Commercial lease terms that Landlords and Tenants should consider when granting or assigning leases of shops, offices or restaurants
Understanding commercial lease terms 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, and which terms are worth negotiating before you sign.
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.
Legal fees for a commercial lease
We offer fixed fees for most commercial lease work, including new leases, renewals, licences to assign and rent reviews. You can see our current indicative fees on our Commercial Lease Solicitors page.
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 lifts and toilets 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 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 permission. 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: 25 March, 24 June, 29 September and 25 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 lease 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. See “Rent and rent review” below for the points to negotiate.
Alienation/Assignment
An alienation clause allows the tenant to assign their commercial lease to a new tenant. This usually needs the landlord’s consent. Where the lease allows assignment with consent, the landlord cannot unreasonably withhold it and must give a written decision within a reasonable time. 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 premises 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. The alterations your business will need should be agreed before you sign (see “Alterations and fit-out” below).
Activities/Use
A commercial lease will usually include the type of business activity that a tenant can carry out in the premises. 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 generally have no right to forfeit the lease, even for unpaid rent, and will be limited to claiming the money owed or damages. This means that if the tenant fails to pay rent or 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 during the term.
Lease Renewal
According to the Landlord and Tenant Act 1954 Part II, 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, a landlord can oppose renewal on one of the grounds set out in section 30 of the Act, for example if the tenant has persistently delayed paying rent or the landlord intends to redevelop. The landlord can specifically exclude the protections offered by the 1954 Act by including a “contracting out” clause in the lease. Before the tenant signs the lease (or commits to signing it), the landlord must also serve a warning notice explaining that the lease will not be protected by the 1954 Act, and the tenant must sign a declaration confirming they accept this. If the notice is served less than 14 days before the tenant commits, the declaration must be a statutory declaration made before a solicitor or other qualified person. 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.
What to Negotiate in a Commercial Lease
Most commercial lease terms can be negotiated, and the best time to do so is before the heads of terms are agreed, as the lease will be drafted from them. The terms you agree will affect your costs, how flexibly you can run your business and your ability to expand or relocate in future. If the landlord’s agent is a member of the Royal Institution of Chartered Surveyors (RICS), the RICS Code for Leasing Business Premises (mandatory for RICS members from 1 September 2020) requires them to encourage a tenant who is not represented to take professional advice, and to record the main terms, such as rent review, break rights, repairs, service charge and alienation, in heads of terms. These are the points most often negotiated.
Lease length
A short lease of one to three years can suit a start-up or a business testing a new location, as it gives flexibility and limits long-term risk. However, it gives less security and less time to recover the cost of fitting out the premises. Longer leases, often five to ten years, give stability, may help you negotiate a lower rent or other incentives, and can make your business easier to sell, as a buyer will want security of occupation. The downside is that you are committed for longer, so consider asking for a break clause (see below). Also agree at the outset whether the lease will be protected by the Landlord and Tenant Act 1954 or contracted out (see “Lease Renewal” above).
Rent and rent review
A rent that looks competitive now may rise steeply at review, so think long term. Rent reviews often take place every three to five years. The new rent may be set by reference to the open market rent for similar premises, linked to an inflation index such as the Consumer Prices Index (CPI) or Retail Prices Index (RPI), or fixed in advance. Most reviews are still “upwards only”, so the rent cannot fall even if market rents drop. Tenants can try to negotiate a review that can go down as well as up, or a cap on index-linked increases. You may also be able to negotiate a rent-free period to cover your fit-out, which helps cash flow in the early months.
Service charge and insurance
In a building with several tenants, you will usually pay a service charge towards the landlord’s costs of maintaining the common parts, cleaning, security and sometimes repairs to the structure and roof, as well as a share of the building insurance. Check how the service charge is calculated and what it covers. Without limits, a landlord may try to recover the cost of improvements as well as repairs, so tenants often negotiate a cap or exclusions, for example for defects in the original construction. On insurance, check that the rent is suspended if the premises are damaged by an insured risk and that you can end the lease if they are not reinstated within a set period.
Repairs
Under a full repairing and insuring (FRI) lease, the tenant is responsible for internal and external repairs, which can include the roof and structure, whatever the condition of the premises at the start (see “Repair” above). If the premises are not in good condition, negotiate a schedule of condition: a written and photographic record of their condition at the start of the lease. It only protects you if the repairing clause says you need not put or keep the premises in better condition than the schedule shows, so check the wording. Otherwise you risk an expensive dilapidations claim when the lease ends.
Alterations and fit-out
Businesses often need to adapt premises, from partitions and signage to kitchen equipment, ventilation or specialist machinery. Most leases prohibit structural alterations and allow other works only with the landlord’s consent. Where the lease allows improvements with consent, the landlord cannot unreasonably withhold it (section 19(2) of the Landlord and Tenant Act 1927). Agree the works you need before you sign, check whether you must remove them and reinstate the premises at the end of the lease, which can be costly, and expect major works to be recorded in a formal licence for alterations.
Break clauses
A break clause lets you end the lease early, for example at year three of a five-year lease, so you can reassess your needs without committing to the full term. Break conditions are applied strictly, so negotiate for them to be as simple as possible: ideally only that the main rent is paid up to date and that you give up occupation. Conditions requiring full compliance with every lease obligation, or “vacant possession”, can be defeated by a minor breach or items left behind. Ask for any rent paid in advance for the period after the break date to be refunded, as it cannot be recovered unless the lease says so, and make sure the notice is served exactly as the lease requires.
