Renting Commercial Property in the United KingdomLast updated 21 February, 2022
In a shifting political and economic landscape, renting and buying commercial property has never been a bigger decision for business owners and investors. Information on the property market is available in broad and plentiful mediums - but the very thought of filtering through it all is time-consuming, and the process itself can be lengthy and complicated. Making the right decision for your business is important, so whether you are considering renting a space for your start-up company - or you're a veteran property investor - we have compiled a comprehensive guide to give you an understanding of the basics and processes involved, and break down the nooks and crannies of signing any business lease, to set you off on the right path.1
What is Commercial Property, and what is a Business Lease?
Commercial property (also known as commercial real estate) are buildings or plots of land used for business activities. It mainly refers to properties that generate a profit, such as retail stores, offices and manufacturing shops, and more. The classification of a commercial property has implications for how it is financed and the laws that apply to it. If you are looking to rent, the world of commercial property renting is vast and there are a lot of factors to take into consideration. At any point you're going to need to reserve a space to run your business, and it can take a number of months (even years) before you find what you're looking for.
Once you've found your space however, there's a final step - signing the lease.
A business lease (or a commercial property lease) is a legally binding contract made between you (the tenant) and the landlord or building owner. The contract gives you the right to use the property for a commercial activity for a period of time, in exchange for rent paid to the landlord.
This is a huge step in the leasing process. The lease is a crucial document that you must be able to read and understand as it lays out the rights and responsibilities you will take on throughout your leasing period. This is where your research into commercial property renting is key. Educating yourself on what is involved and carrying out the necessary procedures and talks could be the difference between a good deal with your landlord - or something potentially problematic.
So before you take out your pen and sign the dotted line, there are a few things to concern yourself with before you think about renting.
Elements of a Commercial Property Lease
When you sign for a business lease, there will be provisions outlined in the agreement that highlight your rights as a tenant and your landlord's obligations. You might expect this - however, you will be handed a 40+ page document that may also contain details on ‘other costs', an important category that must be reviewed carefully. Do not assume that because it looks formal that it contains no mistakes. A commercial lease offers less government protection than a residential lease, and they can last anywhere from five to ten+ years. So you want to be able to adequately protect yourself and have a clear idea of what you can and cannot do.
Naturally, your responsibilities as a tenant are governed by law, but any specifics depend on details stated in your lease. These are some of the basic elements to look out for before signing:
Type of Property:- Describes exactly what is being leased and how the property is identified in legal transactions (in the form of an address). A floor plan describing premise boundaries is included, along with descriptions of any fixtures (toilets, carpeting, etc) and chattels (desks, blinds and curtains, etc)
Tenancy Renewal:- The length of your commercial lease agreement. This can include:
Automatic Renewal - the lease will continue indefinitely until either you or your landlord give termination dates. The renewal period can be weekly, monthly or yearly.
Fixed End Date - there will be a set date when your lease agreement ends. The landlord cannot amend any of the rental terms during this period, unless they have specifically reserved the right to do so and you have agreed to this change. You are required to remain in the property for the duration of the lease and no notice is needed at the end. You may renew the tenancy once the fixed period ends.
Periodic - your tenancy may automatically roll into a periodic one if your landlord is happy for you to stay in the premises. This renews weekly, monthly or yearly until either party gives notice. Rent, or changes in the lease terms, can be amended as long as the landlord gives proper notice.
Rent Payable:- Rent is normally paid in advance every quarter, but there can be flexibility around this:
Base Rent - the minimum amount payable set out by the lease agreement.
Percentage Lease - A base rent plus a percentage of your monthly or annual gross income. This mostly applies to retail businesses in shopping centres/malls.
FRI Lease - 'Full Repairing and Insuring Lease', you will be responsible for anything associated with maintenance, repairs and insurance costs.
Net and Gross Rent Leases - A net rent lease means tenants will pay a specific amount towards utility bills, maintenance and property tax. There are three levels of this type of lease; Single lease, meaning you are responsible for rent and tax; Double (the most common), which includes premiums, and Triple, where all costs fall to you. The opposite of this is the gross rent lease, where the landlord will pay these expenses to operate and maintain the premises, including insurance, maintenance and property tax.
Signing Incentive - the landlord may include a concession to encourage you to sign, such as a month's free rent.
Rent structure is probably the most basic and important element in a business lease. Determining how much you pay per month, as well as any annual increases, allows you to manage your budget and have a clear idea of how long you can stay in the business space.(Rent Reviews and Guarantors can also be included in a business lease - please refer to Step 2 in “How to Rent a Commercial Property”).
