Taking your first commercial lease

If you have ever rented residential property on an assured shorthold tenancy (AST), you can be forgiven for thinking that a lease of commercial premises creates similar rights and obligations between the landlord and tenant. But a commercial lease is very different.

The tenant pays

One of the more noticeable differences is that the tenant pays for everything under most commercial leases. That’s the case, even if it’s the landlord’s responsibility to physically undertake the work.

Under an AST, it’s the landlord’s duty under the Landlord and Tenant Act 1985 to:

• maintain the property, and
• keep installations in working order for the supply of water, gas, electricity and sanitation.

Furthermore, this work is at the landlord’s expense. There are no similar provisions for commercial landlords, and the tenant will likely bear any cost.

If a commercial landlord takes any action, for example, for rent arrears or the breach of some other covenant in the lease, the landlord’s legal costs are likely payable by the tenant.

Repair covenants

Most commercial leases have a covenant obliging the tenant to ‘keep’ the property in good repair. Legally, this creates an obligation to put the property into a good state of repair, considering the property’s age and construction. However, that can lead to unsuspecting commercial tenants taking on more onerous obligations than anticipated. So, it’s sensible to prepare a ‘schedule of condition’ at the start of a commercial tenancy, with the schedule referencing the property repair obligation.

Security of tenure

A commercial tenant has security of tenure under the Landlord and Tenant Act 1954 unless the parties agree to contract out of its provisions. Security of tenure means that at the end of the contractual lease term, the tenant can remain in the premises unless the landlord can end the tenancy on one of the limited grounds in the 1954 Act. Depending on the grounds on which the lease is terminated, the landlord may have to pay compensation to the tenant if the lease is ended.

Discover more about security of tenure.

Length of term and break notices

A commercial lease is for a fixed period, often five years. But, statistically, around 20% of new businesses fail within their first year, rising to 60% within three years. So, it’s essential to remember this when taking a new lease. You may be able to agree to a break clause with the landlord so that you can end the lease early if matters do not work out. Without a break clause, you may remain liable for the rent for the full term. Therefore, it’s important to understand the requirements in the lease should you wish to sell it. Often, the landlord has the power to veto a sale if they have concerns about the finances of the incoming tenant.

Visit our main page on ending a commercial lease.

Subletting

You may want to be able to rent part of the premises out to a third party. Some leases contain provisions restricting your ability to do so.

Guarantees

A lease taken in the name of the tenant’s company may require personal guarantees. Sometimes, a director’s liability remains even after the lease is sold on to another party.

Rent

It’s common practice to pay rent in advance in four instalments yearly. Therefore, tenants need to ensure that they have sufficient cash flow to meet those obligations. You will also likely have to pay a rent deposit at the start of the tenancy, often equivalent to three to six months rent.

Unlike residential tenancies, which require the landlord to take court action to remove a tenant, in commercial leases, there’s often a clause (known as a forfeiture clause) allowing the landlord to change the locks if rent is outstanding for (usually) 14 or 21 days. If a tenant wishes to enter a forfeited premises, they must apply to the court and pay the arrears and the landlord’s costs.

Alterations

A tenant may need the landlord’s permission to make any alterations to the property. You should also be aware that most leases contain a clause obliging the tenant to return the premises to the state they were in before the alterations at the end of the lease (if the landlord so chooses).

The premises

It’s essential to understand what’s included in the premises, including which areas outside the demised premises you can use, such as common areas and access routes. You will also want to check if you or your customers can use any parking spaces. If you need to erect any signs outside the premises, you will likely need the landlord’s permission.

The property’s commercial classification

You can only carry out certain activities in a commercial property if it has the correct planning designation.