Assignment and subletting
If your needs change, you may want to transfer the lease (assignment) or sublet all or part of the premises. Some leases prohibit this outright, so check the alienation clause (see “Alienation/Assignment” above) and negotiate for assignment and subletting to be allowed with the landlord’s consent. For leases granted on or after 1 January 1996, the lease can set out conditions the landlord may impose on an assignment, such as financial tests for the new tenant or an authorised guarantee agreement, and the landlord can then insist on them. Negotiate these conditions before you sign: if they are too restrictive, you could be left with premises that no longer suit your business.
Rent deposits and guarantees
Many landlords ask for extra security. A rent deposit, typically three to six months’ rent, is held under a rent deposit deed to cover unpaid rent or other breaches. Check whether it will be kept in a separate account (which protects you if the landlord becomes insolvent), whether interest is paid to you, and when it will be returned, for example after a period of prompt payment or on a permitted assignment. Where the tenant is a limited company, the landlord may want a personal guarantee from a director, which makes them personally liable if the company defaults. Check how far the guarantee extends, try to negotiate a cap or time limit, and check whether the guarantor could be asked to guarantee an authorised guarantee agreement if the lease is assigned.
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 net present value of the rent and any premium, the tenant may also need to pay Stamp Duty Land Tax (SDLT) on the new lease, with the return due within 14 days. In Wales, Land Transaction Tax (LTT) applies instead. Our guide to Stamp Duty on Commercial Leases explains the current rates and includes a calculator to give you a rough idea – a commercial lease solicitor can provide a more accurate figure.
Do I need to register a commercial lease with HM Land Registry?
You only need to register your commercial lease if it is granted for over 7 years. Your solicitor will do this on your behalf and HM Land Registry may charge a fee for the registration based on the rent and any premium.
Do I need a solicitor for a commercial lease?
It is not a legal requirement, but taking advice before you agree a lease is strongly recommended: our commercial lease solicitors can draft or review the lease, negotiate the terms and register it for you.
Expert Advice from Our Commercial Lease Solicitors
Commercial property law covers a wide range of legal issues, including property acquisitions, disposals, leases and refinancing. Whether your matter relates to a transaction, tenancy agreement or broader property concern, our commercial property solicitors, commercial property conveyancing solicitors and commercial lease specialists are here to help.
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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Get in touch today and speak to one of our dedicated commercial lease solicitors. We are here to help you every step of the way. You can see our indicative fixed fees on our Commercial Lease Solicitors page.
Our solicitors in the Brentford area also serve Chiswick and Hounslow. Our solicitors in the Ealing area cover Acton and Northfields, our solicitors in the Belgravia area cover Victoria and Westminster, our solicitors in the Pinner area cover Harrow, Northwood and Ruislip, our solicitors in the Richmond area cover Twickenham and Kew, and our solicitors in the Canterbury area cover east Kent. Our partner, Raminder Uberoi, can also offer a Notary Public service at any of our London offices.
Commercial Lease Terms FAQs
A break clause lets the landlord, the tenant or both end the lease early on a set date or dates by serving notice. Break clauses often come with conditions, such as paying all rent due and giving vacant possession, and the conditions must be met exactly or the break may fail.
A contracted-out lease is one excluded from the security of tenure provisions of the Landlord and Tenant Act 1954, so the tenant has no automatic right to renew when it ends. The landlord must serve a warning notice and the tenant must sign a declaration before the lease is entered into.
If the lease allows assignment or subletting with the landlord’s consent, the landlord cannot unreasonably withhold it. Under the Landlord and Tenant Act 1988 the landlord must give a written decision within a reasonable time and give reasons for any refusal or conditions.
This depends on the repair and yielding-up clauses. If the property is not handed back in the condition the lease requires, the landlord can claim the cost of the breach (a dilapidations claim), although damages are generally capped at the reduction in the value of the landlord’s interest under section 18 of the Landlord and Tenant Act 1927.
In most cases, yes. Under the minimum energy efficiency standards (MEES), most non-domestic properties in England and Wales cannot be let, or continue to be let, with an Energy Performance Certificate rating below E unless a valid exemption is registered.
A schedule of condition is a written and photographic record of the condition of the premises at the start of the lease. If the repairing clause refers to it, the tenant does not have to hand the premises back in better condition than the schedule shows. It is particularly worth having for older or poorly maintained premises.
An upwards-only rent review means the rent can stay the same or go up at each review, but cannot go down, even if market rents have fallen. Tenants can try to negotiate a review that can go down as well as up, or a review linked to an inflation index with a cap on increases.
A rent-free period is an agreed period, usually at the start of the lease, when no rent (or a reduced rent) is payable, often to give the tenant time to fit out the premises. Its length is negotiated and usually depends on the length of the lease and market conditions.
When leasing commercial property the terms of the lease may include a “break clause” which sets out the conditions under which a tenant can end their commercial lease early. If you want to end your lease early, you will need to follow the requirements set out in your lease. If there are no break clauses in your lease, you will need to ask your landlord if they will allow you to end or surrender your lease early. This can be done by way of a Deed of Surrender and our commercial lease solicitors can help you with this process. While your lease is still valid, you will be obligated to abide by its terms until it expires or is surrendered.
For leases in England and Wales, if your commercial lease includes a forfeiture clause, the landlord can end your tenancy early without your agreement. Usually, they will only be able to end your lease this way if you have breached any of the tenant covenants in the lease, and only if your lease gives your landlord the right to end the lease as a result of the breach. Unless the tenancy is being ended because the tenant hasn’t paid rent, the landlord will generally need to serve a Section 146 notice on the tenant under the Law of Property Act 1925, which sets out the breach and, if it can be remedied, gives the tenant a reasonable time to put it right. If the lease is being brought to an end because the tenant hasn’t paid the rent, the landlord can forfeit your lease without serving a section 146 notice, provided the lease excuses a formal demand for the rent, as most commercial leases do.
