To sign or not sign: considerations for tenants before entering into a new commercial lease

Entering into a new commercial lease can be an exciting but daunting time for a commercial tenant.

Before signing on the dotted line for your commercial premises, there are some very important aspects to consider and check in your commercial lease, including:

1. Am I permitted to make alterations to the premises to suit my business needs?
2. What am I permitted to use the premises for?
3. Does my lease include all necessary rights for the use and enjoyment of the premises?
4. Do I have to pay a service charge as part of my lease?
5. What repairs will I be expected to undertake to the premises?
6. What is the length of the term of the lease?
7. When will the rent be reviewed and on what basis?
8. Is the premises covered by the landlord’s buildings insurance policy under the terms of my lease?
9. Can I transfer my interest in the lease or sublet the premises?
10. Is there a break clause in my lease allowing me to terminate the lease early?

All of these areas are covered in this article, including what to do if you have already entered into a commercial lease and are facing issues.

Am I permitted to make alterations to the leased premises to suit my business needs?

Your lease should contain provisions about the making of alterations to the premises. In most leases, internal non-structural alterations are permitted whereas external and/or structural alterations are prohibited.

What am I permitted to use my premises for?

Your lease will set out exactly what the premises can be used for. It is important to consider this against your current and predicted business operations, assessing whether the premises will be suitable for your needs now and in the future. You should be aware, however, that just because a particular use is permitted by the terms of your lease, this does not guarantee that the premises are authorised under planning law for that use. Indeed, most leases contain a landlord’s disclaimer in this regard.

Does my lease include all necessary rights for the use and enjoyment of the premises?

When reviewing the lease, it is important to check that all appropriate rights are included and that the landlord has a lawful right to grant them. This is especially important if the premises are part of a larger building or estate owned by the landlord. Examples of rights you may require are the right of access to, and egress from, the premises, the right to use and connect into services, the right to use a bin or cycle store etc.

Do I have to pay a service charge as part of my lease?

Before entering into your lease, you should check whether a service charge will be payable and if so, how much this is and what this covers. The service charge should then be budgeted into your lease costings and you should consider the cost-effectiveness of the letting as a whole. Some landlords will agree to cap the service charge so that a tenant can budget without fear of being billed for any abnormal or excessive service costs.

What repairs will I be expected to undertake on the premises?

This depends on whether or not your lease is a full repairing lease. With a full repairing lease, the tenant can be responsible for not only keeping the premises in good repair but also for putting the premises in good repair where they are not so at the commencement of the lease. For this reason, most tenants seek to limit their repairing liability by reference to a schedule of condition. This can simply be a series of photographs evidencing the state of repair of the premises at the commencement of the lease or a full report prepared by a surveyor. The purpose of a schedule of condition is to evidence the state of repair of the premises at the commencement of the lease, as this will set the benchmark for repairs going forwards. The tenant must only keep the premises in the same state of repair and condition as evidenced by the schedule of condition, rather than put the premises in any better or improved state of repair and condition.

The repairing obligations are often the most contentious aspect of a commercial lease negotiation as the cost to the tenant at the end of the lease with regards to any dilapidations can run into thousands of pounds.

What is the length of the term of the lease?

It is important to ensure that the length of your lease suits your business needs. Once you sign the lease, you will be obliged to comply with its terms throughout its duration. You must make sure this is commercially viable and beneficial to your business. A break clause (as discussed below) can give some flexibility. A lease term of three, five or 10 years is common. The level of rent payable should reflect your length of commitment to the premises. For instance, a lease of 10 years with no break clause should attract a lower rent than a 10-year lease containing a tenant’s break clause.

When will the rent be reviewed and on what basis?

Make sure your lease clearly identifies how much you will be expected to pay in rent and when this rent will be reviewed (if ever).  There are a number of mechanisms for dealing with rent reviews, the most common being a fixed rent review (where the rent is known throughout the lease), an open market rent review and a review linked to inflationary increases.  There are advantages and disadvantages to each.

Is the premises covered by the landlord’s buildings insurance policy under the terms of my lease?

The usual position is that the landlord insures the premises and recovers the cost from you. You should make sure that in the event of any loss and/or damage occurring to the premises during the term of your lease, you are covered by the terms of the landlord’s policy of insurance.

Can I transfer my interest in the lease or sublet the premises?

Make sure that your lease covers whether you can transfer (assign) the lease and/or sublet the premises.  For optimum flexibility, the lease should allow you to do both.  For companies who are part of a group of companies, you should also check that the lease allows you to share occupation with another group company.

Is there a break clause in my lease?

Your landlord may agree to include a break clause in your lease, allowing you to terminate your lease early due to a change in business circumstances. Your break clause should be drafted correctly to ensure the landlord cannot insist the lease remains in place due to a technicality. Many tenants get caught out by this.

Check and check again!

Making sure your lease is suitable for your business will not only ensure you can fully use and enjoy the premises, but will also ensure that you have the correct protection in place should you experience any issues during, or on termination of the lease.

Are you already in a commercial lease and facing issues?

Leases are often highly complex documents so it is perhaps not surprising that disputes can sometimes arise.

Our Property Dispute Resolution team has vast experience in developing bespoke solutions to disputes regarding commercial premises and has acted for both landlords and tenants in a wide range of cases.