Security Deposit:- An initial payment usually equal to one month's rent, but can be up to three months. If you fail to pay rent, or any damage is caused to the property, the landlord will use this to recover the money. Deposits are returned to you, minus any deductions for damages, at the end of your tenancy.
Condition Report:- A detailed inspection carried out before the start of a commercial lease. Any damage pre-existing in the property (whether or not it is caused by you) is recorded. The landlord will compare this report to the current state of the property at the end of your lease. It is worth taking photographic evidence of any damage during the first report to avoid becoming liable for it.
Subletting:- Allows you to rent out part or all of the property to a third party. They will take on the necessary responsibilities, but as the original tenant you are still liable for rent and premise conditions. This can be a complicated process and you will need to draft a sublease agreement that everyone agrees to.
Termination of Contract - Break Clause:- This allows you to terminate the lease early without penalty. For example, you may agree to a 20 year tenancy. The clause will allow you to opt out after four years if a flexible clause has been agreed upon.
Knowing the obligations and potential liabilities you may be taking on will give you some clarity moving forward. The 2007 Code for Leasing Business Premises in England and Wales provides the framework for how the landlord should operate during a tenancy agreement. This only acts as guidance and does not guarantee the landlord will comply with the terms listed in the code. This version of the code addresses laws in England and Wales, but states that its intent should address the entirety of the United Kingdom. The code is available to read here: The Code for Leasing Business Premises in England and Wales 2007
Now that we've established some common lease and term structures, let's look at some of the less obvious ones:
|How your lease will be transferred if you want to leave the business space. Subletting is an option, or assignment of the lease, which means letting the entire property to a new tenant
|You may be required to sign personal guarantees when signing a commercial lease. This usually means you are personally responsible for aspects of the lease if your business defaults (We recommend legal guidance here).
|A clause stating that in cases of the tenant staying longer in the premises than for the intended duration, landlords can increase the rent per month. This can result in you paying huge sums of money after your allotted time.
|A requirement that you do not cause any disturbance (such as noise or scent pollution) whilst occupying the commercial property, or for any neighbouring properties.
The Difference Between a License and a Lease?
Unlike a lease, a license is a relatively straightforward and contractual permission to occupy property. They are usually flexible, short-term agreements, normally for six months, non-exclusive and terminable at short notice. A license agreement does not provide security of tenure, so the licensee occupies the entirety of the property at the pleasure of the licensor. There are still obligations you will need to satisfy, but generally a tenant has more rights than the licensee in this case.
There are some scenarios where taking out a licence can seem more suitable for your business needs. They can be granted quickly and cheaply. They require low initial costs (perhaps a deposit equivalent to one month's rent), whereas a lease can offer more stability, but cost significantly more. Leases are more associated with commercial properties. The licence may seem more appropriate if a short-term occupation is needed. For example, if you are a retailer who needs to set up shop throughout a holiday period (such as Christmas or Halloween), a temporary license would be more suitable.
The goal is to be confident in the property you have chosen. You are making a big commitment, and you will need to visualise seeing the business grow and run operations smoothly from your new space. Many businesses choose to rent commercial property rather than commit to buying.
We have listed the pros and cons of renting commercial property for you:
|Flexibility - if your business continues to grow and thrive in the future, you will have the choice to relocate at the end of your lease. There is space for negotiations with your landlord for the duration of your tenancy agreement.
|Rent Reviews - your landlord will have the right to review and raise the rent payable at agreed intervals. You may also need to budget for a service charge.
|Financial Freedom - upfront costs for renting commercial property is relatively low, but generally involves less capital than buying. Freed-up money can be invested in your business development to meet ongoing demands, and you won't lose money if the property value decreases. You also won't have to buy Capital Gains Tax, unless selling the lease for a premium.
|Market Conditions - you won't benefit if the property prices increase. Renting commercial property can come with security and maintenance costs, such as a personal guarantee or liability for environmental expectations.
|Interest Rate Protection - rent may increase after review, but you won't have a mortgage affected by interest rates.
|Neighbouring Businesses - In the case of opting for a multiple occupancy property (a building that holds several businesses) you won't have any control as to who you get for a business neighbour.
|Less Maintenance - you may have less responsibility for maintenance costs (this is dependent on terms agreed with your landlord). Responsibility for internal repairs and maintenance may fall on you, but external coverage is more likely to be your landlord's responsibility (be aware you may still have to contribute a service charge as agreed upon in your rental agreement).
|Making the terms - there will be a lot of to-ing and fro-ing when negotiating terms of the lease, but renting will allow you to discuss them and align them closer to your business needs.
