When leasing business premises, it’s vitally important that both the landlord and tenant understand their obligations before signing a commercial lease. Whilst the tenant is essentially agreeing to rent the property for a fixed term for a specified rent, commercial leases are, in general, lengthy legal documents setting out the obligations of both parties in an effort to try and regulate the relationship as precisely as possible. The tenant in particular must be fully aware of the obligations because these can be onerous. In this article we consider the most important terms of a commercial lease agreement.
Written commercial lease
Whilst it is not a requirement in law to have a written commercial lease agreement, it is not recommended to rent premises without one. The commercial lease should specify clearly:
- the term of the lease and any break clause
- the rent and rent review arrangements
- the deposit
- the permitted use
- the right to assign or sublet the property
- repairing obligations
- service charges
- security of tenure
- prescribed clauses.
Term of the lease and break clause
The length of the lease should be clearly stated together with any break options. A break clause allows either the landlord or tenant to end the lease before the end of the fixed term. This can be useful for a tenant who is finding it difficult to pay the rent due to falling profits, or, on the other hand, for the landlord who wants to redevelop the property. To end the lease early, the conditions set out in the break clause must be met, the most important one being giving the required notice. If notice is given even one day later than specified, the right to end the lease early will be lost.
Rent, rent review and deposit
The lease agreement should clearly state the amount of rent payable, whether VAT is applicable and the frequency of rental payments. Any deposit should also be stated and the terms upon which it will be held and returned. A rent review clause allows the rent to be adjusted to the current market level and must state the date when the rent is to be reviewed, how the rent will be determined and how any disputes should be settled.
The commercial lease sets out the permitted use of the property being let. It is to the tenant’s advantage to make this clause as broad as possible e.g. “for any legal purpose or business”, but if not, the tenant should specify any intended or future uses.
Assignment and subletting
The lease should allow the tenant to transfer or sublet the whole of the property with the landlord’s consent, which must not be withheld unreasonably. Any sublease will be on the terms contained in the original lease agreement. It is common in subletting clauses to get a written guarantee from the transferor that the transferee will perform his obligations under the lease, if so requested by the landlord.
The tenant’s repairing obligations will depend on whether the property is part of a building or the whole building. When renting a whole property, the tenant is usually responsible for repairing and maintaining it. Where the property is part of a building, the landlord usually carries out repairs and recovers the cost from the tenant by way of a service charge. In most cases, the landlord insures the property and the tenant repays the premium to the landlord.
If the landlord is to provide services such as heating and lighting etc these should be listed in the commercial lease and the tenant should ensure that his liabilities are appropriate to the premises being let.
Security of tenure
At the end of the term, the tenant generally has the right to extend the lease unless both the landlord and tenant have agreed before signing the lease that this right will not apply. This is referred to as “contracting out” and means that the security of tenure provisions contained in the Landlord and Tenant Act 1954 are specifically excluded. The landlord must serve a prescribed notice on the tenant and the tenant must sign a declaration accepting the consequences of contracting out. Tenants should take advice before agreeing to contracting out.
Since 19 June 2006 any lease agreement granted for a term of more than 7 years by an owner of registered land must commence with a set of prescribed clauses known as clauses LR1 to LR14. These clauses set out the basic terms of the lease which can be seen at first glance by the Land Registry or anyone looking at the lease. Landlords should include clauses LR1 to LR14 in all new leases, even those for 7 years or less, since the Land Registry aims to introduce a requirement in the future that all leases for terms of more than 3 years are subject to registration.
Where necessary, seek the advice of one of our preferred lawyers or chartered accountants in the matter of commercial leases.