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A commercial lease agreement is one of the most significant financial commitments your business will make. The terms you agree to will affect your finances, flexibility and legal obligations for years to come.
Unlike residential tenancies, commercial leases have minimal statutory protection in the UK. The terms you negotiate at the outset are critical. A poorly reviewed lease can lead to unexpected liabilities, restricted growth or costly disputes.
Once you’ve signed Heads of Terms, it can be difficult to make changes.
If you’re unsure about any of the legal implications, it’s worth getting advice before you sign. Early guidance can help you avoid issues later, from repair obligations to break clauses.
This guide explores the key clauses requiring careful scrutiny in any commercial lease agreement, explaining what to look for and why these provisions matter.
Many business owners underestimate the complexity of commercial lease agreements. These documents are often dense, technical and full of legal terminology that can obscure significant obligations or risks. A commercial lease solicitor brings expertise in property law, negotiation skills and the ability to identify potential pitfalls that could prove costly in the future.
Your solicitor will:
When considering the potential costs of disputes, dilapidation claims or being locked into unsuitable premises, the investment in professional legal advice represents exceptional value. At RLK Solicitors, our commercial property team has extensive experience reviewing and negotiating commercial leases across various sectors.
The lease must clearly define the extent of the property you’re leasing – known as the “demise”. This description should include precise measurements, boundaries and any shared or common areas. The demise determines not only what space you can exclusively occupy but also the extent of your repair obligations.
For instance, does your demise include just the internal space of a unit, or does it extend to external walls, the roof or shared structural elements? This distinction becomes critical when considering repair covenants, particularly in a full repairing and insuring lease.
Tenants should ensure the demised premises are suitable for their intended use and that any necessary parking spaces, storage areas or access rights are clearly documented. Ambiguity in the demise clause can lead to disputes over responsibility for different parts of the property.
The lease term is the duration of your commitment to the property. Commercial leases typically range from short-term agreements of three to five years to longer arrangements of 10, 15 or even 25 years. The length of the term affects your business flexibility, rent review frequency and exit options.
A break clause provides either party with the option to terminate the lease early, usually after giving notice of a specified period – commonly three or six months. Break clauses are invaluable if your business circumstances change, allowing you to exit before the term expires without breaching the lease.
However, break clauses often come with conditions that must be strictly complied with, such as:
Even a minor breach of these conditions can render the break clause invalid, leaving you bound to the full term. A commercial lease solicitor will scrutinise break clause conditions to ensure they’re achievable and advise on compliance as the break date approaches.
The rent clause sets out the initial rental amount and payment frequency (typically quarterly in advance). Equally important is the rent review mechanism, which determines how and when the rent can be increased during the lease term.
Common rent review methods include:
Market rent reviews: The rent is reviewed periodically (often every three or five years) to reflect the current market rate for comparable properties in the area. These reviews typically include an “upwards only” provision, meaning the rent can increase but never decrease, even if market conditions have deteriorated.
Index-linked reviews: The rent increases in line with a specified index, commonly the Retail Price Index (RPI) or Consumer Price Index (CPI). This provides more certainty but may result in rent increases even when market rents have fallen.
Fixed increases: The lease specifies predetermined rent increases at set intervals.
Tenants should carefully consider the rent review mechanism and seek to negotiate terms that provide some protection against excessive increases. For instance, you might negotiate a cap on index-linked increases or argue for an “upwards and downwards” market rent review that reflects true market conditions.
Understanding what happens when a contract is breached, including lease agreements, can help you appreciate why precise rent payment terms matter.
One of the most significant obligations in many commercial lease agreements is the repair covenant, particularly in what’s known as a full repairing and insuring lease (FRI lease). Under a full repairing and insuring lease, the tenant assumes complete responsibility for all repairs, maintenance and insurance of the property, including structural and external elements.
This is important to understand: under an FRI lease, you’re typically obligated to “keep” the property in repair, which legally means you must “put” it into repair if it isn’t already. This means you could be liable for pre-existing disrepair—defects that existed before you took occupation.
A full repairing and insuring lease typically requires the tenant to:
The financial implications can be substantial, particularly for older buildings or properties in poor condition. At the end of the lease, landlords commonly serve a schedule of dilapidations detailing all required repairs, which can result in six-figure claims.
