Common Mistakes Tenants Make With Their Commercial Lease

A commercial property lease is a legally binding agreement between you and your landlord. It grants you the right to sole occupation of a commercial property in return for rent. Understanding your lease agreement is key to avoiding misunderstandings or disputes. This article will explain some common mistakes tenants make with commercial leases.

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Misunderstanding Rent Provisions

One of the most significant details when you lease a commercial property is the rent. It is likely to be one of your primary business outgoings. Unfortunately, a common mistake tenants make with commercial leases is misunderstanding the rent provisions in the lease. 

Many factors affect the rental amount aside from the amount you agree on with your landlord. For example, consider the following:

• your lease might have a rent review clause allowing the landlord to review the amount from time to time and raise it;
• your lease might be a turnover lease, meaning you pay different amounts of rent depending on your business turnover; or
• you may be able to negotiate a rent-free period at the start of your lease. 

Ignoring the Lease Term 

When you find the perfect commercial space to run your business, you are unlikely to consider moving out or terminating the lease. However, overlooking the lease term is a common mistake tenants make when excited at the prospect of a new business location. Amongst the excitement, it is easy to forget that business circumstances might change. Since a lease is a legally binding contract, you must commit to its provisions, including the lease term. 

However, as your business circumstances change, honouring the entire lease term is sometimes difficult. If you commit to a long-term lease, you might be stuck paying rent to avoid breaching your contract. Therefore, it is essential that you understand the lease term and that it is appropriate for your business. If you have upcoming growth plans, consider whether the commercial space will be appropriate in the next few months or years. 

Importantly, review your lease agreement and understand your termination rights. You might decide to negotiate a break clause in your commercial lease, as this can allow either party to end the lease in specific circumstances.

Misreading Your Assignment Rights 

If you have a specific plan to assign your lease to someone else, you need to check your assignment rights. An assignment is where you transfer the lease to a new incoming tenant. Accordingly, you are no longer part of the lease, and the lease obligations fall on the new tenant. 

Many commercial tenants believe it is possible to sell a lease to another party when they no longer want it. However, this is not always the case. You will need to check the alienation clause in your lease, as this will detail whether or not you can assign the lease. This could be relevant if you are a franchisor and enter a lease agreement with plans to assign the lease to your franchisee. If your lease does not allow this, you may be stuck in an inappropriate contract for your business plans. 

Additionally, alienation clauses may contain details about subleasing.  This is where you create a subtenancy to allow another party to lease part or all of the commercial property. You will still continue with your lease as the head lease, but they will pay your rent as their landlord for their occupancy. Subleasing might be suitable if you lease an office floor in a commercial building and want to sublease a section to another company. 

Overlooking Payment Obligations

While rent is a significant expense, your lease agreement may have other payment obligations that you must fulfil. For instance, you might need to pay service charges or costs for repairs and maintenance. A service charge will include costs for the upkeep of shared parts of the building, such as:

• the building’s exterior;
• the rooftop;
• communal kitchens;
• communal gardens; 
• escalators and stairs; and
• corridors and lobbies. 

Another payment obligation includes professional service fees. A common mistake is not realising you may be liable to pay your landlord’s legal fees. Without properly reading your lease, as a commercial tenant, you may find you agree to:

• cover costs, including legal ones, for lease consents and variations; or
• recovery of the landlord’s bailiff costs from you if they decide to evict you, such as because you are in rent arrears.

Key Takeaways

Commercial tenants can make mistakes by failing to read and understand their lease agreement properly. Common mistakes include:

• misunderstanding rent provisions;
• ignoring the lease term;
• misreading your assignment rights; and
• overlooking payment obligations.

If you need help with your lease agreement to avoid these common mistakes, 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.