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Commercial Leases: Key Facts for New Businesses

Commercial Leases: Key Facts for New Businesses
6 September 2017

There comes a time when many start-ups need to move into commercial premises, which usually means signing a commercial lease agreement.  Not many new businesses can afford to buy premises early on, so the first shop, salon or workshop will probably be leased. 

Entering into a commercial lease agreement, especially for the first time, is an important step.  A commercial rental agreement is more complicated than a residential agreement.  Different laws also apply.

You really need to understand the terms of any lease agreement before you sign.  Commercial lease agreements can be fairly complicated and it’s normal practice to discuss and negotiate terms before signing.  If you’re not familiar with standard shop rental agreements, then these are some of the areas you need to consider:

Long term or short term

Commercial property lease are classified as either short term (a few months to about 3 years) or long term (more than 3 years).  The terms and conditions of short and long term leases can be quite different.

In general, a long term lease is more 'hands off' for the landlord and the tenant will maintain and repair the property.  The lease agreement will probably also contain a rent review clause, possibly with rent rising automatically each year.  If there are shared parts of the property then there may be service charge payable by the tenant.

In comparison, a short term commercial lease will probably:

  • not have a rent review clause - the rent remains fixed for the entire term
  • require the landlord to maintain and repair the property
  • not have a service charge.

Registering long commercial leases

Any lease on a commercial property for more than seven years needs to be registered with the HM Land Registry.  The landlord is responsible for registering the lease. The lease agreement also has to contain certain prescribed clauses. You can find out more about registering commercial leases at the HM Land Registry website.

FRI leases

An FRI (full repairing and insurance) is a long term commercial where it is the tenant’s responsibility to repair, insure and maintain the internal, structural and external parts of the property.  You will be responsible for maintaining the property to a 'tenantable' standard.

Whatever damage arises, you will be responsible for repairing the property even if the damage is caused by negligence of the landlord or by a problem unknown to either party.  The only situation where you might avoid liability is if the landlord has insured against the type of risk that caused the damage.

If you’re happy to enter into a FRI lease then it would be wise to have a structural survey of the building (including the roof) done before signing the lease.  Then you will, at least, be aware of any existing structural problems that may require regular maintenance or repair.  Of course, the property needs to be of 'tenantable' standard before you take on responsibility for its maintenance.

Landlord and Tenant Act 1954

The Landlord and Tenant Act (LTA) gives the tenant the legal right to renew a commercial lease contract on 'similar' terms when the initial term ends.  It doesn’t apply to leases of less than six months.

This doesn’t mean that you can stay in the property for as long as you like under the initial terms.  If the landlord wants to end the tenancy at the end of the lease then there is a strict process for doing so.  The starting point is the landlord issuing you (the tenant) a Section 25 notice.

Alternatively, at the end of the tenancy you can request a new tenancy by sending the landlord a Section 26 notice containing details of your proposal.  If the landlord opposes renewing the lease then he has to follow the correct process which includes serving you with a counter notice setting out why a new tenancy will not be offered.

The best case scenario, of course, is where you and the landlord agree on what course of action to take at the end of the initial tenancy.

Opting Out of the LTA

The landlord may suggest, prior to signing the initial lease agreement that you opt out of the LTA.  This means that you give your statutory right to apply to the court for an extension when the lease comes to an end.  If you’re not sure whether or not this is right for you and your business then you would be wise to seek legal advice before signing a commercial lease.

If you do agree to opt out then the landlord must follow a specific, strict procedure using prescribed notices.  The lease agreement will also need to contain appropriate clauses.

Regardless of whether or not you have opted the LTA, the landlord still has the right to end the lease under certain circumstances such as:

  • damage to the property,
  • non-payment of rent, or
  • you having broken other terms of the tenancy agreement.

Drafting a commercial lease

The best starting point, as with any legal contract, is for both parties to agree and understand the terms.  Commercial leases cover a wide range of issues and can be quite complex. Unlike residential tenancy agreements, it is normal practice for the two parties to negotiate terms prior to the contract being drafted.  Sometimes, at considerable length.

A commercial lease agreement doesn't have to be drafted by a lawyer, but it often is.  We offer template commercial lease agreements for both short and long-term leases.  The landlord usually takes responsibility for drafting and presenting a lease agreement to the tenant, but there's no legal reason why you (the tenant) cannot offer your own agreement.

If you're unsure about any aspect of signing your first commercial lease then it's important to see a solicitor early on.  A solicitor can provide valuable advice and assist in negotiating terms.

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