What is a commercial lease?
A commercial lease is an agreement you, as a business owner, make with a landlord to use their commercial property in return for monthly rent payments. You become their business tenant, and you’ll both have obligations to each other.
Commercial leases are used specifically for renting out commercial property. This could include office buildings, restaurants, retail spaces, and warehouses.
What are the typical lease terms for a commercial lease?
A commercial lease agreement is a contract that sets out the terms and conditions of your agreement with your landlord.
Here are some things that may be included in your lease agreement.
The length of the term
You’ll need to agree how long your tenancy agreement will last.
Different types of lease agreements can be short-term or long-term. Commercial leases typically have a lease term of around five years. But it could be anything up to 20 years, depending on the needs of your business.
You may agree a break clause with your landlord if either of you wanted to terminate the lease early. And you could set out how you would renew the lease when it expires.
Rent payments
Rent is usually paid quarterly or monthly in advance, sometimes with penalties for late payments.
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 repairing obligations.
How much rent you pay depends on a few factors. These include the property’s size, location, and condition, as well as the state of the property market.
Property alterations
Your business may require altering the property to meet your commercial needs. Your commercial lease should stipulate if alterations are allowed. Certain levels of property modifications may be allowed, whilst others aren't. Perhaps you'd have the freedom to add fixtures, but not to knock a wall down.
Maintenance obligations and service charges
Both you and your landlord will be responsible for maintaining the property.
Typically, a commercial tenant is responsible for minor improvements, like paint and furniture. Your landlord will be responsible for structural issues and ensuring that the property meets health and safety standards.
Landlords are also responsible for providing cleaning heating for the building. You’ll typically pay a service charge to contribute towards these costs.
Insurance
The lease should specify whether your or your landlord is responsible for paying buildings insurance premiums. If your landlord arranges the insurance, you’ll usually pay the premiums as part of the service charges.
How to negotiate a commercial lease agreement
Agreeing a commercial lease involves a negotiation between you and your prospective landlord.
While you don’t have to get legal representation, a commercial property solicitor will help you to get the best deal.
When you’re happy with the terms of the agreement, you’ll sign a legally binding contract, and you’ll pay any upfront costs.
However, before you make an offer on a commercial property, you need to make sure that it’s right for you.
Here’s what you should consider before you sign a commercial lease agreement.
The condition of the property
It’s important that you check what condition the property is in before you start leasing it. This is so you can’t be blamed for any issues later down the line.
A building surveyor’s report will highlight any issues. You can use the findings to get any problems fixed before you make an offer.
Does it suit your business?
Commercial properties have different purposes they can be used for. This is called a ‘planning use class’. For example, some properties can be used as retail space, while others can be used as office space.
You need to make sure that you’re allowed to operate your business from the property. It is possible to change what a property can be used for, but you may need to get planning permission.
It’s also important to consider whether the property will help your business be successful. For example, make sure that you’re happy with the property’s size and location.
How long your lease should be
You’ll need to decide how long your lease should be.
A short-term lease gives you more flexibility, but a longer term lease will give you more stability. What’s right for you depends on your specific business needs.
Business rates
When you rent commercial property, you’ll need to pay business rates. Business rates are paid to the local authority to go towards services in the area.
The amount you’ll need to pay varies depending on the property – it’s worked out based on its open market rental value.
Make sure that you’ll be able afford these payments before you sign a lease agreement.
Who pays for a commercial lease agreement?
As the potential tenant of the commercial property, you’ll typically pay for drawing up the commercial lease agreement. However, sometimes both the landlord and tenant will pay their costs in the heads of terms.
You’ll also have to pay legal fees and Stamp Duty Land Tax.
Find out more in our guide: Costs of agreeing a commercial lease.
What happens when a commercial lease is about to expire?
When a commercial lease is due to expire, you can choose to either leave or renew the lease.
If you wish to renew, this can usually be arranged with your landlord.
Alternatively, if you agreed a breakout clause with your landlord, either of you can use it to end the tenancy before the expiry date without violating the terms of your agreement.
What is the most common commercial lease agreement?
Though there are several types of commercial lease agreements, the most common is a net lease. A net lease leaves the tenant responsible for a base rent payment. They will also have to pay any expenses attached to the property.
Do you need a solicitor to draw up a commercial lease?
Whilst it's not required for you to have a solicitor when drawing up a commercial property lease, it's strongly advised. As with any legal process, terms can get complicated and documents can get confusing. A solicitor will be able to support you and streamline the process.
Can a landlord refuse to renew a commercial lease?
Your landlord can refuse to renew your lease under certain circumstances.
The grounds for opposition include where:
- You breached the terms of the lease. For example, by persistently paying rent late, or not looking after the property.
- Your landlord offered you other suitable premises.
- Your landlord wishes to sell the property.
- Your landlord wishes to demolish, rebuild, or repossess the premises for their own use.
Talk to a solicitor
If you have any questions about commercial lease agreements, you should speak to a solicitor.
The Law Superstore connects you to business property solicitors across England and Wales.