A guide to commercial leases for tenants

A lease is a legally binding agreement between you and your landlord for you to occupy their property with various rights granted in return for you making regular rental payments and complying with various obligations.

Many commercial tenants seek to keep their costs as low as possible and do not take legal advice before entering into their lease. This often leads to both time and cost implications, with tenants missing key deadlines, incurring financial penalties and interest, and, at worse, tenants being stuck in a lease which is not commercially suitable for their business.

Before entering into your lease, you should consider taking legal advice on the following:

Does your lease trigger Stamp Duty Land Tax, and is it registrable?

If your lease is for a term of 7 years or more, the lease must be registered at HM Land Registry. If you fail to register the lease, this may mean that you do not have a valid legal lease, which can put you in a vulnerable position. It may also be appropriate for you to have your interest “noted” against a property at HM Land Registry.

Depending on the amount of rent payable under your lease and the term of the lease, and whether there is a premium payable, you may be required to pay Stamp Duty Land Tax (SDLT) to HM Revenue and Customs. The deadline to pay this and submit your SDLT return is within 14 days of completion of the lease, and you may incur a financial penalty and/or daily interest if you miss this deadline.

Can you end your lease early?

Often, leases contain a clause which allows either the landlord or the tenant (or both parties) to terminate the lease early without facing a penalty. This is usually called a ‘break clause’ and will include an agreed date when the lease can be ended.

If you are considering ending your lease early, it is crucial that you exercise your break clause in accordance with the terms of the lease. If you serve the break notice incorrectly, this may be deemed to be invalid, and your lease will continue. It is, therefore, important to seek legal advice on serving your break notice in accordance with the terms of your lease. 

What is being leased to you and what rights do you have?

It is crucial that you know exactly what your landlord is renting out to you, what rights you will have in your lease, and whether this is commercially acceptable for your business. A lease can be either of the whole or part of a building, and you must ensure that your heads of terms accurately reflect what you believe you are taking on.

You must also make sure that you have sufficient rights granted to you in the lease not only so that you can use the property for your business but also so that you can comply with your obligations in the lease (for example, you may have repairing obligations which require you to have access to the property outside of what is actually being rented to you). It is important to obtain legal advice in relation to rights granted as these can often be overlooked but may be difficult and expensive to resolve.

What is the rent and how is this reviewed?

As well as knowing what amount of rent you will pay to the landlord, you should also consider when you will be required to pay the rent, as this can have an effect on your business’s cash flow. In addition, you should make the necessary enquiries so that you know if VAT is payable on the rent/whether the landlord has retained the right to charge VAT on the rent in the future.

Many leases also contain a mechanism for “rent review”. It is important that you consider and understand this, and ensure that the provision is not drafted in a way which could result in you paying rent which is higher than market value.

It is important to take legal advice to ensure that your lease protects you in the event of property damage, whereby you may not be able to occupy the property, but the lease may still require you to pay rent. 

What is the service charge and how is this reviewed?

In addition to rent, you may be required to pay a service charge to your landlord, which is usually payable if a property is part of a larger building or part of an estate. Service charge is a fee, paid on a regular basis, which is intended to cover the costs incurred by your landlord in managing the property. This can cover a wide range of services and will vary from lease to lease. It is prudent to have a solicitor look over your service charge clause as these can be very broad and/or particularly specific, and you will want to know which services you are liable for.

Taking legal advice as early as possible will also ensure that you are certain of how much your service charge will be, whether this is fixed and, if not, how much the service charge is likely to increase by.

What happens when your lease ends?

Depending on whether you have a protected lease, you may be required to vacate the property immediately at the end of the lease term, or you may be allowed to stay in occupation. If you have a protected lease, this will mean that you have the right to security of tenure (a legal right to renew your lease). There may be some circumstances where a landlord does not have to grant you a new lease (if, for example, they can demonstrate a clear intention to demolish or reconstruct the property), but they will be required to compensate you financially for the inconvenience and cost of having to vacate the property.

A landlord can require you to exclude this right to security of tenure subject to a number of steps being complied with prior to entering into the lease. If this right is excluded, you will not have the automatic right to renew your lease, and you will be required to vacate the property at the end of the term. 

Can you make any alterations to the property?

You should carefully consider what your lease says in relation to making alterations to the property, as you may need to do work to “fit out” the property before you can operate your business. Many leases will allow you to carry out work so long as you have first obtained your landlord’s consent.

Can you sell your lease?

It is likely that your lease will contain several provisions which set out what you can and can’t do, such as being able to sell, sub-let, charge or share occupation of the property, as well as setting out the conditions which must be complied with whilst carrying out any dealing of the property. As a business, it is crucial that you take legal advice to ensure that your lease allows you to vacate the premises before the agreed termination date, giving you greater flexibility to mitigate potential future financial burdens, relocation of the business, and other changes in the business’ needs. 

Who insures the property?

It is likely that your landlord will insure the property and will pass this cost down to you as insurance rent under your lease. If damage to the property occurs from any risk which is not included, you may be responsible for the costs arising from such risk. The lease may also exclude your landlord’s responsibility if the insurers do not pay as a result of something which you have done which has invalidated the insurance policy. Our team will ensure that you understand what the lease requires of you and that your position is protected in the event of property damage by an uninsured risk.

What are your repairing obligations?

Your lease will set out your repairing obligations, and it is important to take legal advice before entering into the lease so that you can comply with the terms of the lease and understand the potential risk you may be taking on.

This article outlines what you will need to consider before entering into a commercial lease. Taking advice from our Commercial Real Estate team from the outset can accelerate the process, making sure that you are in occupation as quickly as possible whilst, most importantly, minimising any potential future risk to your business.  

If you would like advice on any of the above matters, our team would be more than willing to assist. I can be contacted on 01245 453855 or via [email protected]