Table of Contents
Entering a commercial lease is a significant decision. Not only do you commit to a financial and legal obligation for a fixed period, but you must also choose a commercial property most suitable to operate your business. There are several cost considerations you need to weigh up to ensure the space you choose is the best value for your business. This article will explore some common cost considerations for tenants when choosing a commercial lease.
What is a Commercial Lease?
A commercial lease is an agreement between a landlord and a tenant. As a tenant, you will occupy your business from the commercial space in exchange for rent for a fixed period. A lease agreement is a legally binding document outlining your rights and responsibilities during the lease term.
This cheat sheet outlines what you should be aware of in your lease agreement.
Common Cost Considerations
When choosing a suitable property to lease, the rental amount is often the key figure in your mind. However, this is not the only cost consideration to note. We explore common ones below.
Rental Amount
The rental amount is typically the highest cost associated with a commercial lease. Rent costs tend to reflect the amount of property space you will occupy, as well as other factors like the location and quality of the property.
When considering rent costs, check whether the commercial lease agreement has a rent review clause. This clause allows the commercial landlord to assess the rent price periodically with the view to raising it. If a rent review clause is present, you will need to consider the possibility of a rent increase later down the line, so find out:
- how often and when the rent reviews will occur; and
- the type of rent review the landlord uses.
Security Deposit
When you choose a commercial premises and enter a commercial lease, you will sign your lease agreement and pay a deposit to secure the property. A deposit typically amounts to three to six months’ worth of rent. This is an upfront cost consideration when choosing your commercial premises, so you need to have an amount readily available from your business.
Business Rates
A further cost consideration for commercial tenants is the cost of business rates. The rental value of the business premises will determine these. You should consider whether your business is making enough profit to meet these payments.
Service Charges
When you enter a commercial lease and occupy a property, you will incur service costs such as gas, internet and electricity. You may pay these independently or through a service charge that your landlord will bill to you. Typically, the latter will occur where your commercial premises is in a shared building.
A service charge will include costs for the upkeep of shared parts of the building, such as:
- communal kitchens;
- the roof;
- the building exterior;
- structure; and
- corridors.
Repairs and Insurance
You will likely need to pay insurance when you enter a commercial lease. In addition to content insurance which protects your possessions, your lease might require you to pay building insurance.
Further, review the lease agreement regarding your repair obligations. These can be onerous in some commercial leases, such as where you have a full repairing and insuring lease (FRI). This requires you to bear all the repair and insurance costs of the lease. Therefore, this is a cost you must consider when choosing a commercial lease.
Costs to Seek Your Landlord’s Permission
Another cost you may not initially consider when choosing a commercial premises are those associated with seeking your landlord’s permission for certain actions. Your lease agreement might state that you need consent from your landlord to:
- transfer the lease;
- sublet part of the premises to another party who becomes your tenant;
- assign your interest in the lease; and
- make alterations to the premises.
VAT
In addition to all the cost considerations when you choose a commercial lease, you must consider potential VAT on top of these. Depending on the property you select, you may have to pay VAT where the landlord is VAT registered and decides to pay tax on their property. This could be payable on your rent and service charge, for example, so consider this additional figure before signing the lease agreement.
Professional Fees
When you choose a commercial lease, you will likely incur initial costs for a solicitor to help negotiate and review the draft lease agreement. This cost can vary depending on the clauses in the commercial lease agreement.
You may also need to consider professional fees if you select a long-term lease, in particular, requesting a surveyor to examine the property before entering into the lease.
Continue reading this article below the formCall 0808 196 8584 for urgent assistance.
Otherwise, complete this form and we will contact you within one business day.
Key Takeaways
When choosing a commercial lease as a potential tenant, there are many considerations you need to factor in to help you decide which lease to take. Such cost considerations include:
- rent;
- a security deposit;
- business rates;
- service charges;
- repairs and insurance;
- costs to gain your landlord’s consent;
- VAT; and
- professional fees.
If you need help with 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.
We appreciate your feedback – your submission has been successfully received.
