Commercial Lease Guide
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What is a Commercial Lease?
A commercial lease is a contract between a business tenant and landlord outlining the terms of use for a commercial property.
Sometimes called a commercial property lease or commercial rent agreement, the lease gives a tenant the right to use the property for business commercial activities and contains the rights and responsibilities for both parties during the term of the lease.
Commercial leases have fewer protections by default than residential leases, so these agreements are typically more complex and contain additional schedules and rules to clearly define the terms of lease.
What's the difference between a commercial lease and a residential one?
The main difference between a commercial lease and a residential lease lies in the level of legal protection for tenants and the flexibility to negotiate.
Typically commercial leases offer tenants fewer legal protections compared to residential leases. This is because it's assumed that business owners leasing commercial spaces are more knowledgeable and capable of handling their responsibilities.
Additionally, there's often more room for negotiation in commercial leases. Both landlords and tenants are presumed to understand business practices, leading to more open realistic discussions about lease terms.
What to look for when leasing commercial property
When looking to lease commercial property, there are a few important things to consider to make sure you find the right space for your business. First of all you should:
Understand what you'll be using the property for;
Decide how long you'll need it for;
Determine the level of responsibility you're willing to take on for the property.
Landlord's terms in a commercial lease may be negotiable. A solicitor who is knowledgeable about commercial leases can help you make sense of the terms, spot any potential issues, and negotiate terms that work for you.
By considering the above factors and getting the right legal advice, you can lease commercial property confidently, with the peace of mind that you have done everything possible to protect your interests.
What is included in a commercial lease?
A commercial lease will typically include the following clauses which are agreed upon between landlord and tenant:
The legal description of the property
This will be a description of the property you intend to lease, usually as described in the property deed. It will typically include the address, floor plan, any boundaries, fixtures (such as toilets or fixed cabinets), and included fittings (also known as chattels, such as desks or white goods).
Rental terms and reviews
The lease will describe how rent payments will be arranged, including the amount, frequency, and any associated payment terms. Landlords may offer fixed payable rents, they may require a percentage of your business income (turnover rent) or they might ask you to cover all or part of the costs of bills, maintenance, or insurance of the property (full repairing and insuring lease).
Usually included is a rent review clause that describes when and how your rent might be updated in line with market conditions.
The frequency of these reviews should be considered carefully against your tolerance to fluctuating rent. Typically these clauses can be negotiated with your landlord.
Lease term
The lease term describes how long a lease will be valid, and describes how the expiry of the lease is handled.
For example include any renewal or rolling agreements you or your landlord wish to put in place.
Some examples of such agreements are: fixed-term leases, which end on a certain date; or automatic renewals which will roll periodically according to the terms specified.
Different lease terms will have different notice periods or rights describing how the lease terms can be changed during renewal periods. Additionally, the lease term should be evaluated alongside the break clause, assignment rights, or subletting clauses to ensure that you can support the length of your lease in different business scenarios.
Break clause
This optional clause will specify how and when a lease agreement can be terminated early by either the landlord or tenant without penalty.
There are usually stipulations about the minimum tenancy length and longer notice periods needed to trigger a break clause. These clauses can be negotiated with your landlord to suit your business scenario plans.
Assignment and subletting rules
These optional clauses include additional rights to the tenant to either transfer the lease to another party (assignment) or to allow you to rent the property to another tenant (subletting).
Subletting may require you to draft a sublease agreement with your new tenant.
This can be a complicated process and not all landlords will allow such clauses, but they do provide additional safety if you feel your rental obligations for the entire period are too much of a financial risk. Additionally, these clauses may not result in a complete transfer of liability from you to the new tenant, and you may still be legally and financially on the hook should problems arise with a new tenant. Ensuring these clauses clearly define the liability you are comfortable with is important if you wish to utilise them.
