Commercial lease terms that Landlords and Tenants should consider when granting or assigning leases of shops, offices or restaurants
Understanding what a commercial lease’s terms mean is vital for landlords and tenants alike. In this blog, our commercial lease solicitors explain how common lease terms work and what you should make sure is included in your commercial lease.
How are commercial leases different from residential leases?
A commercial lease is not completely distinct from a residential landlord and tenant agreement. However, there are some key differences and complexities involved. These complex obstacles mean that it is recommended to instruct an experienced commercial lease solicitor. Most commercial leases won’t be based on a standard template form and are individually negotiated for the business. This is because the type of business that takes the lease can drastically alter what will be needed. A restaurant may only need a short lease with allowances to make large alterations for kitchen appliances, but a retail chain would need completely different terms and alterations. That is why each lease must be tailored to the business.
What is the fixed fee for a commercial lease solicitor?
At Starck Uberoi Solicitors, we offer fixed fees on the majority of our commercial lease work, rather than an hourly rate. We can assist with the grant of a new lease (and assisting with a connected purchase of a new business if applicable), buying or selling a commercial property, renewal of an existing commercial lease and rent reviews. Here is an indication our fee scales for commercial lease matters.*
For acting on the Licence to assign a commercial lease:
- Acting for Landlords: Our fees will be roughly between £1,500 – £2,000
- Acting for the Assignor (the tenant leaving the property): Our fees for our work will be roughly between £1,500 – £2,000 for the assignment of lease.
- Acting for the Assignee (the incoming tenant): Our fees will be roughly between £1,500 – £2,000.
For acting on the Grant of a Commercial Lease to a new tenant
- Acting for Landlords: Our fees will be around £2,000 – £2,500.
- Acting for Tenants: Our fees will be around £1,500 – £2,000.
For acting on a commercial lease renewal
- Acting for Landlords: Our fees will be around £1,500 – £2,000
- Acting Tenants: Our fees will be around £1,500 – £2,000
For acting on a commercial rent review:
- Acting for Landlords: Our fees will be around £600 – £800.
- Acting for Tenants: Our fees will be around £600 – £800.**
*Please note that VAT will also be payable on all of our fees. **Please also note that these figures are an indication of our fees at the time of writing and may not apply. If you are a commercial landlord and your tenant wants to assign their lease to a new tenant, your legal fees will usually be paid by your tenant under the normal terms of the contract for assignment. Additionally, if you are granting a new lease to a commercial tenant, you can often negotiate who will cover your legal fees. If you are a commercial tenant assigning your lease to another tenant, we can also assist you with the sale of your business and the sale of the property’s fixtures and fittings. It is important to create a formal document setting out the details of the sale of business or of fixtures and fittings as otherwise, there will be no record as to what the agreements were which can lead to problems later on. We can help you create a formal document which sets out the terms of the sale of your business called a Deed of Assignment of Goodwill, and a Fixtures and Fittings List which details which items will be included in the sale. There will be additional fees for this work which your commercial lease solicitor will discuss with you.
What should a commercial lease include?
When drafting a commercial lease, these are the key terms that you would need to consider:
Property and contact details
A commercial lease should include the landlord and tenant’s full details such as their names and addresses. If the tenant is a company, make sure to include the company registration number and address of the registered office. The property details should explicitly lay out the address and the space you are renting; whether it be an entire building, specific rooms or specific floors. Any common areas such as elevators and restrooms should be included too. You will also need a lease plan for your property which accurately sets out what parts of the property will be included in the lease (including parking spaces or outdoor areas if applicable) and any common areas.
Lease term
The specific date of the lease’s commencement and the date of expiry should be made clear in the lease. Commercial leases can range from anywhere to a few years to as long as 25 years, though there is no limit on how long they can be. You may be concerned about the idea of having a long-lasting commercial lease, but many commercial leases include clauses which allow the landlord or tenant to end the lease early, or for the tenant to transfer their commercial lease to someone else with the landlord’s position. This will be discussed further in our alienation clause below.
Rent
This section should contain the exact amount of rent to be paid and how often those payments need to be made. In most commercial leases, rent is often demanded on usual quarterly dates: 25th March 24th June 29th September and 25th December. The lease should also clearly state whether VAT will be payable on the rent or not.
Rent review
With longer leases over 5 years it is common for a commercial to have provisions for a rent review. A rent review is where the landlord values the premises and reconsiders the rent that the tenant pays. The purpose of a rent review is to ensure that the landlord charges rent that is in line with the rental rates of the current market and the lease should set out when the review will take place. The figure that the landlord gives is negotiable; the tenant is not obligated to accept the first number they offer. It is advisable to instruct a commercial lease solicitor to assist with rent negotiations to ensure that you’re getting a fair price. Starck Uberoi’s experienced commercial lease solicitors can give expert advice on your rent review negotiation.
Alienation/Assignment
An alienation clause allows the tenant to assign their commercial lease to a new tenant. This can only be done with the landlord’s consent, which cannot be unreasonably withheld. The landlord can also impose certain conditions on which the tenant can assign their lease – a common example is the requirement of an authorised guarantee agreement, which means that the leaving tenant has to act as a guarantor for the new tenant. You may also wish to consider whether or not to include a clause which allows the tenant to sublet the property in your commercial lease.
