Agreeing a new commercial lease

Taking a new lease on a commercial property will be one of the most important business decisions you make, so it’s important to understand the implications of what is being agreed. In this month's journal, I cover some of the headline terms of a commercial lease, and provide some pointers on what to consider when negotiating terms. 

Term

The term will be the duration of the agreement and is usually arrived at through negotiation. A long lease is useful if you want security, but also means that you are tied to the premises for a long time, so what you gain in security, you lose in flexibility. One way of having both, is to agree a break clause. But be prepared to pay for this flexibility in an increased rent to offset the additional risk to the Landlord. 

Start date

It may sound obvious, but the start date of the lease is the date you become liable for the premises. Even if you don’t move in on this date, you are still obliged to pay the rent and, if the terms provide, insure it, pay utilities and repair it. 

Rent and reviews

The rent will usually be settled through negotiation. A rent review may be included so that the rent keeps pace with the market, and is there to protect the Landlord’s investment and prevents them ‘frontloading’ the rent. You should be aware that most leases contain upwards only rent reviews, so if market rents fall, your rent will, at best, stay the same. Some leases contain rents that increase by a fixed amount every year, and these are referred to as stepped rents. Another common rent structure is one where there is a rent-free period for a number of months or years. Rent-free periods are usually agreed by negotiation, and are useful if there is renovation work required, where the Landlord wants to incentivise a Tenant, or where there is an accounting or tax advantage to paying the rent at a certain point in time. 

Alterations

You are not automatically allowed to alter the premises, and what you can and can’t do will be covered under the alterations clause. This will usually provide that you have to have consent, with such consent not to be unreasonably withheld. It is important to check whether any alterations have to be removed at the end of the lease and also, how the alterations will be treated at rent review. For example, if you have extended the floor area, can the Landlord then charge you a rent for this new floor area? If you do carry out any alterations, make sure you get the Landlord’s consent in writing.  

Alienation

Alienation covers whether or not you can assign (transfer) your lease to another party. Most leases will allow the Tenant to do so, but only with the Landlord’s consent, with such consent not to be unreasonably withheld. However, in most cases, even if you do assign the lease, the Landlord can still ask you to guarantee the new Tenant, so choose any assignee carefully. 

Repairs and decoration

Leases generally fall into two groups, internal repairing and fully repairing leases. The first will usually only involve the Tenant being responsible for the internal fabric of the premises - decoration for example. Whilst the latter covers the majority of the building and structure - so items such as the roof, walls and floor. It is important to consider how much of an obligation you have under the repairing clause - you wouldn’t want to be responsible for an ageing roof when you only have a 2 year lease. In a lot of cases with internal repairing leases, there will be a service charge to cover a fair proportion of the external repairs. Alternatively, the rent may be higher to cover the Landlord's costs. 

User

The use of the premises will be restricted by the user clause. This will state precisely what use can take place at the premises and can state how this use takes place, for example, the opening times for a shop or the type of items that can be sold. If this user clause is too strict, you may struggle to assign the lease at a later date. 

Security of tenure

Unless you opt out, or the Landlord objects using one of the specific grounds for possession, commercial Tenants have a right to renew a lease at the end of the term. This security is provided by the Landlord and Tenant Act 1954 and covers almost all commercial leases automatically. If a Landlord or Tenant wishes to opt out of these provisions, then there is a specific procedure that needs to be followed and has to be done during the drafting stage. Otherwise, at the end of the term, if the Tenant remains in occupation, the lease continues as a 'hold over' tenancy until the relevant notices are served by either party. 

Hopefully you have found the above guide useful, but it shouldn’t be seen as an alternative to taking professional advice from an experienced surveyor and solicitor. If you have any questions about a lease you are thinking of signing, please do not hesitate to contact Williams Ellis on 01248 714485 for an informal and no obligation chat to see if we can help you.