If you’re entering into a full repairing and insuring lease, your commercial lease solicitor should negotiate for:
A schedule of condition: This photographic survey documents the property’s state at the lease commencement. It limits your repair obligation to maintaining (but not improving) the property’s condition as recorded in the schedule. This is perhaps the single most important protection a tenant can secure.
Exclusions: Try to exclude certain elements from the repairing obligation, particularly if they’re in poor condition. For example, you might negotiate to exclude an old roof or specific structural elements.
Limitations on the scope: Ensure the demise clearly defines what you’re responsible for repairing. In multi-let buildings, structural repairs might be covered through a service charge rather than direct tenant obligation.
Insurance damage exclusions: Confirm that you’re not required to repair damage caused by insured risks (such as fire or flood), as this should be covered by the insurance policy.
Commercial property disputes often arise from misunderstandings about repair obligations. If you find yourself facing a dilapidations claim or other property dispute, our commercial property litigation solicitors can provide expert guidance.
In multi-let buildings, landlords typically operate a service charge to recover costs for maintaining common areas, providing services and insuring the building. Unlike residential service charges, commercial service charges have no statutory regulation requiring reasonableness.
Your lease should clearly set out:
Tenants should negotiate for transparent accounting procedures and the right to challenge unreasonable costs. Consider requesting a cap on service charges or at least on specific elements like management fees.
Vague service charge provisions can result in unexpectedly high costs, particularly if the landlord undertakes extensive works or recovers disproportionate management fees.
The permitted use clause defines what business activities you can conduct from the premises. This is typically defined by reference to the Use Classes Order or by specific description.
A narrowly defined use restricts your operational flexibility and can affect the property’s marketability if you later wish to assign the lease. For example, if the permitted use is restricted to “use as a coffee shop”, you couldn’t change to a restaurant without the landlord’s consent, which they might refuse or grant subject to conditions.
Tenants should negotiate for the broadest possible use that the landlord will accept. Rather than “coffee shop”, you might seek “use as a café, restaurant or other Class E use” (using the current Use Classes Order).
The permitted use also impacts rent reviews, as a restrictive use covenant can depress the property’s market rental value, potentially working in your favour during reviews.
Alienation clauses govern your ability to transfer your interest in the lease to another party. These provisions are critical for business flexibility, particularly if your circumstances change or you wish to sell your business.
Assignment involves transferring the entire lease to a new tenant, who takes over all your rights and obligations. Most commercial leases permit assignment but subject to landlord’s consent, which must not be unreasonably withheld.
However, landlords typically impose conditions, including:
Authorised Guarantee Agreements (AGAs): You may be required to guarantee the incoming tenant’s performance until they assign the lease to someone else. This means if your assignee defaults on rent or other obligations, the landlord can pursue you for payment.
Financial and business standing requirements: The incoming tenant must demonstrate sufficient financial strength and relevant business experience.
Landlord’s costs: You’ll typically bear the landlord’s reasonable legal and surveying costs in assessing the assignment.
No rent arrears or breaches: You must be fully compliant with all lease covenants.
The AGA requirement means assignment doesn’t completely sever your connection to the property. Your commercial lease solicitor should negotiate to limit AGA obligations where possible and ensure conditions for consent are reasonable and clearly defined.
Subletting (or underletting) involves granting a new lease to a third party while retaining your own lease obligations to the head landlord. This can be useful if you need to reduce your space requirements or generate income from surplus areas.
Leases often permit subletting of the whole premises but prohibit or restrict subletting of part. Landlords typically require:
Subletting provides flexibility but adds complexity, as you become a landlord to your subtenant whilst remaining a tenant to your head landlord. You’re still liable for all head lease obligations even if your subtenant fails to comply.
Some leases prohibit sharing occupation or granting licences to third parties, even within group companies. If your business model involves co-working, franchising or allowing affiliated entities to use the space, ensure the alienation clause permits this.
Understanding your rights regarding disputes in business can help when alienation restrictions create conflicts with business needs.
Alteration covenants govern your ability to modify the premises. These provisions typically distinguish between structural and non-structural alterations, with different consent requirements for each.
Structural alterations: Changes affecting load-bearing walls, the building’s structure or external appearance usually require landlord’s consent, which may be given subject to conditions such as planning permission, building regulations compliance and reinstatement at lease end.
