Commercial Leases UK - Everything you need to know (2021) | LawHive - Solicitors & Lawyers Online

Commercial Leases UK - Everything you need to know (2021)

Table of Contents

What is a Commercial Lease?

A commercial lease, also called a commercial property lease or commercial rent agreement, is a contract between a business tenant and landlord outlining the terms of use for a commercial property. 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 to look for when leasing commercial property

Your specific needs for commercial property may depend on a number of factors - for example, what activities do you want to use the property for? What length of time will you need it for? What responsibilities over the property are you willing to accept?

Landlords offering commercial property will typically present their high-level restrictions and terms in their sales and marketing documents, but these may be negotiable or have subtleties that are not obvious on first inspection.

It is important to have a good understanding of your requirements for the property so you can agree on the terms of a lease that suit both you and your landlord. Solicitors can help to define some of these requirements and ensure they are covered in any agreements you make, but this will ultimately depend on your business.

What is included in a commercial lease?

A commercial lease will typically include the following clauses which are agreed between landlord and tenant:

This will be a description of 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 or they might ask you to cover all or part of the costs of bills, maintenance or insurance of the property.

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 for, and describes how expiry of the lease is handled. For example to 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 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 in 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 refers 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 the 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. walk-ways 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 to pay 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 for it 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 which 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 which describes any outstanding dilapidations in the property. This may include any outstanding repairs and decoration, rectifying compliance issues or describe any other breaches in the terms of 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.

Do I need a solicitor to lease commercial property?

Leasing a commercial property involves coming to an agreement with a landlord over the terms and scope surrounding leasing their property. This agreement is formulated into a document which outlines the rights and obligations of both parties during the term of the lease. Because commercial leases have fewer default protections than residential tenancies, extra scrutiny and rules are usually applied to these agreements.

The unique nature of each property and landlord makes these documents bespoke and often difficult to understand, which is why solicitors are frequently used in advising and drafting lease agreements. Although commercial leases can be undertaken independently, it is highly recommended that both parties seek professional legal help to ensure they are protected and get the results they are looking for.

Can a commercial lease be terminated early?

Whether or not a commercial lease can be terminated early depends on the agreements made at the start of the lease in any agreement documents. A commercial lease may contain break clause provisions, or other justifications to break out of the fixed lease period. There may also be provisions to terminate a lease after giving sufficient notice. Other options that may be included in your agreement is the right to sublet or assign the lease (transfer it to another party). Additionally, landlords may allow the terms of lease to change, so it is important to discuss your circumstances with them.

What is a commercial lease break clause?

A commercial lease break clause is an optional condition of a commercial lease agreement that may allow for either party to terminate the lease when certain conditions are met. This may be time-based during the tenancy period, for example to have a break option every year, or it may be based on the situation of the tenant or landlord. These agreements are negotiated up-front when the lease is initiated.

How do I lease commercial property?

To lease commercial property, you and a landlord must come to an agreement about the terms of lease which will include: the property in question, the rent payment terms, lease length and conditions of use. A solicitor may be required to advise on your lease agreement and ensure your property requirements are met.

How do I end my commercial lease?

Tenants and landlords may be able to end their commercial lease depending on the terms of their lease. If you are within your lease term, you may be able to use your break clause or negotiate a change of lease with your landlord or tenant. If your lease term has ended, you can end your commercial lease using either a Section 25 Form (for landlords) or Section 26 Form (for tenants), assuming you are not "contracted out".

How do I renew my commercial lease?

You can use a Section 26 Form to renew your lease or amend terms to a lease once its fixed period has ended. Landlords have a right to refuse a renewal only if they have legitimate grounds to oppose it, which are specified in Section 30(1) of the Landlord and Tenant Act 1954.

How long does it take to sign a commercial lease?

The time it takes to sign a lease depends on how long any lease negotiations may last in ensuring both landlord and tenant are happy with the lease agreement. Solicitors might expedite this process or advise on changes aimed to make agreements easier or more protective for either party.

Can a landlord refuse to renew a commercial lease?

If you are operating under a typical commercial lease that isn’t "contracted out", a landlord can refuse to renew a commercial lease only if it meets one of the grounds specified in Section 30(1) of the Landlord and Tenant Act 1954. If there are no valid grounds for refusal, a tenant has a security of tenure in their commercial lease, and can apply to the courts to renew their lease. If "contracted out", no such protections apply and a landlord can refuse a lease renewal at their discretion.

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