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As a new business tenant, you have taken the plunge to lease property to run your business from. You are likely moving from working at home to a commercial property dedicated to your business. Once you have found what you would like as your first commercial premises, you need to sign a commercial lease agreement. This substantial financial commitment requires you to carry out many obligations. Therefore, when selecting a new UK commercial lease, you must know what to look for to ensure the commercial lease agreement contains what you can and want to commit to. You can negotiate with your prospective commercial landlord before signing the lease to ensure you are happy with the terms. This article will explain what a new commercial tenant like you should look for when selecting a commercial lease.
Commercial Lease Agreement
With a commercial lease, you occupy your landlord’s property or part of it for a specified agreed time which is the term of your lease. It enables you to use the premises for business that your landlord permits. In return, you will pay your landlord’s rent.
The commercial lease agreement details the lease terms, including your commercial landlord’s rights and responsibilities in the commercial lease. This is a legally binding agreement, so you must be content with its contents. Below are some points to look out for when selecting a commercial lease.
Lease Costs
As a new commercial tenant, looking out for the costs associated with your commercial lease is essential when selecting one. First, you must understand what you must pay and satisfy you can commit to this. The cost you will likely focus on is the rate of rent you will pay. However, there are potentially other costs associated with your commercial lease. For example, you may have to pay the following:
- a rent deposit which can amount to anything between three to six month’s worth of your rental amount;
- a service charge for communal parts of the property, such as the rest areas;
- insurance rent which covers the landlord’s cost for the insurance premium for their buildings insurance; and
- a charge if you wish to transfer or sublet the business premises you will occupy.
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Lease Term
An obvious but important point to look out for when selecting a commercial lease is the length of the lease term for the commercial property. Lease terms can vary greatly, and you must ensure that the lease term suits your business needs. For example, when selecting your first commercial premises, you may choose a short-term lease if you are unsure how your business may develop. Alternatively, consider a longer-term lease if you do not plan to expand your business and want the security of commercial premises for some time.
Regardless of the lease term when selecting a commercial lease, it is crucial to determine whether your lease has contracted out of the Landlord and Tenant Act 1954. If it has, you do not have a protected lease, and therefore, your lease will end at the end of the term without a legal right to request a renewal lease.
Repair Obligations
When you select your first commercial lease, you may not be aware that a commercial tenant’s repair obligations can vary from lease to lease. Therefore, when choosing a commercial lease, you must consider your repair obligations. Unfortunately, most commercial landlords will try to pass as many repair obligations as possible onto their tenants, which can cause you significant responsibility and cost. For example, determine whether your commercial lease is a full repairing and insuring lease (FRI), which means all repair and insurance costs are your responsibility.
Also, look out for a clause concerning how to return the property at the end of the lease. Often, this can obligate you to return the commercial premises to the repair condition and state they were in when you first took the lease. Ideally, you should get a survey for the property to ensure that you know its state before selecting your commercial lease.
Transferring and Terminating
As a prospective commercial tenant, you need to remember that business can change, and your intentions may affect the terms of your commercial lease. Therefore, when selecting a commercial lease, consider whether you can terminate the lease before the lease term (a break right) and transfer any of your rights in the property (an assignment right).
If the commercial lease agreement has a break clause, this will allow you or potentially your landlord to end the lease before the end of the lease terms. This can benefit you if you can no longer commit to it. However, you should note the details of any clause. For example, some allow you to exercise the clause at any point and others at a certain point with conditions.
While not a transfer of rights, if you no longer need the commercial lease over the property, another option is to sublease. In a sublease, you grant a lease to a third party that sits under your lease, and you become that subtenant’s landlord.
Key Takeaways
If you are a new commercial tenant looking for a commercial lease, the commercial property market will be new to you. Therefore, you need to understand the points to consider when selecting a commercial lease. This will allow you to commit to what works for your business. There are many things to look out for when selecting a commercial lease. For example, you should look out for all costs associated with it. This often includes rent, service charges, deposit and insurance costs. Another point to look out for when selecting a commercial lease is whether or not you can terminate the lease early through a break clause in case your business needs changes. Similarly, you may be able to sublet the premises or assign your property interest, so it is worth looking out for when selecting a commercial lease.
If you need help understanding what to look for when selecting a 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 for a low monthly fee. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A commercial lease is where you lease property from a commercial landlord as your business premises. You have the sole occupation of the commercial space and will pay your landlord rent in return.
One clause to check for is the repair and maintenance obligations. Sometimes, landlords tend to pass as much of this as possible to their tenants.
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