Repair
Commercial leases will usually stipulate that it is the tenant’s responsibility to keep the premises clean tidy and in good repair and condition. It is important to ensure that the tenant’s repair obligations are clear so that there is no ambiguity over who is responsible for maintenance. Tenants should beware of a repair clause requiring them to keep the property “in good repair” if the property was not in a good condition originally. Otherwise, the tenant could be made responsible for putting the property into a good condition if it was not already and could therefore be required to fix problems that the property already had.
Alterations
Alterations to the premise cannot be made without the landlord’s consent. The commercial lease should set out what kind of alterations can be made or what specific ones cannot be made; For example, a commercial lease could include a covenant that signs attached to the outside of the building are not allowed. When thinking about your business in the space you are leasing, think of what alterations you would need. Perhaps you would require adding cubicles or requiring the space for better communication. Changes like that need to be checked with the landlord and included on the lease to avoid complications later down the line.
Activities/Use
A commercial lease will usually include the type of business activity that a tenant can carry out in the premise. If you alter the type of activity carried out, you first need to make sure a provision for future change of use was included in the lease when it was initially negotiated. An example would be a restaurant starting to deliver food using online sales. If there’s no provision for future change of use, this could be interpreted as breaking the activities/uses clause.
Forfeiture
A forfeiture clause states the circumstances in which the landlord can repossess the property and the procedure the landlord must follow in order to do so. In most cases, a forfeiture clause will give the landlord the right to re-enter the property if the tenant has breached a term of their lease, such as by failing to pay rent or keep up with their repair obligations. The Landlord should take care to ensure that a forfeiture clause is included in their lease. If the lease does not contain a forfeiture clause, the landlord will only be able to forfeit the lease if the tenant fails to pay the rent and must follow a very specific procedure in order to do so. This means if the tenant breaks their lease terms in another way, for example by subletting the property without permission, the landlord will not be able to reclaim possession of the property.
Lease Renewal
According to the Landlord and Tenant Act 1954 Part 2, occupants of certain business premises have a statutory right to stay in the building and can renew their lease when the term ends. These rights can be legally enforced by the tenant. However, if a tenant is proven to have breached their tenancy agreement, perhaps by failing to pay rent, then a landlord has the right to refuse the renewal of a commercial lease. The landlord can specifically exclude the protections offered by the 1954 Act by including a “contracting out” clause in the lease. They must also serve a notice on the tenant confirming that the lease will not be protected by the 1954 Act and have the tenant sign a statutory declaration in the presence of a qualified legal professional to confirm that they understand that they will have no automatic right to renew their lease at the end of the term. Even if the lease includes a contracting out clause, the landlord and tenant can still agree to renew the lease when the original lease expires if the arrangement worked well.
How do I vary a commercial lease?
You don’t have to create an entirely new lease if you want to change some of the terms. If you and your freeholder/leaseholder can agree on the changes, a solicitor can help you create a deed of variation of lease which will set out what is to change. All parties involved will need to agree to the new terms before the lease can be varied. The process is not dissimilar from the way leases are varied for residential leasehold properties – find out more in our blog post on creating a deed of variation of lease.
Who normally pays for a commercial lease?
In most cases, either the tenant pays for the landlord’s legal fees as well as their own, or each party pays their own legal fees. This is up to negotiation.
Do I pay Stamp Duty on a Commercial Lease?
Depending on the amount of rent the tenant will be paying, the tenant may also need to pay Stamp Duty on the new lease. The HMRC Stamp Duty Land Tax calculator can give you a rough idea how much Stamp Duty you can expect to pay, but may not be accurate – a commercial lease solicitor can provide a more accurate figure.
Do I need to register a commercial lease with the Land Registry?
You only need to register your commercial lease if it is over 7 years in length. Your solicitor will do this on your behalf and the Land Registry may charge a fee for the registration based on the figure of rent that will be payable.
Do I need a solicitor for a commercial lease?
While it is not a legal requirement, it is highly adviseable that you instruct legal advice before agreeing to a commercial lease. If you’re a commercial tenant, a tenant can warn you of any onerous terms your landlord has proposed in your lease, negotiate better terms with the landlord’s solicitor on your behalf and register the lease at the Land Registry; if you’re a commercial landlord, a commercial lease solicitor can draft your lease for you and make sure that the lease contains everything it needs to.
Expert Advice from Our Commercial Lease Solicitors
If you need guidance on any aspect of a lease agreement for commercial premises, our experienced commercial lease solicitors can help. We advise landlords and tenants on every stage of a commercial property lease, from commercial lease negotiations and drafting through to renewals and dispute resolution. Whether you’re agreeing commercial lease terms, reviewing commercial lease rent, or leasing commercial property for the first time, we ensure your rights and interests are fully protected. Our expertise covers short-term commercial leases, commercial lease transfers, and resolving any commercial lease dispute that may arise. We also act for landlords dealing with the forfeiture of a commercial lease, helping them follow the correct legal process. For clear, practical legal advice on any aspect of commercial lease law, contact Starck Uberoi today.
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