The lease is probably the most important document in a commercial property arrangement. It sets out the terms on which the relationship between a landlord (the property owner) and tenant (the property occupier) will function. Without a lease in place it can be very difficult to work out who is entitled to what, as well as the time frames that apply.
What factors affect the terms of a lease?
The property, its location, state of repair and size will all affect the terms of a commercial lease. Also important will be the current state of the wider property market and how the landlord and tenant relate to each other in terms of their position. For example, if the tenant really needs to sign the lease because they have no other option then the landlord has more bargaining power and so the terms may be weighted more in their favour.
What is in a commercial lease?
The lease will establish the basics of the relationship, including how long it will last for, the amount and frequency of rent, the rights and obligations of both tenant and landlord, as well as requirements for repair, maintenance and decoration and how the tenant’s interest in the lease is to be dealt with. There is no standard form lease in England and Wales and lease provisions are not heavily regulated. The only guidance is provided by the Code for Leasing Business Premises, which is voluntary.
Is it possible to negotiate a lease?
This depends a lot on the relative bargaining powers of the parties but it should always be possible to negotiate a lease. This applies whether you are signing a new lease or taking on the terms of an existing lease that you’re not entirely happy with.
How long does the lease last and can you get out early?
Most commercial leases will be for a maximum of 25 years but normally the term (i.e. the length of the lease) is much shorter. If there is a ‘break clause’ then this offers the opportunity to give notice and leave early. However, the flexibility of including a break clause will normally cost a tenant a higher rent. A tenant has a statutory right under the Landlord and Tenant Act 1954 to extend the contractual term of their lease. However, these provisions can be excluded by the agreement of landlord and tenant.
Will the rent go up?
Normally, yes. Most commercial leases contain a ‘rent review’ clause that allows the landlord to increase the rent. In the past, landlords have had the right to review the rent upwards even if market rents are going down. However, now many commercial leases tie prices instead to something like the Retail Prices Index.
Who is responsible for what?
The lease will establish where the responsibility lies – the tenant will usually be responsible for keeping the property in a good state of repair and for decorating. Common areas in a building may be the responsibility of a landlord but they will usually seek to recover the cost of repairs to stairs etc via a service charge paid by the tenant. Any alterations a tenant wants to make must usually have the consent of the landlord. Finally, the tenant is responsible for remaining within the permitted use of the property so it’s important to establish from the start that the permitted use defined in the lease is wide enough.