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You will need to sign a lease agreement to occupy property space for your business. A commercial lease agreement is a legally binding contract with all the lease details between the tenant and landlord. Before you enter a lease for your commercial property, you will negotiate with your commercial landlord the lease terms, including particular covenants. Therefore, it is essential to consider terms you may wish to include and those you may want to avoid. This article will discuss five key points you should consider when signing a lease agreement.
Security of Tenure
An important point to consider before you sign a commercial lease is whether the lease has tenure security. A security of tenure protects your lease and ensures that your lease will only end if the landlord follows a strict legal process. Additionally, you gain the right to renew the lease. But, again, the landlord can only refuse if it follows a strict legal process.
Most commercial leases will be protected by default unless they have been contracted out of the laws that grant the protections.
Break Clause
Before signing a lease agreement, you should negotiate the lease term (the length of your lease). When you do this, you should consider including a break clause. A break clause allows you to end your lease earlier than the full term. For example, you could experience difficulties with your business as a business owner, meaning you can no longer commit to a lease. Alternatively, your business may grow, and your current premises may no longer suffice.
There are different break clauses to consider when signing a lease agreement. For example, fixed break clauses mean you can end the tenancy on a specific date. Other break clauses are on a rolling basis, meaning you can end the tenancy on any date if you provide the proper notice to your landlord. Some are just for your benefit. Although, others allow both you and the landlord to terminate the lease.
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Rent Clauses
When signing a commercial lease, you should note the rent clauses. Apart from the obvious one, which details the rental amount, it would help if you looked out for the following:
- whether you will have a value-added tax (VAT) charge on your rent;
- any rent-free period for your lease; and
- any rent review clause.
A rent review clause details when your commercial landlord may review your rental amount. If you have a long-term lease, it will likely contain a rent review clause. As a commercial tenant, you can negotiate the frequency of rent reviews and the form they take. If you disagree with a rent review, you should also look for the process.
Alterations and Repairs
Alterations and repair clauses detail further obligations you may have in your commercial lease. It will help to know what your obligations are. It is wise to survey your commercial premises before signing the lease to record it’d condition.
Commercial landlords tend to ensure that most of the responsibility for repairs lies with you as the commercial tenant. Therefore, many repair clauses nowadays are fully repairing and insuring (FRI). This means you must carry out repairs and pay the landlord for its insurance of the commercial premises. You may also find that your repair clause requires you to leave the property in a good state of repair regardless of what it looked like when you entered. This means you may need to repair things that were broken before your lease began, which might mean improving the landlord’s property.
Some leases detail that you need consent to alter the premises. If you know you must make alterations before you enter a lease, such as any fit-out works, gaining consent before signing the lease is advisable.
Alienations Covenant
You must look for any alienation covenant when signing your lease agreement. Most commercial leases will contain these, and they will either grant rights or restrict you in terms of:
- assignment;
- charges;
- subleases; and
- sharing (for example, licensing part of the premises).
These actions are not an automatic right for commercial tenants. But, unfortunately, many tenants make the mistake that assignment is an automatic right.
Key Takeaways
Before you sign a commercial lease, there are many points to look out for in the lease agreement, including:
- a security of tenure;
- rent clauses;
- break clauses;
- alteration clauses;
- repair clauses; and
- alienation covenants.
It is essential to look out for these as they give your rights, restrictions and obligations in your commercial lease.
If you need help understanding commercial leases 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
A lease agreement is a legally binding contract between you and your commercial landlord that details the occupation of your commercial premises.
A key point you should look out for in a lease agreement is how the alienation covenant restricts you, such as whether you can sublease.
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