out the length of time the lease will run from an agreed start date.
But what happens if you want to leave the property before the lease expires? Many commercial leases will include an early termination or break clause which allows the tenant to end the lease early – but there will be conditions attached. It is vital to read the terms of the early termination clause carefully as a breach of the lease at the date of early termination can mean the break option is invalid, and the lease must continue to the end.