Burnetts logo

Guide to Commercial Leases

For commercial tenants, negotiating reasonable lease terms is a crucial part of developing a successful business.

For commercial tenants, negotiating reasonable lease terms is a crucial part of developing a successful business.

Standard Lease

There is no such thing as a standard lease.  All leases are different and tailored to suit particular requirements although different leases might contain certain clauses that are the same or similar.  Nevertheless, taken as a whole there are many alternatives. This article gives only a flavour of some of different possibilities.

Price

The rent payable for a lease will depend upon not only the property but also the terms of the proposed lease.

There can be extras such as service charges and insurance premiums.  VAT may be payable in addition.

It is likely that for leases longer than 5 years, there will be provision for review of the rent.  Often rent reviews are upwards only, meaning that the rent will never go down even if due to recession the actual rental value of the property has decreased.  An alternative is a review provision that allows both upwards and downwards review.  Expect though, to pay more by way of rent for a lease that allows upwards and downwards rent reviews.

Term

A lease gives the tenant a right to occupy the property for the duration of the agreed term   provided the tenant pays the rent promptly and complies with all of the obligations in the lease.  A longer lease gives security but at the cost of being committed to a longer lease. 

A tenant who requires the security of a long lease but would like the option to determine the lease before the end of the term could negotiate a break clause.  This would give flexibility but probably at the cost of an increase in the amount of rent to be paid (since the advantage of having both security and flexibility will come at a higher price).

Business tenants can take advantage of a statutory continuation of the lease once the term has expired and the right to a new lease (provided they follow certain strict requirements).  However, some landlords will try to exclude these rights. A prospective tenant may be wise to look instead for premises where these rights are not being excluded.

Stamp Duty Land Tax may be payable on the proposed lease. The length of term granted by the lease and the dates of rent review can have a dramatic adverse impact on the amount of SDLT payable (and subsequent reporting requirements - with consequent administration and professional costs).

Repairs

A frequently used term in lease negotiations is “a full repairing and insuring” or “FRI” lease.  A tenant who takes on an FRI lease is going to be obliged to put the property in a good state of repair, even if the property is not already in good repair.  A survey of the property would therefore be recommended.  The survey should at the very least give peace of mind, if not save the cost of an expensive mistake.  A survey will often lead to a reduction of the rent or the responsibilities as to repairs, where it reveals disrepair.

In the case of new buildings, an FRI lease could make the tenant responsible for certain defects that are hidden and not yet apparent.  For example, defects attributable to the construction or design of the new building can later lead to unexpected and expensive remedial works.  A prospective tenant of a new building would be wise to exclude responsibility for these. 

Another term used is “an effectively FRI lease”.  What this usually means is that the tenant will only have direct responsibility for certain (perhaps internal non-structural internal repairs).  The Landlord takes on the responsibility for the repairs to the structural and outside parts of the building but recovers all the cost of doing so from the tenant.

Dealings 

Leases usually contain provisions restricting a tenant’s ability to transfer or underlet the lease to someone else. 

Sometimes the lease will not be transferable and underletting will not be allowed at all.

Other leases may allow transfer and/or underletting. 

If you have a lease that cannot be assigned and cannot be underlet, then it is personal to you throughout the entirety of the term.

If you have a lease that can be transferred or underlet then you will have the possibility of being able to dispose of the lease to someone else and move on.

A tenant would normally expect to pay a higher rent for a lease that can be transferred or underlet as opposed to one that cannot. 

Prospective tenants should be cautious about taking on a non-transferrable lease.  Otherwise, they could find themselves with an unsaleable business and unable to move premises. 

Commercial Lease Code

The British Property Federation has published a code and its aim is to make Lease terms fairer to both landlords and tenants.

Conclusion

Lease terms can be difficult and problematic. By their very nature, leases are onerous obligations for a tenant.  During the term of a lease, it can be regarded as an asset all the time the business being conducted from the property is successful.  Otherwise it could be a purely expensive liability. 

The impact of certain provisions may not be immediately apparent to a prospective tenant, whether from a practical point of view or a legal point of view.  The meaning of provisions in leases can be affected by case law and statute.

To ensure that you have the terms most suitable to your business needs, seek professional advice from a qualified surveyor / valuer and consult your solicitor before you conclude preliminary negotiations.

Tony Lake is a commercial property partner at Burnetts Solcitors in Carlisle Cumbria. For further information on leasing property, contact Tony on 01228 552222.

About the author

Published: Thursday 22nd May 2008
Categorised: Commercial Property

All Factsheets