Seeking Expert Help
You may find you are faced with all, or a combination of these hidden clauses. Once you have signed, you could be responsible for extra costs and liabilities, such as repairs, maintenance, service charges, environmental expectations, risk of exposure, or find yourself trapped in an inflexible agreement overall. As you will be entering a business partnership, researching the landlord should help you figure out an idea of who they are, what their financial situation is and whether they are a good match for you. This aspect of research is often overlooked and you could end up renting from a less accommodating landlord.
While these are elements to be aware of, it should be noted that everything here can be negotiated. You will need good negotiation skills. Don't hesitate to enter negotiations either. Landlords can be reluctant to discuss discounts, but it is worth it if you want the best deal possible for your business. You may think you have the gift of the gab - in that case, good for you - but general advice dictates seeking out a professional early or hiring a solicitor to negotiate on your behalf. Some businesses do proceed without seeking any legal advice, particularly when they are agreeing to more flexible commercial property terms. Having a legal advisor, or a building surveyor (or both) and having them check a commercial lease could be the difference between a great deal for you and your business - or something very inconvenient.
“Forewarned is Forearmed”
- a phrase used to say if you can identify a problem or situation beforehand, it will give you a tactical advantage to deal with it
The right professional will have the necessary experience and expertise to secure you the best deal - this could mean securing discounts on certain utilities, or removing a few extra costs altogether. You may be a start-up company, but even the largest organisations who have moved premises will take professional/legal guidance before engaging in talks, or making any decisions.
Each case will vary depending on your ability to discuss terms, but this way you can protect your business and have time to focus on the thing you do best - running your business.
Typical hourly rates will depend on the level of expertise and years of experience. The firm's location will also play a factor in determining prices. Broadly speaking, areas with higher property prices (such as in London) means more expensive rates. Smaller towns in Northern England or in South Wales will be slightly cheaper. It is a good idea to inquire about general fees/rates in advance when seeking professional help. More information and exact costs in the UK can be found here: How much does a solicitor cost?
Now that you are prepared (forewarned and forearmed), we can begin our step-by-step guide in...
How To Rent a Commercial Property
Step 1: Finding the Right Commercial Property for your Business
Signing any commercial property lease is a massive step towards the development of your business. Preparation is key in this regard - but there is a lot of property evaluation and planning to be prepared for.
Which type of Commercial Property are you Looking for?
There are a lot of questions to be asked when searching for a new business space. First and foremost, you should allow yourself plenty of time to evaluate the suitability of the premises, and for lease terms to be negotiated and agreed upon. There is going to be a lot of discussion anyway and it may take months before any agreements are finalised. You will need a space that fits your business description, as well as look into local property market dynamics, tenant requirements, and even availability.
There are five main categories in the commercial building market, and the use of these properties vary:
|(General office blocks, but can include studios)
|(Stores, shops & shopping centres)
|(Factories & warehouses)
|(Hotels, pubs, restaurants, cafes & sport facilities)
|(Hospitals, medical centres & nursing homes)
How much, or exactly what type of space will you need for your business? If you are opening a restaurant (which would fall under leisure), you will need to consider aspects such as how many employees can work on site at a given time. If you are looking in cities (such as in London), you may need somewhere close to transport links, like the tube or bus station, so staff can easily commute to work. If you run a delivery service, you will need good distribution networks that may require loading bays or parking facilities. You might anticipate growth for your business, so you may need a bigger space, or you might consider relocation further down the line.
Warehouse facilities are ideal for companies in need of large storage spaces. Whereas office spaces are better for companies that require smaller spaces, but anticipate business growth in the near future.
Choosing the commercial property that fits your business structure will be a profitable investment and smoother operation in the long-term. Of course, having a general feel for the space is a good start, but you should check with the local authority that the designated use of the building does not conflict with your intended use.
- Delivery Facilities
- Parking Facilities
- Staff Facilities
- Broadband Coverage
Space and On-Site Facilities
In cases of opening a new office space, one of your concerns may be calculating how much space you are going to need. There is no definitive answer to this question, so you will need to plan carefully as this is critical to running your business efficiently. The wrong size can potentially disrupt any operations, so there are some techniques to help you calculate the right size.
