Table of Contents
In Short
- Commercial tenants typically pay rent, rent deposits and service charges for communal areas or maintenance.
- Additional costs can include building insurance contributions, maintenance fees and permission costs for modifications or lease transfers.
- Tenants may also be responsible for VAT, utilities, business rates and stamp duty land tax in certain cases.
Tips for Businesses
Before signing a commercial lease, review all potential costs carefully, including rent, service charges and maintenance obligations. Negotiate the terms to ensure you understand your responsibilities, especially regarding deposits, insurance contributions and any permission costs for property modifications. Always budget for hidden costs such as VAT and stamp duty land tax.
When you lease a business premises through a commercial lease, you inevitably incur certain costs. It is essential to understand these costs to ensure that you can afford to commit to the commercial lease. You should negotiate your financial responsibilities in a commercial lease with your landlord when you determine terms before signing the lease agreement. Otherwise, you risk breaching the lease agreement if you do not make payments according to the lease terms. This article will detail some of the costs you may have to pay as a commercial tenant in a commercial lease.
1. Rent
The first cost that will come to mind when you ask what costs to pay under a commercial lease is the rental cost for leasing the commercial space. You usually calculate property rental costs per square foot, which are determined partly by the size of the commercial premises.
You will usually have to pay rent quarterly. If you do not pay your rent on time, you may incur an additional charge fee for late payment if your commercial lease agreement has a term that grants your commercial landlord this right.
Rent charges are a lease term you can negotiate before committing to the commercial lease. However, if you have a rent review clause in your lease agreement, your rental amount is not set in stone. Rent review clauses mean that your landlord can periodically review the level of rent you pay.
2. Rent Deposit
Before you can secure your commercial premises as a commercial tenant, you are likely to have to pay a rent deposit. This provides your commercial landlord with security if you break a lease term, for example, by not abiding by your repair obligations in the lease agreement. A deposit can be as much as six months’ worth of rent, which can be a hefty upfront cost alongside your commercial lease.
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3. Service Charges
Depending on the type of commercial premises your commercial lease covers, you may have to pay a service charge. This is typically where the business premises are part of a larger building such as an office space or shopping centre. Service charges usually cover the costs of communal areas of the building, such as the lift and break-out rooms. Service charges may also be in place to aid your landlord in maintaining legal requirements, for example, complying with safety laws such as providing fire equipment.
However, a service charge can cover various costs your landlord wishes to recover from you as the tenant. For example, this may include:
- structural maintenance costs for the building; or
- maintenance of access routes to the building.
In addition, your lease agreement may contain a ‘sweeper’ clause that covers any other costs your landlord wants to include.
4. Maintenance and Repair Fees
As a commercial tenant, your commercial lease agreement will often detail your obligations to repair and maintain your commercial premises. Sometimes, a commercial landlord may take on the responsibility for repairs and maintenance obligations. In this instance, they may request a maintenance and repair fee from you to cover the costs.
If your commercial lease agreement contains a clause on dilapidations, you could incur further costs. When people think of dilapidations, they think of terminal dilapidations. Terminal dilapidations are dilapidations that occur after the lease has ended for obligations you should have carried out before the lease ended. Often, this will mean you will incur costs when restoring the business premises to its original structure and appearance.
5. Building Insurance
As a commercial tenant, you will not have to arrange and directly pay building insurance for the commercial premises. This is usually the landlord’s responsibility. Your lease agreement will detail who is obliged to do this.
However, even if building insurance is an obligation on your commercial landlord, you will be responsible for all or part of the cost, depending on whether you are leasing all the insured property. That cost is called insurance rent and will generally include the cost of the landlord’s premium before any discounts.
6. Permission Costs
Your commercial lease will also state whether you are liable for the costs of obtaining consent or approval from your landlord for something under the lease. For example, carrying our works to the property or transferring the lease to a third party (known as assignment). Again, the lease will not say what the cost is. It will just say that you are liable for whatever it is, including the landlord’s legal, consultant and professional fees.
7. Other Costs
There may be other costs associated with your commercial lease, such as:
- utilities;
- business rates; and
- contents insurance.
You may also have to pay VAT on top of all the costs in the lease where the landlord has opted for VAT to apply.
Another cost to keep in mind is stamp duty land tax. This is a tax assessable on certain grants of leases where the rent and any premium payable for the lease exceeds the applicable threshold. Note that this is the VAT-inclusive amount. As this is a tax, it is applicable irrespective of what your lease says if you meet the criteria to pay it. Accordingly, it is something you should obtain tax advice on.
This cheat sheet outlines what you should be aware of in your lease agreement.
Key Takeaways
As a commercial tenant, many costs may be associated with your commercial lease, and your commercial lease agreement should detail your financial obligations. Rent is an obvious cost, and you should be aware that this can change throughout your lease if your lease agreement contains a rent review clause. Your commercial lease may also detail service charge costs, which may assist your commercial landlord in covering costs associated with their legal obligations, such as in terms of the safety of communal areas. Finally, your commercial lease may also detail costs such as your repair obligations and any tax due under your commercial lease.
If you need help understanding costs in a commercial lease in the UK, 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. So call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
As a commercial tenant, you are typically responsible for rent, service charges, insurance contributions, and maintenance fees. You may also need to cover VAT, utilities, business rates, and other costs like permission fees for modifications or lease transfers.
Yes, you can negotiate the terms of your lease, including the costs you are responsible for. It’s important to understand all the potential charges before signing and ensure you are clear on obligations like service charges, maintenance, and any extra costs.
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