Usage terms
These terms may be included by a landlord to restrict the types of activities that take place within a commercial property. Should the type of business change, it may be necessary to renegotiate with the landlord or be disallowed from that property completely.
What are fixtures?
Fixtures are items in the property that are attached in a permanent or semi-permanent manner such that their removal might cause damage to the property. Some examples would include toilets or sinks, built-in cabinets, or fixed appliances such as air conditioners, heaters, or kitchen units. A commercial lease will typically include the fixtures attached to the property.
What are chattels?
Chattels are also known as fittings, which refer to owned property that is movable and thus not considered a physical part of the property being leased. This may include lighting, desks, chairs, removable white goods (ovens, dishwashers), and curtains or blinds. Your commercial lease will state which chattels are included in your commercial property.
What are restrictive covenants?
A restrictive covenant is a legally enforceable limit or restriction on the use of your property or land. These are often placed to protect the property, neighbours, or the surrounding area from harmful externalities that may result from prohibited activities. These may be negotiable with the landlord but may exclude your business from being able to lease a property.
What are easements?
Easements are rights over the use of property or land which are granted to others under specified conditions.
Common examples of easements include rights of way to the public (e.g. walkways and footpaths) or to cross over a neighbour's land to access an entryway to your property. Easements are situational and specific to your property.
What is an FRI lease?
An FRI lease, also known as a Full Repairing and Insurance lease, is a type of lease whose rental terms make the tenant responsible for paying for all repairs, maintenance, and insurance of the property. These costs are on top of any other rental payments between the landlord and tenant. The insurance may be provided by the landlord or a third party.
What is security of tenure?
Security of tenure gives a tenant the right to remain in a commercial property after their commercial lease ends. It grants an implicit renewal of the agreement for both parties and would require a formal notice to quit from either party to terminate. This right can be excluded from some commercial leases, or other rolling agreements may provide additional terms to lease renewals.
What is a Section 25 form?
A Section 25 form is used by a landlord to either: end a commercial lease with a proposal for new lease terms; or to end a commercial lease with the reasons why a new lease is refused. The Section 25 form specifies the date at which the tenancy will come to an end, and any refusal for a tenancy renewal must meet one of the grounds in Section 30(1) of the Landlord and Tenant Act 1954.
What is a Section 26 form?
A Section 26 form is used by a tenant to either; request a new commercial lease under new terms; or to end a tenancy. Once a landlord receives such a form, they must decide whether to grant the request for a new or ended tenancy. If a landlord refuses this request, they must do so using one of the grounds specified in Section 30(1) of the Landlord and Tenant Act 1954.
How do a section 25 and section 26 form differ?
A Section 25 Notice differs from a Section 26 as they are served by different parties. A Section 25 form is served by a landlord to their tenant, whereas a Section 26 form is served by a tenant to their landlord. Both forms represent either the ending, alteration or renewal of a commercial tenancy.
What is a Schedule of Condition?
A Schedule of Condition is a report prepared at the start of a commercial lease that describes the condition of the property, including any evidence to support it. The Schedule is used at the end of a tenancy to resolve any disputes over the condition of the commercial premises and determine if the tenant was the cause of any damage. The tenant must ensure this schedule comprehensively catalogues all damage to the property to avoid liability for it.
What is a Schedule of Dilapidations?
A Schedule of Dilapidations is a report prepared at the end of a commercial lease that describes any outstanding dilapidations in the property. This may include any outstanding repairs and decoration, rectifying compliance issues, or describing any other breaches in the terms of the commercial lease. This Schedule may include remedial actions to be taken, or the costs associated to rectify the dilapidation.
What does "contract out" mean?
To "contract out" means the landlord and tenant both agree that the tenant will have no security of tenure after their commercial lease period expires. A tenant will be unable to apply to a court for a renewed lease, will not have rights to remain in the property but also won’t be required to use a Section 25 or Section 26 Notice to end their lease. These arrangements are usually only used in short-term commercial leases.