Knowing the specific tasks you will be using the office for will help determine the space you need. It's important to have workrooms with enough space for people to get to and from work areas with ease. It is also essential that every room has sufficient height, floor space and unoccupied space for the health, safety and welfare of your employees.
You should ask questions such as:
- How many people do I currently employ?
- Does each employee need an individual desk, or is sharing an option?
- Do I expect staff numbers to grow in the future?
- Will they be executive, administrative or sales staff?
Hot-desking is a workplace system in which desks are used by different people at different times. This is often linked with employee innovation, and to help maximise space efficiency and lessen property risk.
Using a size guide will help you decide on what space you need. More information on business space sizing can be found here: https://www.centaurproperties.co.uk/size-guide
Ensuring great productivity is being produced within the premises is a huge benefit. The location of your new premises will determine what facilities are needed, but this table should give an idea of what is required to provide adequate welfare for your workers:
Sites may also include these additional facilities:
|Waste Management/Recycling Facilities
Be clear about which type of office you need before choosing a business space.
Renovations may be necessary to make the space match what you visualise for it. The right on-site facilities can make an enormous impact on your employees.
The location of your commercial property plays a vital role when deciding. This can be a balancing act as you will want to choose a location that caters to your customer demographic, employees and suppliers. If you are a start-up company, you may want to consider setting up in less well-known areas to save as much money as possible.
Taking into account some of the facility options will help you (see “Space and On-Site Facilities”), but you may need to inspect the property for other factors, such as:
- Transport links to airports, trains, buses and roads
- Congestion charges
- Restrictions in delivery and parking facilities
- Proximity to clients, customers and staff
- Local amenities, such as cafes and shops
- General aesthetic
If you are looking for a restaurant, cafe or shop, you will want to ensure it has a high footfall - this is the number of people (or traffic) entering the premises, an important indicator of how efficient your company is at attracting customers.
If you are seeking a distribution warehouse, you will need to find an area with good transport links. Or if you are searching for office space, you will need a location where staff can easily commute to, such as near a train/tube/bus station or access to a parking facility.
Commercial property is allocated into 'use classes' under the Town and Country Planning (Uses Classes) Order of 1987. The order determines how each of the building types should be occupied and operated. Any commercial activity carried out within these premises must be in line with its planning use, otherwise you may be fined.
Permitted use is key. All commercial leases stipulate a permitted use for the term of the lease. The plans you already have may align with how the building was originally intended to be used for, but any aim to renovate or alter the use of the building may require planning permission from your local planning authority (LPA).
A broader permitted use is preferable, but you should check the property classification system (or ‘use classes') to see which category the building falls into, so that any business you do while in occupation does not conflict with the agreed terms on usage. For more information you can refer to our Different Types of Commercial Property in the UK guide, plus more info is also available here: Changes To The Use Classes Order In England 2020
Defining your Budget
Business owners and property investors wanting to obtain and expand commercial properties know how important it is to have an annual budget. It should be monitored and updated every financial year, and adjusted quarterly where necessary. Having a rough idea of your budget may work against you in the long run, so we recommend having a progressive plan to help maximise your company's value, rather than a snapshot estimate. Having a current view may not demonstrate your plans for the company or use of the property. You will have more ground when negotiating your lease agreement, so take your business goals into consideration before defining how much you are willing to spend.
Step 2: Commercial Property Rental Rates
As rent is the main cost you will encounter, it is advisable to research rental trends and forecasts before you sign. The lease - particularly if it is a long one - may include rent reviews, typically every three, four or five years which can alter the amount you pay over time. It is important to take note that rent can increase as well as decrease, depending on the terms.
Rent Reviews are a mechanism in your lease in which the landlord can adjust the rental rate, based on current market rent.
In a rent review process, the landlord will usually provide a new rent notice based on the assessment of market dynamics. You will have the opportunity to agree or disagree within the set time frame. The landlord must always notify you in advance of any forthcoming changes. There may be a few provisions to take note of. These are commonly:
- Upwards Only Review - the rent stays the same or increases in line with the market rent. This is not always easy to predict
- Retail Price Index Review - mainly linked to inflation and easier to predict
- Stepped Rent Increase - the rent will increase by a set amount on specific dates
As far as rent reviews are concerned, you will find everything in the details. There will be advantages and disadvantages for each of the provisions listed, but understanding the rent obligations in the lease will help you move forward. Rent is normally paid quarterly in advance on March 25, June 24, September 29, and December 25, but landlords are increasingly accepting rent payments on a monthly basis.
