Key Terms to Understand in Commercial Lease Agreements

As a business owner, you may be considering a commercial property lease to secure business premises for your company. This means you will occupy a property or part of it for specific business use in return for rental payments. As a potential commercial tenant, you should know what key terms to expect in a commercial lease agreement to ensure your lease agreement protects you and grants you the rights you may require to run your business. This article will outline the key terms that business tenants should understand in a lease agreement.

The Lease

A lease is a legally binding contract in the form of a lease agreement between a tenant and a landlord. 

What makes the occupation of property a lease rather than any other contract is that the tenant has sole possession of the property as their commercial premises. As such, they can prevent anyone else from entering, including the landlord, without good reason, and they have a legal estate. Legal estate means they enjoy some of the rights the landowner enjoys over the land.

Lease Term

As a commercial tenant, the lease term details the time you commit to staying on the premises. When you consider the lease term at the start of your lease, you will need to consider factors such as:

• whether your business intends to change location soon;
• if you plan to invest in equipment on the premises, which may mean you want to stay longer to make this worthwhile;
• whether you expect your business to expand shortly and whether the premises can cope with this; and 
• whether the lease allows you the right to automatically renew the lease when it comes to an end, and which is where your lease has security of tenure.

Demise

Demise refers to the area of the land and property the commercial tenant has sole possession of. In a lease, the demise must be very specific. Typically, it will include measurements for a floor plan and surrounding gardens, back alleys, or a garage where applicable. A demise avoids confusion between the tenant and landlord, mainly where the commercial premises is a unit in a larger commercial building. 

The Use of Premises

As a business owner, you will know what business use you will engage in within your commercial premises. However, you need to ensure that this is clear in the lease. A key term to expect in your lease is what your commercial landlord permits you to do and any restrictions. For instance, if the use of the premises is limited to operating a cafe, you will encounter difficulties if you thought it was a retail space.

A lease may state a general class type for the use, which you need to ensure covers your business type, or it may be more specific than this.

Although your commercial lease should explain what business activity you can carry out on the premises, your commercial landlord still needs to obtain relevant planning consent. Therefore, before you commit to a lease, you should check this to satisfy yourself that you can use the commercial premises for the business you intend.

Exclusive Possession

The term ‘exclusive possession’ ensures your lease is a commercial lease rather than an alternative legal document, such as a licence.

Exclusive possession means that, as the tenant only, you can occupy the commercial property, or the relevant part of it, including access to it. Therefore, your landlord (unless the lease grants them a right to do so in specific circumstances) and any third party cannot enter or share the property with you. You also own land, which gives you freedom about what you do with the property.

Rent Review   

A rent review is where your commercial landlord periodically assesses the amount of rent you pay and can potentially change it. This usually occurs every three or five years. It will typically only change with an increase. A rent review is commonly based on market prices to ensure you pay what other properties currently charge in your area. You should check that any rent review clause is clear on processes where you dispute any change in rent.

Break Clause

Your lease may have a break clause concerning the lease term. This allows you or your landlord to terminate the lease before the lease term. For example, if you struggle to pay rent, you may end the lease early. Likewise, if you decide your business needs larger commercial premises, you could end the lease early. 

In certain circumstances, breaking a lease may have conditions attached to it. Be sure to read the finer details of your break clause, as some may specify:

• a specific date when you can exercise the clause;
• criteria that you need to meet, such as being up to date with rent payments; and
• the notice required.

Forfeiture

Forfeiture refers to a commercial landlord’s right to terminate the lease before the lease ends in specific situations. A landlord can apply the right to forfeiture if a tenant breaches the lease where they take back possession of their property.  

A lease must specifically state that the landlord has the right to forfeit the lease for forfeiture to occur.

Cheat Sheet for Leasing Terms

This cheat sheet outlines what you should be aware of in your lease agreement.

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Alienation

Alienation refers to specific rights a lease may grant to the commercial tenant to dispose of the commercial lease or part of it. It is a lease provision which details what types of disposal can occur, such as:

• lease assignment;
• an underlease; or
• a charge.

Security of Tenure  

Security of tenure terms are rare in contemporary UK commercial lease agreements but are beneficial to commercial tenants. These provisions ensure when a lease reaches the lease term end date, the lease automatically renews. Your commercial landlord has limited recourse to refuse the automatic lease renewal. Therefore, you will likely continue occupying your commercial premises as your lease continues on the same terms unless you or your landlord negotiate new ones.

Repair Terms

A key term your commercial lease should contain is a repair term. This will detail your obligations regarding repairs and may also describe your landlord’s. You must check the details of this as repair terms vary between commercial leases. If yours is a full repairing and insuring lease (FRI), your repair terms will state that you must pay for all repairs and the property insurance. However, your landlord will likely organise the latter and pass the cost to you as insurance rent. When your lease ends, you must ensure the business premises are in ‘nearly new’ condition. 

If your repair terms are not FRI, it is crucial to understand what you are obligated to repair. It is wise to appoint a surveyor to check the property’s condition before you use it as your business premises.

Key Takeaways

You should expect to see some key terms in your commercial lease agreement. As a commercial tenant, you should understand these to ensure the lease is appropriate for your business. Key terms within a commercial lease include:

•  the lease;
• lease term;
• demise;
• use of premises;
• exclusive possession;
• rent review;
• break clause;
• forfeiture;
• alienation;
• security of tenure; and
• repair terms.

For more information on key terms to include in your commercial lease, 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.