Agreeing a Commercial Lease

In Business Property

Most businesses rent commercial premises from landlords. Compared to buying premises, the upfront costs are lower, freeing up more capital.

Short-term property licences are sometimes used, but most tenants enter into leases: legally-binding contracts setting out the terms on which they may occupy the landlord’s property.

It is usual for landlords and prospective tenants to instruct knowledgeable commercial property solicitors to get them the best deal, and to guide them through the lease negotiation process.

Tenants will generally also instruct a building surveyor’s report, to assess the condition of the property and document its pre-lease condition, should any dispute about maintenance or repairs arise later.

Before making an offer to lease a property, it is important for prospective tenants to check which uses of the premises are permissible. If a property is to be used, e.g. as a food takeaway, the necessary local authority consent will be required. Tenants should also consider whether planning permission is required for any changes they might wish to make to the property.

Business rates, payable to the local authority, are also an important consideration; tenants can pay these directly, or via the landlord. The rateable value of a business premises is based on its open-market rental value.

Tenants may also require to pay the landlord a premium or deposit in advance, and provide a rent payment guarantee. A deposit equivalent to 3–6 months’ rent is usual.

Important matters to be documented in the lease itself include:

  • Length of term: Leases vary from short-term arrangements to commitments lasting 10–20 years or more. A lease might include a break clause, allowing one or both parties to end it early at particular points within the term. Both parties should also be aware of legislation about security of tenure, and lease extension.
  • Subleasing: Should the tenant be permitted to sublease the premises, if they no longer wish to remain?
  • Rent: The rent will depend on many factors, including the state of the property market, and the location, size, and condition of the premises.
  • Rent periods: Rent is usually paid quarterly or monthly in advance, sometimes with penalties for late payment. Leases often specify rent reviews every 3–5 years, and sometimes rents may only increase, not decrease. Sometimes landlords offer rent-free periods to incentivise tenants to enter leases, or to compensate for necessary repairs.
  • Maintenance obligations and service charges: Tenants are usually responsible for internal maintenance and repairs, with external maintenance being the responsibility of the landlord. Tenants often pay a service charge to the landlord, to cover a proportion of charges such as cleaning and heating.
  • Insurance: The lease should specify whether the landlord or tenant is responsible for paying buildings insurance premiums – if the landlord arranges the insurance, the tenant usually pays the premiums as part of the service charges.
  • Dilapidations: These are amounts payable to the landlord at the end of the lease in relation to items of disrepair.

Once both parties are satisfied with the agreed terms, and the condition of the premises, they will complete a legally-binding lease contract, and any upfront payments from the tenant will be due.