Commercial leases: Some common terms you'll find in a lease agreement

When you agree to a lease on commercial premises in London for your business, you have the exclusive possession of that property for as long as the contract lasts.

However, you won't own the property, and as a commercial tenant, you don't have the same legal protections as residential tenants.

Because of this, it's important to carefully review your lease agreement before taking it on. Most importantly, the lease should detail your obligations and rights (as tenant) and your landlord's. A written lease agreement is best policy, but if that isn't possible, a verbal lease can be legally binding for both parties.

In this blog, you'll find the most common terms that commercial lease agreements tend to include. Whether or not you've encountered them before, taking the time to understand how commercial leases use them – and what they mean in terms of the law – will help you make sure you're agreeing to a contract that's in your business' best interests.

Terms you might find in a commercial lease agreement

Alterations

If you want to make alterations to the property to make it fit for your purposes, make sure your lease allows you to do so. For example, you may be allowed to make non-structural alterations without consent but need permission for more extensive changes.

Dilapidations, reinstatement and fixtures and fittings

When your lease agreement comes to an end, you must return your premises to the condition they were in at the start of the lease. Your contract may also state that any fixtures or fittings you've installed become the landlord's property.

Your lease should spell out in full the extent of this requirement, so you can make sure you'll be able to return the property to its previous condition before you sign.

Lease term

The lease term is the length of your contract, after which you'll have to either renew or leave the premises. Lease terms are usually three to five years but could be as long as 25 years. Whatever the term is, make sure it fits with your commercial goals.

Notice period and break clause

Your lease might include a break clause that allows you or your landlord to bring your contract to a premature end under certain conditions.

Either party must give written notice if they plan to trigger a break clause. If your landlord has inserted a break clause, make sure you understand exactly how this could affect your business.

Personal guarantee

Your landlord might insist that you, or any other director or owners of your business, personally guarantee the lease. These guarantees aren't negotiable, but you could try to limit it to only a portion of the lease term (half, for example). Seek legal advice before you take on any guarantee.

Rent

Your lease should detail when and how you should pay your rent. For example, with commercial property in London, it's common to pay for every three months in advance on the four annual quarter dates:

• 25 March

• 24 June

• 29 September

• 25 December

Your lease will probably also specify what interest you'll be charged if you're late paying rent. Remember that you must pay rent by the above dates whether your landlord formally demands it or not. You may not always receive an invoice, but the deadlines are still binding.

Rent reviews

Most leases have a "rent review clause", meaning the landlord can adjust or review your rent after a certain period. This period should be set out in the lease, but will typically be three to five years.

Your lease should provide detail on how the landlord will work out the new rent, and any legal processes involved. The most common method is "upwards-only open market rent reviews", which means that, even if the market rent drops, your rent will remain the same.

Before you agree to a lease, make sure it provides all these details so you'll know how often to prepare for a possible rent hike.

Repairing obligations

Most new commercial leases are fully repairing and insuring (FRI) leases, meaning you're responsible for repairing and insuring the premises. Repair clauses are one of the most frequently challenged aspects of commercial leases, so make sure you're fully clear on what "repair" means, so you can avoid disagreements down the line.

Security measures

The lease should spell out who is responsible for the security of the premises, whether any extra measures are needed (such as CCTV), and who has to pay for it.

Security of tenure

Your lease should say whether it's protected by the Landlord and Tenant Act 1954 or "contracted out" of the Act.

Security of tenure – sometimes called a "protected lease" or "renewal lease" – means you have the right to renew your lease when your existing contract ends. It also means you're entitled to compensation if your landlord doesn't agree to a new lease.

If you're contracted out, you don't have the right to renew your lease and the landlord can evict you as soon as the lease ends.

Service charges

You should check whether the lease agreement holds you liable for maintaining shared spaces at the premises. These service charges could include the following:

• Common area maintenance (CAM): Your lease is likely to be "triple net", which means that, on top of rent, you pay a share of CAM.

  This should be detailed under the service charge clause in your lease, including the percentage of CAM you're responsible for based on a percentage of the building.

• Capital expenditure: This refers to things like the roof, foundations, HVAC (heating, ventilation and air conditioning) and other major repairs or replacements.

  If possible, it's advisable you remove the term "replacement" from any proposed lease, or limit your repair obligations to a maintenance contract and, for general repairs, up to a certain maximum amount each year.

Subletting and assigning the lease

You may be allowed to sublet all or a part of your property, or to assign (sell) the lease to a third party.

If this is your plan, it's important to check the lease agreement for any restrictions on doing so and how this will affect your responsibilities. For example, if a subtenant doesn't pay their rent, you might become responsible for it.

Here are the most important things to check:

• What your landlord considers "non-structural".

• Whether you need your landlord's consent to make changes. They might employ a surveyor to check your proposal is acceptable and will probably draw up a "licence to alter".

• Landlords will pass the cost of surveying and drawing up contracts on to you. But they're usually not allowed to charge a premium for this or increase your rent in response.

• If you make alterations without consent, your landlord can increase your rent.

• Whether or not you had consent to make alterations, your landlord can insist you remove them at the end of your lease.

If you're not sure about your rights around consent for alterations, make sure to seek legal advice.

User

The "user" clause dictates what you can and can't use your commercial property for. The main thing here, of course, is to check there aren't any restrictions on the property that would prevent you from using it for your intended purpose. Also, make sure to check separately that the correct planning consent are in place before you sign the lease.

Get your lease checked

As long as you review your lease agreement carefully and challenge anything that isn't clear, you can sign a contract that gives your business the best chance of success.

But it's always wise to have a lawyer check over the agreement. The cost of doing so will more than pay for itself if it means avoiding disaster.

Your cultural and community space toolkit

If you're reading this guide as part of the Grow London Local toolkit for opening, running and growing a cultural or community space, next look at step 8: signing and negotiating a lease. 

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