Any service charges or insurance is normally billed along with the rent. The rent price might be increased to cover these and may be based on a fixed or proportional basis.
Owners letting a commercial property must provide an Energy Performance Certificate (EPC), giving a rating of the energy efficiency and carbon emissions of the building.
Business rates can often involve additional payments made by other businesses with a high relatable value. You will need to factor in this tax that is paid on non-residential buildings in England and Wales. The rates cover all different kinds of commercial property and are typically paid by tenants.
There are two main factors used to calculate business rates:
- Relatable Value - the open market rental value of the commercial property
- Uniform Business Rate (UBR) - a centrally set multiplier that ensures basic bills rise no more than the rate of inflation
Re-evaluations of the rates tend to happen every five years to reflect any changes in the commercial property market. The most recent has come into effect in England and Wales on April 1, 2017, based on relatable values seen from 2015.
Rates tend to add around 40% to the cost of renting retail shops or offices. Local authorities may charge for parking and waste collection, so be sure to factor in these costs.
In Scotland and Northern Ireland, they handle a separate system called non-domestic rates. The most recent revisions for this were in 2010.
Step 3: Negotiate a Tenancy Commercial Agreement
The commercial lease is a legally-binding contract which sets out the terms and conditions agreed upon by you and your landlord. It offers long-term stability than a standard licence, but leases have become more flexible in recent years and there are a few clauses you can negotiate with your landlord to make the terms more acceptable.
- Rent free periods have become more prevalent
- Break clauses, which give you the option to terminate your contract early without penalty (you should give your landlord two month's notice before exercising this right)
It is important to know the conditions of payment, how to pay your rent, any penalties incurred, and the process for rent reviews.
The Royal Institution of Chartered Surveyors (RICS) advises taking note of what a proposed contract makes on rent reviews, subletting space, assigning the lease, any repairing/decorating obligations and personal guarantees, etc
Most landlords will ask for a personal guarantee if your company is relatively new. You may sign in your personal or company name. BE CAREFUL - signing your name may make you personally-liable and your personal assets vulnerable should the company become insolvent. This also reduces risk to the landlord. Seek legal advice before agreeing to any personal guarantee
The rights of commercial tenants are more limited than those of residential tenants. This may affect your use of the property and have a considerable impact on your business operations if these are not examined thoroughly. You will still have rights in any commercial property agreement, and you need to check that these rights will suit your business requirements. As an example:
If you are a retailer, you would need to ensure that the right of access includes
- Access for deliveries
- The business would be permitted to post significant signage rather than just a small plaque
The lease should also state the extent to which you are (or are not) allowed to make alterations to the premises. Your basic rights under the lease should include:
- Access to the premises
- The benefit of any lighting, heating and cleaning services
- Use of shared facilities, such as toilets or specified parking spaces
- The right to hang signs, such as your name plaque
Commercial tenants may have the protection of the Landlord and Tenant Act 1954, an act which grants security of tenure for occupying tenants under certain leases, whether for residential or business purposes.
Step 4: Agree on an Offer for the Commercial Property Lease
When you have found a property that suits your needs, and you have undertaken the necessary procedures to ensure it is the right space for your business, you will be ready to submit an offer.
Once the landlord has considered your offer, they will either:
a) Accept your offer - at this stage it is recommended to ensure the landlord will not negotiate or offer the property for rental to other third parties. This is known as a lockout agreement, which gives you exclusive rights to proceed with securing the lease for a certain period of time.
b) Decline your offer - try to negotiate further to build a mutually acceptable agreement. It may not just be about price, but other conditions. Completing negotiations in a strict time frame will often work in your favour.
Building Surveys & Schedule of Condition Report
Throughout the stages of finalising the contract, it is recommended carrying out a building survey to ensure awareness of any building defects before you begin your tenancy. A Commercial Building Survey (formerly known as a structural survey) is a practical and detailed report of the overall condition of the property.
In addition to this, you should set up a Schedule of Condition report which will identify and record any defects within the property, the same way you would carry out checks in a residential house. It is normally a written statement along with a photograph for contextualisation. This is required in a few instances:
- As an attachment to a lease
- In order to limit a tenant's dilapidation liability, or in the case of newly refurbished premises, to ensure there is a record of the property's original condition
- In case it is required of the tenant to return the property to its original condition, if any building or remediation works have taken place
The report can be appointed by you, a neighbour or the property owner. Leases are commonly drafted with full repairing or insuring costs. A detailed report drawn up and prepared by an agreed expert will help clearly establish which party should be responsible for covering these. It will also help reduce any service or maintenance costs stated in the lease. The report may give you greater authority in cases of a dispute.
