What Is A Commercial Lease Agreement?

A commercial lease is a contract between a landlord and a business for the rental of a commercial property, such as a shop, office, medical centre, hotel, retail store or restaurant.

The lease states the time period the tenant has exclusive possession of the property and is signed in agreement with the landlord, subject to clauses and rent payments. It is protected by the Landlord and Tenant Act 1954.

Frequently Asked Questions

What are the key contents of a commercial lease?

Contents of a commercial lease may include the rent amount, the length of the lease, the covenants applicable to the landlord and tenant, any rights reserved, rights granted, any restrictions on planning and attestation and any service charges, repairs or alterations.

Can you negotiate on a new commercial lease?

Contractual terms can usually be negotiated on a new commercial lease, even if the landlord states otherwise.

Can you negotiate on the terms of an existing commercial lease?

Terms are not normally open to negotiation on an existing lease; however, they should still be reviewed carefully to identify any unfamiliar or restrictive terms.

What is the typical length of a commercial lease?

The length will vary depending upon the requirements of the landlord and the tenant. The average lease is around eight years, but they are at times granted for more than 25 years.

What is a break clause?

Break clauses state the terms on which you or a tenant can terminate the commercial lease before the end of the contract term. If these terms are not met, for example if rent is not paid, then the termination will not be legal or take effect until it is.

They may impact the investment value of a property, because if they are enacted the income from the premises will stop until it is re-let. Tenants therefore often need to pay a higher rent for the flexibility of a break clause.

Can I sell or sublet the commercial property?

Commercial lease agreements will tend to allow this if you guarantee the new tenant will pay the rent. This would be your responsibility though, so if rent was not paid for some reason, then you would have to take the lease back.

Can the term of a commercial lease be extended or renewed?

Business tenants have a statutory right to extend and renew the contractual term of their commercial lease subject to satisfying certain criteria, under the Landlord and Tenant Act 1954.

They are valuable tenant rights and you should think carefully before agreeing to the lease being excluded from the 1954 Act.

There are few grounds on which a landlord can resist the tenant’s request, the most common of these are that the landlord wants to redevelop or occupy the premises themselves. In these instances, compensation may be payable to the tenant.

Can the rent payable be changed under a commercial lease?

Commercial leases over five years normally have rent review provisions and are commonly negotiated between the landlord and the tenant.

Traditionally in England and Wales, these rent reviews only increased from the value from which they were set, without taking into account market conditions.

However it is becoming more common for rents to be reviewed in line with specified indices such as the Retail Prices Index (RPI). Rent for commercial property is normally paid in quarters and very occasionally on a monthly basis.

How long is a tenant legally responsible for under a commercial lease?

If the commercial lease was granted prior to 1996, it requires the original tenant to be legally responsible for the rent and the other lease commitments for the duration of the term. Post 1996, the lease states the tenant ceases to be liable to the landlord for future breaches once it has sold the lease.

However, it’s important to note that landlords can request the selling tenant to guarantee the new tenant’s lease obligations by drawing up an Authorised Guarantee Agreement or AGA. This is a complex area and it is worth getting legal advice on to ensure you are happy with the covenant strength of your buyer.

Who is responsible for repairing and maintaining the property in a commercial lease?

The tenant is normally responsible for keeping the property in a good condition in a commercial lease agreement. However, if tenants share the building with others, the landlord is usually responsible.

If you are taking a lease of property which is not in a good condition you may find that you are legally obliged to make the repairs. It’s always worth carrying out a survey beforehand so you are fully aware of your responsibilities and can potentially negotiate more limited maintenance liabilities.

What are service charges on a commercial lease?

This is the cost that it takes the landlord to maintain the common areas of multi-occupied premises, such as stairs and entrance halls, or provide services, such as lifts or lighting. Service charges can represent a significant cost for business tenants.

It is therefore key that that any service charge provisions in commercial leases are carefully negotiated. In particular it may be possible to limit your service charge exposure by negotiating a service charge cap.

Is there any regulation of commercial leases in England and Wales?

Commercial lease provisions are not heavily regulated in England and Wales. The Code for Leasing Business Premises offers a voluntary code of practice, but leases are not often compliant.

Are there usually restrictions on how I can use the property?

Yes, it is therefore important to ensure the lease is suitable for your purposes.

Can I alter the leased property?

Some structural and external alternations, for example shop fronts and external signs, are normally difficult to undertake and require planning permission.

However non-structural internal alterations should be permitted subject to the landlord’s consent and non-structural partitioning should be permitted without the landlord's consent.

Consent is usually given by a formal deed requiring the tenant to comply with various building requirements when carrying out the works. All of this will be worded in the contents of the commercial lease agreement.

What does a commercial lease say about insurance?

An insurance clause in a commercial lease agreement ensures that the property is appropriately insured. If the commercial premises was damaged by an insured risk, such as by fire, you could decide to offer a reduced rent or allow your tenant to terminate their contract. 

Key Commercial Lease Agreement Terms

Commercial lease agreements are more complex than residential leases, because the terms are negotiable and can vary widely. We’ve outlined the terms you need to understand before signing a commercial lease, so you can ensure it meets the specific needs of your business.

Rent amount: This is based on the square footage of the space. You should be aware of what this includes, for example, does it include the lift or interior walls? Where possible, negotiate which party is responsible for costs like utilities, repairs and insurance.

Lease length: A short-term lease with an option to renew may be preferable than a long-term lease for a new business. It may increase the rent amount, but it is a better alternative than being held to a lengthy term.

Rent increases: An annual percentage-based rent increase is normally included in the lease. You can negotiate for a cap on this in order to avoid unmanageable costs later.

Improvements: A lease should address what alternations can be made to the property, which party will pay for the modifications, and whether the tenant is responsible for returning the property to its original condition at the end of the tenancy.

Property description: The lease should give a clear account of the property and state features such as kitchens, common areas, bathrooms and parking.

Signs:Businesses often need signs to bring in passing trade. You should therefore be clear that the lease agreement does not prohibit signs that are visible from the street.

Use clause: This defines the activity the tenant can engage in on the property. Use clauses limit the liability of the property owner if any damage is caused. A broad usage clause may be preferable for a new business in case it expands into other activities.

Assigning and subletting: This is an important term because the tenant is still responsible for paying the rent if the business fails or relocates. However, with the right to assign or sublet the space to another tenant, the business can find someone else to cover the rent.

Exclusivity clause: An exclusivity clause will prevent a landlord from renting space to a competitor.It’s therefore an important clause for retail businesses renting space in a commercial complex.

Security deposit:The amount of the security deposit and the terms of its return should be outlined in the lease.

Compliance with the Americans with Disabilities Act (ADA):Under the ADA, if a business is open to the public and has more than 15 employees, the premises must be accessible to people with disabilities. The lease should determine who is responsible for making any necessary alterations to the property and who must pay for these change

 

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