Non-structural alterations: Internal, non-structural changes might be permitted subject to consent not to be unreasonably withheld, or in some cases, might not require consent at all.
Tenants should ensure the lease allows reasonable alterations necessary to fit out the premises for their business use. Consider negotiating that certain alterations, once consented to, need not be removed at lease end, particularly if they enhance the property’s value.
In a full repairing and insuring lease, insurance obligations typically require the tenant to:
Crucially, review the provisions regarding insured damage. The lease should clearly state that if the premises are damaged by an insured risk, rent ceases until reinstatement is complete, and you’re not liable for repairs that should be covered by insurance.
Watch for provisions requiring you to insure against uninsurable risks or to pay increased premiums due to the landlord’s or other tenants’ activities. These should be resisted or limited where possible.
Under the Landlord and Tenant Act 1954, commercial tenants have automatic security of tenure, meaning they have the right to remain in the property at the end of the lease term and to request a new lease on similar terms.
However, landlords often require the lease to be “contracted out” of the 1954 Act protections, removing this automatic renewal right. Contracting out gives the landlord certainty that they can recover the property at the end of the term but removes your security.
Whether you agree to contract out depends on your circumstances:
Favour contracting out: If you’re unsure about long-term premises needs or want flexibility to relocate
Resist contracting out: If you need long-term security for your business location and want protection against being forced to move
The contracting out process requires specific notices and procedures to be followed before the lease is completed, so this must be addressed early in negotiations.
As the lease approaches its end, the repair covenant comes into sharp focus. Landlords commonly commission a schedule of dilapidations—a detailed list of all disrepair and breaches of covenant—and present this to the tenant along with a costed estimate for remedial works.
Dilapidations claims can be substantial, particularly under a full repairing and insuring lease. The landlord may seek:
Tenants have various defences to dilapidations claims, including:
Section 18 of the Landlord and Tenant Act 1927: Damages cannot exceed the diminution in the property’s value
Supersession: If the landlord intends to demolish or substantially refurbish the property, they cannot claim for repairs that would be superseded
Schedule of condition: Limits liability to the condition recorded at lease commencement
Managing dilapidations requires strategic planning throughout the lease term, particularly in the final years. Consider engaging a building surveyor to undertake regular condition surveys and budget for end-of-lease obligations.
If you’re facing a dilapidations claim or other commercial property dispute, our litigation team can help you achieve a pragmatic resolution.
Many commercial leases, particularly for new or smaller businesses, require a third party (often a director or principal of the tenant company) to guarantee the tenant’s obligations.
Guarantor covenants make the guarantor jointly and severally liable for all lease obligations, including rent, service charges, repairs and dilapidations. This personal liability can extend throughout the entire lease term and, in some cases, even after the tenant assigns the lease.
If you’re asked to provide a guarantee:
Directors should be particularly cautious about providing guarantees that continue beyond assignment, as they could become personally liable for a successor tenant’s defaults.
Forfeiture clauses give the landlord the right to terminate the lease and regain possession if the tenant breaches key covenants. Common triggers include:
The forfeiture clause should set out:
Tenants have some statutory protections, including the right to apply for relief from forfeiture in certain circumstances. However, forfeiture represents a serious risk that could force your business out of the premises with potentially devastating consequences.
Ensure you understand what actions could trigger forfeiture and maintain strict compliance with all lease covenants. If you receive a forfeiture notice, seek immediate legal advice.
Understanding the pitfalls of DIY litigation is particularly relevant when facing forfeiture proceedings, where time is of the essence and errors can be catastrophic.
In addition to rent, tenants in multi-occupancy buildings typically contribute to building operating costs through a service charge. The service charge clause should detail:
Unlike residential leases, commercial service charges aren’t subject to statutory reasonableness requirements, so the lease terms are essential for protection. Negotiate for transparent procedures, spend caps and the right to withhold payment pending resolution of disputes.
A commercial lease is a major commitment with lasting implications. Every lease is different, so professional advice is essential before signing.
At RLK Solicitors, our commercial property team reviews and negotiates leases for landlords and tenants, ensuring your agreement supports your business goals.
Whether you’re negotiating, reviewing terms, or resolving a lease issue, we’re here to help. Contact our team today to discuss your requirements.
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