Commercial Lease Agreements in England and Wales

If you are considering leasing property for your business in England and Wales, you will need a commercial lease agreement with your landlord. Most aspects of commercial lease agreements are negotiable, including your rent and lease term. This article explains the key provisions you should include in your lease and what you will need to consider before signing.

Types of Leases in England and Wales

In England and Wales, there are broadly two types of leases:

1. residential lease for renting somewhere to live; or 
2. commercial lease for renting property for business purposes. 

You will use a commercial lease if you want to rent somewhere to carry out business in England and Wales.

Commercial lease agreements will either be short-form or long-form, depending on the type of property you are renting. Long-form leases are common for complex and high-value lettings like an entire business premise. Conversely, a short-form lease is typical for most lettings of office space and retail or industrial units. 

For example, suppose you want to turn a retail shop into a takeaway or gym. Since 1 September 2020, most commercial business properties fall into Class E, covering most Commercial, Business or Service uses. With a commercial lease, you can negotiate with any prospective landlord so that you can both agree on terms that you are happy with.

Negotiating Your Lease

Before you consider renting a commercial property, think about what you need the property for and ensure that the property and location you are interested in will be suitable for your business. Your landlord will likely have elements they are unwilling to negotiate on. Therefore, you should also consider what you are and are unwilling to negotiate on.  

Some elements you might want to consider negotiating for are:

• a rent-free period or another rent incentive. This may be appropriate depending on the type of property and if it will benefit your landlord by having a business presence. For example, a new shopping centre will want to have a good range of shops to encourage customers to visit;
• flexibility to end the lease early via a break or early termination clause, or explicit clauses which permit you to assign or sublet your lease to another party;
• the extent of your obligation to keep premises and their fixtures and fittings in good repair. For example, if the property you are planning to lease is not in particularly good condition or repair, you would not want to be obligated to keep it in any better condition than it currently is; 
• that any rent-reviews are reasonable and that the landlord cannot increase the rent by a significant amount; and
• if you need to pay costs in addition to your agreed rent, you will likely want to make sure these costs are fixed and that the landlord cannot add extra costs over time.

Rent and Other Payments

You will generally pay your rent quarterly with a commercial lease. This can be difficult for new businesses struggling with cash flow. So, it is vital to plan your business finances effectively to ensure you can pay rent when due. You may also find that you have to pay value-added tax (VAT) on your rent.

Additionally, commercial lease agreements may include other terms regarding payments, such as any service charge you need to pay. These may include costs like the provision of parking or a share of cleaning or energy costs for common areas of the property, such as a unit in a shopping centre or business park.

Just as with renting a home, you may find that your commercial landlord requires you to provide a security deposit. The amount of this will depend on the property you are renting and your business’ financial position.

Further, depending on the value of your lease, you may have to pay Stamp Duty Land Tax (England) or Land Transaction Tax (Wales) on the rent you pay and any premium you pay for the property you are leasing. Again, the amount will vary depending on the property’s value. You can find more information about how this is charged and calculate the amount of any Stamp Duty in England and for Welsh Land Transaction Tax.

How Long Do Commercial Leases Last?

The length of commercial lease agreements can vary significantly, and you can usually negotiate this with your landlord. Generally speaking, properties are leased for between 5 to 15 years. Before you decide to lease a commercial property, it is a good idea to consider your business’ future needs and what you need right now. 

What Happens at the End of a Commercial Lease Term?

Unless you have otherwise agreed with your landlord, at the end of your lease term, you can request a new lease from your landlord. This new lease should broadly have the same terms as the original lease you signed. However, remember that your landlord can increase the rent amount according to market rates. 

Additionally, you can stay in the property whilst you agree on new terms with your landlord. This is known as security of tenure. It is essential to understand that this right has to be explicitly excluded in your commercial lease if you or your landlord does not want it to apply. There are various reasons why a landlord might want to negotiate to exclude security of tenure in a commercial lease. For example, they may have plans to redevelop the property in a few years or be planning to sell the property in the future.

Ending Your Commercial Lease Early

If you find that you need to end your commercial lease earlier than planned, you do have a few options. For example, you can:

• take advantage of a break clause or early termination clause contained in your lease;
• negotiate with your landlord to let you end the tenancy early;
• assign your lease to a new tenant; and
• sublet the property to a new subtenant.

Key Takeaways 

Most elements in a commercial lease are up for negotiation, so it is essential to be as sure as possible on your ‘must haves.’ You will also want to confirm that the property is appropriate for the purpose you wish to use it for. Otherwise, you will need to apply for planning permission which can take time, and there is no guarantee that you will be successful. Among the elements you may wish to consider negotiating on are:

• a rent-free period or other rent incentives;
• the length of the tenancy;
• options to end the tenancy early via a break clause or by finding a new tenant to take over your lease;
• the ability to sublet the property to someone else; and
• a landlord’s power to increase the rent and add extra charges as time goes on.

If you need help negotiating commercial lease agreements, our experienced leasing lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

Frequently Asked Questions