Navigating Business Leases: Procedure, Terms, and Drawing Up a Lease
What is a commercial/business lease?
A business lease is a legally binding contract made between the owner of the property and a business who wants to use the property for their operations. This forms a landlord-tenant relationship, where the property owner is the landlord and the business is the tenant.
The more technical name for a “business lease” is a “commercial property lease”, although you will often find the two terms used interchangeably to describe any non-residential lease.
Drawing up a business lease?
It is advisable to seek independent legal advice when drafting or reviewing a lease to ensure you are sufficiently protected.
A commercial property lawyer will review the terms of the lease before you agree to enter into it. They will ensure it is sufficient to protect your particular interests as a tenant and does not contain any onerous clauses. They will achieve this by conducting various searches, enquiries and investigations on your behalf. Your solicitor should also explain your obligations under the lease (rent, maintenance, insurance etc.).
As a tenant, you will usually be the party responsible for covering any of the legal and other costs for the drafting of the lease agreement.
It is also advisable for tenants to obtain (at their own cost) a building survey. This has the dual purpose of uncovering structural issues with the property. This is particularly important for a tenant to know if they are negotiating to enter into a full repairing lease. A full repairing lease is where the tenant is financially responsible for the repairs and maintenance of the property.
Some Important Terms in a business lease
Term
This is the fixed period of time for which it lasts - occupancy continues on a periodic basis after the fixed term has come to an end.
The term of a lease will be the subject of negotiation between tenant and landlord. A tenant will typically prefer a shorter term, so that they have the flexibility to vacate, should their business circumstances change.
It is standard for the term of a lease to be at least 5 years for office space and at least 10 years for retail space. As a tenant, it may be worthwhile negotiating for a break clause, to enable yourself (or the landlord) the option to bring the lease to an end before the term has expired.
In the absence of a break clause, there are three main circumstances when a lease may be terminated early:
You are able to pass the lease on to a 3rd party - the landlord may require you to act as guarantor for this 3rd party;
The lease entitles the tenant to sublet and collect rent themselves from a 3rd party; and/or
A landlord gives permission to end the lease early.
Security of Tenure
The Law and Tenant Act 1954 (“LTA 1954”) provides statutory rights for the benefit of tenants, which are collectively referred to as “security of tenure”. A business tenancy covered by the Act will continue on the same terms even after the fixed term has come to an end. The LTA 1954 will automatically apply to non-residential leases, (including business leases) unless the landlord and tenant have agreed to “contract out” of the relevant sections. The tenant effectively has three options:
Do nothing and remain in the property, which would mean the terms of the existing lease continue and the tenant continues to pay the same rent. This is known as “holding over”;
Serve a section 26 Notice on the landlord, requesting a new lease; or
Vacate the property and return the keys to the landlord as a statement of intent.
Rent
The lease will need to stipulate the amount of rent payable, the frequency or dates of payment and also the method of payment. Tenants should take care to observe any penalties which the landlord can impose for late payment of rent.
The most common factors which will affect the rental value of commercial property are as follows:
Location;
Condition of premises (state of repair);
Size;
Lease restrictions; or
Competition within the wider property market.
Landlords can offer an initial “rent-free-period” to commercial tenants as an incentive to enter into a lease of their property. It could also insinuate that the property is in need of extensive renovation at a cost to the incoming tenant.
Longer leases commonly contain a provision for rent to be increased at regular intervals, such as every three or five years - a “Rent Review”. Often, these operate on an upwards-only basis, meaning rent will not decrease if market values ever fall.
A review date is usually set by reference to an anniversary from the term commencement date.
The most common basis for reviewing the rental value is the “open market revaluation” (“OMRV”). This requires the parties to agree upon what rent the premises would achieve on the open market if newly let.
Procedural Aspects
A lease is prepared in two identical parts. The actual lease is executed by the landlord and given to the tenant. A counterpart is then executed by the tenant and given to the landlord.
A “land transaction return” must be submitted to HMRC following completion. Stamp duty land tax is payable on any premium paid for the grant of the lease and on the rent reserved by the lease.
On completion, the tenant will pay the rent due in advance for the period from the completion date to the next rent payment day under the lease.
Planning law dictates that only certain types of business may be run from particular premises - permitted use. Every commercial property has a classification code (A1, C2 etc.) which restricts the type of business which may be operated from them. You will need to request planning permission from your local authority for “change-of-use” and obtain your landlord’s consent to any change, if your business does not fall within the categories that apply to the existing Use Class.
Author: Edward Bennett-Gibbon -
Author: Edward Bennett-Gibbon -
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DISCLAIMER
This article has been written by law students for the sole purpose of providing informative insight. The information in this article is intended for educational purposes only and does not constitute legal advice, nor should the information be used for the purpose of advising clients. You should seek independent legal advice before relying on any of the information provided in this article.
Sources
Net lawman, 'An introduction to business leases' (Net Lawman, 01 September 2022) <https://www.netlawman.co.uk/ia/business-property-leases> accessed September 2022
Julia Watts, 'Signing a commercial lease: A guide to renting small business premises in 2023' (Startups, 21 December 2022) <https://startups.co.uk/premises/legal/commercial-lease/> accessed June 2023
Clare Harris and Anne Rodell, Property Law and Practice (20th edn, CLP 2020)
Ika Částka, 'What is a Full Repairing Lease?' (Wilson Browne Solicitors, 14 January 2020) <https://www.wilsonbrowne.co.uk/news/business/what-is-a-full-repairing-lease/> accessed 28 July 2023
Anna Svensson, 'Commercial Lease – What is Security of Tenure?' (Herrington Carmichael Solicitors, 27 September 2021) <https://www.herrington-carmichael.com/commercial-lease-what-is-security-of-tenure/> accessed 28 July 2023