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As a business owner entering a commercial lease for a commercial property, you take on a significant commitment. A commercial lease is not just a financial commitment but a legal one as you enter into a legally binding contract as a commercial tenant with your commercial landlord. If you are new to commercial leases, you may be unsure of what to do first. This article will detail some key steps for a business tenant in entering a commercial lease in the UK.
Commercial Lease
A commercial lease is where you occupy a property owner’s property as your commercial premises. You do so for an agreed timeframe (lease term) and carry out a permitted business activity. In return, you will pay your landlord rent.
A commercial lease agreement governs the commercial lease. It contains the lease terms and conditions detailing both parties’ rights and obligations.
Key Steps
There are key steps you should take when entering a commercial lease in the UK. The process from start to lease completion may take 4-6 weeks once the heads of terms, as detailed below, are complete.
1. Drafting a Heads of Terms
The first step to take is to sit down with your potential landlord and enter into heads of agreement or heads of terms. This is not a legally binding document but lists the principal commercial terms both parties intend for the commercial lease agreement. It is essential that you use this opportunity to negotiate terms that may benefit you, as a tenant, in your commercial lease.
You should also check if your landlord intends a contracted-out lease or whether you will have a protected lease. The former means you will not enjoy the protection a protected lease offers, such as:
- that the lease will not automatically end after the fixed term; and
- the legal right to lease renewal on the same terms once your lease term ends.
You may also wish to consider, for example, the inclusion of a:
- break clause;
- cap on any rent review; and
- rent-free period.
2. Engaging a Solicitor and Conducting Legal Checks
Once you and your commercial landlord have agreed on the heads of terms, this is the point at which you may involve a solicitor to help you enter the commercial lease. Solicitors for both parties will need to carry out legal checks for anti-money laundering, which will require you to provide identification.
Your solicitor will also require draft papers from your landlord’s solicitor, which generally include the following:
- copy title which proves that your landlord does own the property and so is legally entitled to grant you a lease;
- the rent deposit they require;
- a licence for alterations;
- responses to pre-contract enquiries (CPSEs); and
- a draft of the commercial lease agreement.
You may find that your solicitor also carries out property searches on the commercial premises at this point. These cover any concerns or issues you may have and tend to include searches on the following:
- water and drainage;
- local authority; and
- environment.
3. Undertaking Lease Negotiations
Once your solicitor has explained their findings to you and shown you the draft lease agreement, you may wish to enter negotiations with your commercial landlord to resolve any issues or discrepancies with the draft agreement. This process can involve several separate conversations between both parties.
4. Signing the Lease Agreement
Once you are content with the negotiated lease, you will be ready to sign your lease agreement. At this point, you must make your lease payment, including a rent deposit and the first rental payment.
Further, the lease will be dated between solicitors. If your lease is registrable, your solicitor will then attend to its registration after you have paid any stamp duty land tax that is required for the lease.
This cheat sheet outlines what you should be aware of in your lease agreement.
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Key Takeaways
Before you sign a commercial lease, several key steps typically occur. The first step is negotiating heads of terms. You will then instruct your solicitors, who will conduct legal and ID checks and potentially any property searches. Your solicitor will also request specific documents from your commercial landlord’s solicitor, including the draft lease agreement. Following a series of negotiations between both parties, you can then sign your lease and make any necessary payment for your lease to start.
For assistance reviewing your commercial lease agreement, 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 a commercial landlord has a legal agreement with a business owner that they can occupy their property as their business premises in return for rental payments.
A heads of agreement (or heads of terms) is a document listing the principal commercial terms both parties intend for the agreement. While it is not legally binding, it will specify the mean terms of the agreement, and parties can refer back to it when drafting the final agreement.
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