Commercial lease terms - everything you need to know

You could be a tenant that has finally secured the perfect business premises or a landlord that has been approached by the ideal tenant, but your work is not over yet. It is essential that you now secure favourable lease terms.

Below is a list of the sort of commercial lease terms you may want to think about. You should have a clear idea of at least a hand full of the terms below before approaching the other side. Remember, you are not likely to get everything you want when negotiating lease terms, but you should push for the terms that will work for you.

1. Rent.  How much is the rent to be? Is it to be paid monthly or quarterly in advance?
2. Rent free period. Is there to be any rent free period granted to the tenant?
3. Rent review.  How often is the rent to be reviewed, e.g. every 3 or 5 years on an open market basis or is the rent review to be stepped at set amounts?
4. Rent deposit. Is the tenant to pay 1 or 3 or 6 or 12 months’ worth of rent as a rent deposit? If so, if the tenant falls behind with the rent at any point the landlord can take any rent shortfall from the rent deposit. A rent deposit can provide a certain amount of comfort to a landlord when the tenant’s financial stability is in doubt. A tenant would not normally offer a rent deposit unless a landlord insists.
5. VAT. Will the landlord charge VAT on the rent? The relevant VAT election must be made by the landlord with HMRC if VAT is to be charged on the rent.
6. Property.  What is the exact extent of the building/estate that the tenant is to occupy e.g. ground floor, first floor, second floor, third floor, yard, full building etc..? A lease plan showing the extent of the property is necessary for leases over 7 years.
7. Shared areas. Are there any areas in the building/estate which will be shared by the different tenants in the building/estate, e.g. shared arcade entrance, shared staircase, shared paths, shared yard?  
8. Parking.  Will the tenant be allocated any car parking space/s? How many car parking spaces are required? Are the parking spaces for the tenant’s exclusive use only?
9. Term. For how long is the lease to be granted?
10. Break Clause. Does the tenant or landlord require the ability to terminate the lease at a/any set time/s during the lease? e.g. only the tenant can terminate the lease at the end of year 1 or 3 or 5 or multiple dates or the tenant can terminate at any time on giving 6 months notice etc.
11. Tenant.  Who is to be the named tenant on the lease? Is it a person/s or company? Have bank/trade/credit references been requested to evidence a good credit and trade history for the proposed tenant?
12. Guarantor. Does the landlord require a guarantor for the rent? This could be a director or party connected to a tenant or a parent company. A guarantor is generally requested if there are concerns as to the tenant’s ability to pay rent. This can be required in place of or in addition to a rent deposit deed (see above). A tenant would not normally offer a guarantor unless a landlord insists.
13. Tenants proposed use. What is the tenants proposed use of the property? Office, industrial, restaurant or retail etc.?
14. Repair.  Is the lease to be a full repair liability lease or internal repair liability lease? Generally if the lease is internal repair only the tenant will only be liable to maintain and repair the internal surfaces/parts of the property (but the tenant may also be subject to a requirement to pay a service charge, see below). If the lease is full repair the tenant will generally be liable to maintain and repair the full building including roof and structural walls. If the lease is for part of the building only e.g. only ground floor of 3 storey building, the lease will generally be an internal repair only lease (but the tenant may also be subject to a requirement to pay a service charge, see below). If the lease is for the full building it will generally be a full repair lease.
15. Service charge. If the lease is of part of a building only or of a unit on an estate does the landlord require the tenant to pay a service charge contribution? The service charge contribution from the tenant will be towards the landlord’s costs of repairing and maintaining the exterior, structure and shared areas of the building/estate. If the tenant merely occupies 50% of the building/estate they would normally only be liable for a service charge of 50% of the costs incurred by the landlord. There is normally no need for a service charge if the lease is a full repair lease as the tenant will already be responsible for maintaining and repairing the building, unless the property is situated on an estate owned and maintained by the landlord.
16. Security of tenure. Will the lease benefit from security of tenure? If so the tenant will generally automatically be entitled to a new lease at the end of the term on the same terms of the existing lease (but for the rent which can increase). Security of tenure can be excluded and if so the tenant will not be automatically entitled to a new lease at the end of their term and so evicting them would be much easier. Regardless of the security of tenure position if the tenant is behind with rent for a set number of days the landlord will, depending on the wording of the lease, be entitled to evict them during or after the expiry of the lease. It is normal for a lease to have security of tenure.
17. Dealings. Is the lease to be transferable by the tenant to a new tenant? Generally landlords allow this subject to a condition that the transfer can only occur if the outgoing tenant becomes the guarantor of the incoming tenant. Is the tenant to be allowed to grant a sublease to a sub-tenant? Again landlords generally allow this subject to the sublease meeting certain requirements.
18. Alterations. Does the tenant propose to make any alterations or improvements to the property? If so what alterations? Are these to be removed at the end of the term? It would be in the parties’ interests to record such alterations in a Licence for Alterations which would clarify the parties’ rights in relation to the works so as to avoid any disputes later on.  

     

Should you need expert legal advice regarding any of the above or indeed any other property law matter, please contact Joseph Seyed Hossein at joseph.hossein@fieldingsporter.co.uk or by telephone.

The contents of this article are for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.