Step 5: Exchange Contracts and Complete the Deal for your Commercial Property
You are ready to exchange contracts with your landlord if the following has occurred:
- Both tenant and landlord are satisfied with the contract and the necessary reviews/searches have been carried out
- The building surveyor and solicitor have completed inspections and checks of the property
- Any conditional planning permission has been granted
- The initial money has been raised to exchange and complete the transaction
The contracts will need to be exchanged for them to be legally-binding. The exchange will be completed once the balance due has been paid in full. Until this has happened, the landlord has the option to lease the property to another interested party (unless a lockout agreement has been arranged).
This is not required under Scotland's laws. There is no legal contract between the two parties, so until a contract has been agreed upon, either party can opt out of the deal with no penalty.
If a deposit is required then it is paid at this stage. Completion will typically follow a month later, but this may vary. This is when you pay the remaining balance, and the contract is complete.
Congratulations. You have completed the leasing process and are now the tenant of a commercial property.
FAQs (Frequently Asked Questions)
- Do I Need a Survey When I Lease a Commercial Premises?
It is recommended that you carry out a commercial survey report. Identifying building defects early can shave significant sums off a property's asking price, or avoid a poor investment altogether. They can also protect you from a legal standpoint or any dispute with a landlord. If you are thinking of taking a short term license on office space where you will be responsible only for internal conditions, you may feel that a visual inspection is sufficient. Leases generally give you some or all of the responsibilities for maintaining and repairing the premises, or reinstating them to their original condition.
- What Initial Costs Will I Pay when Taking a Commercial Property Lease?
Initial costs are restricted to legal fees, administrative charges and any security deposits.
Taking a lease will typically include:
- Lease premium
- Legal fees (you may be able to negotiate this)
- The cost of a survey
- Stamp Duty Land Tax
- Land registry fees
- Any security deposit you are required to make
- First period's rent (this initial payment may need to cover both the unexpired portion of taking a lease part way through the rent period and the whole of the next period)
There may possibly be VAT implications depending on the amounts involved.
- What Ongoing Costs do I Need to Look out for when Taking a Commercial Property Lease?
There are two major costs:
- Rent (or license fee) typically payable quarterly in advance
Other costs you should be aware of can include:
- Service charges
- General running costs – for example, any utilities you pay for directly, and the costs of any repairs and maintenance for which you are responsible.
- What Service Charges Should I Expect to Pay When Taking a Commercial Property Lease?
Service charges should reflect communal services, which are provided by the landlord rather than being paid directly by you. These might include:
- Car Parking
- Utility bills and maintenance costs
Insurance is usually handled as a separate charge. Consider the length of time you plan to stay in the space as well as terms of the lease to determine if you'll want to avoid any payments into a sinking fund for future major repairs. There should be chances to negotiate caps on service charges.
- Will I Need to Insure the Premises when I Lease a Commercial Property?
You should ensure that the lease stipulates who is responsible for arranging and paying for the insurance. With most leases, the landlord will arrange for the building's insurance, but then passes on the costs (or an appropriate portion) either as part of the service charge. You would usually want to arrange other insurances – for example, to cover contents, employer's liability insurance etc. The landlord will usually also insure against loss of rent and, again will pass on the cost. This means that if the premises are damaged and you are unable to use them, you will not have to pay rent until the damage is repaired.
- What is a Break Clause in a Commercial Property Lease and what Should I Look for?
A break clause allows for early termination of the lease agreement. For example, you might negotiate a 20 year lease on the premises, but with the option to terminate after four years if you so wish.
Some key considerations:
- Whether the break clause gives you the flexibility you want. You may no longer have the right to terminate a lease if you choose to.
- The notice you need to give if you want to exercise your right to terminate the contract
- Whether there are any penalties to terminating a lease – for example, a break payment
- Whether there are any conditions – a lease gives the landlord the right to reject a break proposal if you are in breach of the contract in any way.
- How do Rent Reviews for a Commercial Property work?
Most leases allow reviews for rent to be adjusted periodically. The terms of the lease will lay out how they work. They will also specify what notice the landlord will give you of the new rent and how it will be calculated.
Some key pitfalls to look out for:
- An ‘upward only' clause – this states that if the open market rental value has fallen your rent will remain the same level.
