A Guide to Commercial Leases. Part 1: Overview
If you are considering entering into a commercial lease for your business or if you’re coming to the end of your commercial lease and wish to negotiate a new one, it’s important to understand the rules, duties and issues involved. It can be tempting to deal with the negotiation and agreement of commercial leases without professional help, but they can be complex, nuanced and time-consuming and in order to avoid future problems, it is sensible to take legal advice from the outset.
From due diligence and dilapidations to the complexities of insurance requirements and agreeing appropriate security, the more thorough your approach to your lease, the better the chance that it will be a commercial success.
In this four-part guide to commercial leases, we outline the main areas to consider starting with this general overview. It is, however, important to understand that this is not a substitute for getting proper legal advice and is only by way of a summary of some of the main issues involved.
Preparation and due diligence
A lease is a binding agreement between you and your landlord allowing you to occupy their property for the purposes of running your business. The lease will grant you various rights in return for you complying with various obligations, including payment of rent.
As a tenant, as you start your search for suitable premises you will need:
Drawing up a brief
It is important to get clear about what you require from a commercial property. This will require you to think about your business needs, now and in the future in terms of space and location. It is also important to have a realistic budget based both on your financial forecasts and also taking into account the different expenses involved in leasing a commercial property.
Legal title
It is essential to check the proposed landlord is the freehold owner or has a suitable leasehold interest in the property and has the right to lease the property without any restrictions that prevent or limit business activities on the site.
Commercial Property Standard Enquiries (CPSEs)
CPSEs are a set of enquiries used with commercial property transactions to provide information about the property such as any additional rights or easements. There are seven CPSE questionnaires although they may not all be necessary for your situation. This combined with a surveyor’s report provides essential information for the purpose of your negotiations as well as ensuring you know exactly what you’re taking on.
Security of tenure
Part of the law that covers commercial leases is found in the Landlord and Tenant Act 1954 (LTA). In particular, it provides certain commercial tenants with “security of tenure” and sets out the way in which commercial leases can be extended or ended. It is important that you understand the implications of either entering into a secured tenancy or opting out.
Terms of your tenancy
The length of your tenancy will depend on what is agreed in the lease. That said, when renewing a protected tenancy the court has discretion to grant a term of up to 15 year and will consider what is reasonable in all the circumstances.
Break clauses
A commercial property lease usually continues until its end date unless it includes a break clause. The parties therefore may want to negotiate a term that either the landlord or the tenant (or both) can terminate the lease early without facing a penalty.
For more information about finding a suitable property, due diligence, understanding security of tenure and break clauses, visit: Guide to Commercial Leases Part 2.
Deposits and security
The landlord will almost invariably require some sort of security in the shape of a rent deposit or guarantee. Rent deposits are more common and can be a complex area to agree. They will require of a number of ancillary issues such as interest on the deposit, ownership of the deposit and return of the deposit.
Rent and rent reviews
At the heart of every commercial tenancy is the rent to be paid by the tenant. When negotiating the level of rent, common issues that arise include rent free periods, reductions for fit out or capital contributions and whether or not a turnover rent should be agreed.
Rent reviews are also a vital component of any commercial lease and the terms of these need to be clearly defined. If there is a risk of serious rent increases by way of an index-linked rent review, the tenant may seek to include a cap on rent increases or a break clause to protect their position.
Service charges and insurance
The cost of a service charge is also often a thorny issue and needs to be drafted with care to protect the tenant from unexpected or unreasonable charges. Similarly, with insurance, it is essential to make sure the lease does not leave the tenant exposed to the risk of having to pay for damage or destruction caused by uninsured risks.
For more information about deposits and security, rent and rent reviews, service charges and insurance, visit: Guide to Commercial Leases Part 3.
Alienation
It is important, even at the very start of the landlord and tenant relationship to consider what should happen if for some reason the tenant needs or wants to assign or sublet the tenancy. Inevitably, the landlord will want to retain an element of control over the terms of the sub lease or assignment and the party to whom the lease is being assigned or let to.
Alteration
It is not uncommon for a tenant to want or need to make alterations to a property in order for it to meet their business requirements. Once again, there is a framework within which this should be done, and it is important that this is clarified and set out within the lease.
Repair and maintenance
It is not unreasonable to expect the tenant to leave the property in a good state of repair when the tenancy eventually comes to an end. However, it is essential to set out the extent of their repair and maintenance obligations at the outset to ensure what is required is fair and reasonable.
For more information about alienation, alteration and repair obligations, visit: Guide to Commercial Leases Part 4.
If you would like to discuss a commercial lease, please get in touch.
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