Contact Law’s guide to commercial leases

 

What is a lease?

At its most basic, a lease is a contract between a tenant and a landlord that sets out the agreed terms of the tenancy.

It is an important legal document that governs the term of the relationship from beginning to end. It is important for both parties to be familiar with the provisions of the lease as it contains the obligations and rights of both parties.

This is our guide to commercial leases - click here for a guide to residential leases.

Commercial leases

A commercial lease is an agreement between a landlord and a commercial tenant. They differ from residential leases in a number of ways and can be quite complex - particularly when the commercial property is in a block with a number of units.

The parties under commercial lease law are referred to as the landlord and the tenant. The lease lays down the responsibilities and obligations of both parties and these are known as covenants.  

Common tenant covenants include:

  • Paying service charge
  • Keeping the interior of the property in good repair
  • Not altering the structure of the property

Common landlord covenants include:

  • Insuring the property
  • Affording the tenant quiet enjoyment of the property without interruption  

It is important for both parties to read the lease with extreme care because once it is signed the respective parties are bound under commercial lease law by all the clauses.

Here is a list of some of the key clauses in a commercial lease that a property solicitor will check for their client – and that you should ensure you have.

Leasing a commercial property

Rent review

A rent review clause allows the landlord to review the rent every three-to-five years and decide if it should be increased.

There are three main ways the rent can be increased:

  • Firstly, the landlord can refer to the ‘market rent’. The clause will say how the ‘market rent’ is to be calculated, i.e. by reference to an index (usually the Retail Price Index)
  • Secondly, the rent can increase by pre-determined amounts set out in the lease agreement
  • Thirdly, the landlord can increase the rent in proportion to the tenant’s profit for the year


Both landlord and tenant should pay particular attention to the notice periods for utilising the rent review clause. If the notice period is missed, the landlord may not be able to ask for more rent or the tenant could inadvertently accept the increase by not responding in time to the landlord’s notice.

Break clause

A break clause allows the parties to bring the lease to an early end. They are not always included in a commercial lease but can be beneficial for both landlords and tenants. Landlords may wish to terminate a lease early if they want to redevelop the property and tenants may wish to get out of the lease if they have been through tough times and can no longer afford the rent.

The break clause can specify certain times when the parties can use it, for example the break clause may coincide with the rent review clause. Alternatively, the clause may state that it can be used if other events come to pass, for example if there is a breach of the tenant’s covenants.

The most important thing for both parties to be aware of in regard to break clauses is the notice periods necessary for using the clause. If one party serves the notice even one day late according to the terms of the lease, they will lose their right to break the lease.

Insurance

The insurance clause is an important one for both landlord and tenant. It’s important to clarify who is responsible for insuring the property as double insuring or no insurance is to be avoided.

The landlord or the tenant can be responsible for insuring the property, or they can have a policy that is in both their names. A property solicitor will look at the obligations under the clause for their client and negotiate if necessary.

For example, if the landlord is responsible for insuring the commercial property, their solicitor may want the tenant to pay a percentage of the premium to cover the area of the property that falls under the demise of the lease. The tenant’s solicitor will asses if the level of insurance is right for their client and determine if their client is responsible for any excess on a claim.

Repairs

The repair clause of a commercial lease will set out the repair obligations of the tenant and the landlord. It will state who is responsible for repairing what.

If the part of the property under the demise of the tenant is part of a larger property, for example a retail shop in a mall, the tenant must ensure that the landlord is responsible for repairing the parts not included in the lease. These may include the outside of the property, communal areas and the structure of the property.

The tenant may be required to ‘keep’ the property in a good state of repair. This means they will have to make sure the property is kept in good condition, even if it was not in a good condition when the lease commenced.

In addition, the tenant may be required to follow a schedule of repair that the landlord has attached to the lease. Knowing their obligations under the repair clause is important for both parties as failure to fulfil them may lead to the termination of the lease.

Contracting out of the LTA 1954

The Landlord and Tenant Act 1954 (LTA 1954) grants tenants certain rights to renew their ‘business lease’ at the end of its term. However, these rights can be contracted out of the lease. If the tenant contracts out of sections 24 to 28 of the LTA 1954, they will have to vacate and empty the premises at the end of the lease term. If they do not contract out of these sections, the lease will continue until it has been properly terminated under the LTA 1954 or has been renewed, during which the tenant will have the right to remain in the property.

If you are entering into a commercial lease (or writing the terms for one) then legal advice is highly advisable. We work with commercial solicitors around the UK, and can find you one perfect for your needs. Call us on 0800 1777 162 or fill in the web-form above and we will be able to help.

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