- Low initial rent – agreeing a low rent for the initial period of the lease will not protect you from a steep increase at the first review.
- Improvements – review agreements should specify that the new rent will not reflect the value of any improvements you have made to the premises
- Will I be Able to get out of the Commercial Property Lease?
The terms stated in your lease will determine what options you have for getting out of the agreement. These may include:
- Sub-letting – part or all of the premises
- Assigning to a new tenant
- Exercising your right to terminate a lease under a break clause or because the landlord has broken the terms of agreement
When negotiating termination of the lease, please note the landlord will not be under any obligation to accept any proposal you make. While terminating a lease will usually absolve you of any future responsibility for the premises, subletting or assigning the lease usually will not.
- Will the Commercial Property Lease Include the Contents of the Premises?
The lease should include the contents of the premises, but check this to see what items are included.
Confirm that the equipment listed is outright owned by the vendor and is not subject to a hire purchase or leasing agreement. Always check the service records and warranty for any appliances within the premises.
- What Liability for Maintenance and Repairs will I Have for the Premises that I Lease?
This depends on the terms of the lease. An FRI (Fully Repairing and Insuring) lease makes you liable for all maintenance and insurance costs. Usually, property owners are liable for alterations and repairs needed to comply with legal requirements. You are normally responsible for internal repairs. Even so, you may have to contribute towards maintenance costs. In circumstances like these, it is important to investigate the state of the premises and what maintenance plans the landlord has, as you may end up being charged for these.
- How Can I Negotiate a Better Deal on my Commercial Property Lease Agreement?
We recommend seeking professional help to negotiate on your behalf. Everything is negotiable when discussing the terms of a new lease. It is common to only negotiate rent rather than terms of agreement. They can be complicated contracts and there is plenty of scope to trade concessions.
- At what Point in the Negotiation does a Commercial Property Lease Agreement Become Legally Binding?
The lease agreement will become legally binding once it is signed by both parties. Any payments, such as Stamp Duty Land Tax, Land Registry Fees etc, will be paid at the completion date when you take over the space.
- How Long does it take to Finalise a Commercial Property Lease Agreement and can I Prevent the Landlord from Accepting Other Offers in the Interim?
When negotiating a lease agreement, it can take several weeks to complete legal due diligence. The whole process can be drawn out if more than one party is involved. For example, when the landlord is also the tenant of another owner. You may want to negotiate a ‘lockout agreement', which prohibits the landlord from settling agreements with other prospective tenants or accepting other offers, provided you exchange contracts in the set time limit.
- Can I Use a Commercial Property Lease as Security for a Bank Loan?
If the lease has any intrinsic value, then yes. You will be paying a premium for the lease. A lease at open market rental value with no initial premium has no value for security as a loan. Unlike freehold premises, the value of a lease as security will fall steeply over time.
This should be discussed with your bank at an early stage and ensure that the forfeiture provisions are amended to allow the property to be mortgaged.
- What Happens If I Discover a Major Problem after I have taken a Commercial Property Lease?
You will have very little ground against the landlord for such problems if it states in your agreement you are liable for maintenance and repairs. You may have some right to claim compensation (or stop paying rent) if the problem stops you from enjoying your right to use the premises. As always, the terms of the lease are the key factors. In some cases, you might have a claim against your surveyor or lawyer if the problem is one which should have been identified by the survey.
- What Happens when the Commercial Property Lease Expires?
If you are protected under the Landlord and Tenant Act 1954, then as a general rule you will have a right to renew it, unless you have breached its terms. There can be financial implications to renewing a lease. If you do not wish to renew, you may be responsible for restoring the space to its original condition. This is usually a matter for negotiation – and, if necessary, agreeing on any appropriate payments.
- What Happens if I Default on my Commercial Property Lease?
If you default on any obligations under your agreement, such as paying rent on time, your landlord will be forced to follow certain procedures. A formal notice is issued in this case and you will be given a specific amount of days to remedy this breach. Failure to do so will result in your landlord seeking recovery of the rent payable – it is important that the landlord notifies you of any breaches so that you have a chance to fix it without any legal action. Maintaining a good relationship with your landlord will help avoid any complications.
- Do you need Good Credit to Lease a Commercial Space?
Landlords will require financial and credit information about you or your business, to prove that you have the ability to pay rent. There is no way around this. If you don't have a positive credit rating, your applications may be turned down. You may also not be able to qualify for bank financing. Guarantors are sometimes requested when seeking to rent a business space. To ensure you get the best terms and conditions it's important that you present yourself in the best financial position.
- Should you put the Commercial Property Lease in your Personal or Company Name?
Depending on what kind of lease you have signed, you could find yourself in trouble if your business defaults. You can put the lease in your company's name, or alternatively you can sign in your personal name. It is often the case that you will be given the option as to which route you want to take. In some instances, the landlord may demand that the lease be put in your personal name. If this is the case and you fail to keep up with required payments, then the landlord can carry out legal action against you to recover the amount owed. By putting the lease in the name of your limited company, you are given the protection afforded by limited liability. This means that if the company is unable to make the required payments, you will not be held personally liable, nor would you be held legally responsible for breaking the terms of the agreement.
- What Repairs and Maintenance are you responsible for when you move out from your Commercial Property Building?
Any repairs which are required are called ‘dilapidations' and these should be specified in the lease. In general, any responsibilities which are not specified in the lease will fall to the tenant. Many commercial properties are let on an FRI basis, which means the tenant takes on both repair and insurance costs. The terms of a commercial lease will often clarify disputes relating to repair obligations. If you refer to Section 7 of the Code for Leasing Business Premises in England and Wales 2007, it states that unless expressly stated in the heads of terms of a lease, tenants should only be obliged to give the premises back at the end of their lease in the same condition as they were in at its grant.
- What is the Situation if the Commercial Premises I want to Lease are Currently Occupied?
The contract should include ‘vacant possession' – i.e. the current occupant will move out before the completion date. You should also ensure that the contract includes arrangements for putting the premises in good order before you take over – for example, clearing and cleaning the premises.
- What do I need to Look out for when I purchase an Assigned Commercial Property Lease from an Existing Tenant?
It is essential that the original lease gives the current tenant the right to assign the lease. The terms of the lease can be open to interpretation, and the landlord is not likely to be prepared to negotiate key terms of an existing lease. This may give you less flexibility to ensure that the lease suits your requirements. You are likely to be asked to pay your own, the tenant's and the landlord's legal fees, though this is open to negotiation. There also may be other options as to how the deal is structured – for example, whether you are purchasing any extras such as equipment. Pay particular attention to what liabilities you will be taking on, particularly if you will be responsible at the end of the lease for restoring the premises.
- What do I need to Look out for when I Sublet a Commercial Property from a Landlord who Owns a Lease rather than the Freehold?
Check that the landlord has the right to sublet, and you will also need to check whether the superior landlord (i.e. the building owner) has any right to be involved in the negotiations. You will also need to check the terms of the landlord's lease, and more specifically any restrictions (for example, how the premises is intended to be used).
- Will I Be Able to Sublet Part or all of the Commercial Premises that I Lease?
The terms of your lease will state whether you are allowed to sublet, and any conditions along with this. Bear in mind that when you sublet, the original lease remains in force and you retain your liabilities. The Landlord and Tenant Act 1954 governs landlord and tenant relationships in the United Kingdom. A tenant cannot sublet the property if it falls outside the protection of the Act. Tenants will be required to guarantee the lease if they are assigning it to another individual.
Renting Commercial Property CHECKLIST
- Have you prepared a budget?
- Have you researched the market rent in the area?
- Have you checked what normal lease terms are given the state of the local market and the condition of the premises?
- Is the length of the lease suitable?
- Does the lease have a suitable break clause?
- Does the property require a survey?
- Is the property suitable for your intended use?
- Will you need planning permission or change in use?
- Will the lease agreement give you full statutory protection under the Landlord & Tenant Act?
- Have you checked the rateable value and business rates?
- Are rent reviews included and are they suitable?
- Will the lease agreement be in your personal or your company name? Will you need to sign a Personal Guarantee?
- Will you need a guarantor?
- What upfront costs will you need to pay, such as the deposit?
- Do you have references?
Organisations that Endorse the Code
- Association of British Insurers - http://www.abi.org.uk
- British Council for Offices - http://www.bco.org.uk
- British Property Federation - http://www.bpf.org.uk
- British Retail Consortium - http://www.brc.org.uk
- Communities and Local Government - http://www.communities.gov.uk
- Confederation of British Industry - http://www.cbi.org.uk
- CoreNet Global - http://www.corenetglobal.org.uk
- The Forum of Private Business - http://www.fpb.org.uk
- Please note that this guide outlines commercial property renting laws recognised in England & Wales, and addresses them in normal circumstances – the Covid-19 pandemic may affect the following rules around renting commercial property.?