Understanding the complex language of commercial property leases can take time and effort. These legal documents often use words that are hard to grasp, which makes it tricky to understand what you’re signing up for. In this guide, I want to make the language of commercial leases easier to understand. This will help you make smart choices and work out better deals.
Key Terms in UK Commercial Leases
- Lease: A legal contract that gives a tenant the right to use a commercial property for a set time, following agreed rules and conditions.
- Landlord: The person who owns the commercial property and lets the tenant use it.
- Tenant: The person or company that rents the commercial property from the landlord and must follow the lease rules.
- Term: How long the lease lasts, which can be negotiated at the start.
- Rent: The money the tenant pays the landlord to use the property. The rent is often paid quarterly in advance and is normally plus VAT.
- Service Charge: Extra money the tenant pays to help cover the costs of keeping up and running the shared parts of the property.
- Security Deposit: A sum of money the tenant pays to the landlord, which the landlord holds in a nominated bank account. This deposit serves to protect against possible damage or unpaid rent and can be drawn down by the landlord in certain situations..
- Break Clause: A part of the agreement that lets either side end the lease before it’s supposed to finish as long as they meet certain rules. Typically break clauses are tenant only.
- Rent Review: A review of the rent amount that happens from time to time. Ina commercial lease, rent reviews tend to be upwards only. Meaning the rent cannot fall, even if there is a downturn in the market.
- Dilapidations: What the tenant needs to do to get the property back into repair when the lease ends.
Here are some examples of terms you’ll see in a commercial lease. To understand the rights, duties, and obligations of both sides, you need to know what these terms mean.
Understanding Lease Types and Terms
Commercial leases come in different forms. Each type has its own features and effects. Here are some common lease types:
- Full Repairing and Insuring (FRI) Lease: This lease requires the tenant to pay for all repairs, upkeep, and insurance costs for the property, on top of rent.
- Internal Repairing Lease: The tenant has to maintain and fix the inside of the premises. The landlord takes care of the outside and structural parts.
- Short-Term Lease: A lease that lasts less than five years. It gives you more flexibility but fewer legal protections as a tenant.
- Long-Term Lease: A lease that runs for more than five years. If negotiated it can often give tenants more security and legal rights.
- Periodic Tenancy: A lease that keeps going on a regular basis (like month-to-month or year-to-year) until either side ends it.
The lease type you pick will depend on what your business needs how much you can spend, and how much control you want over the property. Make sure you think about the good and bad points of each option before you sign a lease agreement.
Rent and Rent Reviews
Rent is the main financial commitment with a commercial lease. However, it’s important to understand the different parts that control rent payments and possible changes:
- Rent: The sum the tenant agrees to pay the landlord, for the lease of the premises. Often calculated on an annual basis
- Rent Review Clause: A part of the agreement that lets the rent change from time to time. This can be based on things like market rent, RPI (Retail Price Index), or a set formula.
- Rent-Free Period: A deal where the landlord lets the tenant use the property without paying rent for an agreed period of time. This is frequently (but not always) at the start of the lease.
- Turnover Rent: A way of setting rent where the tenant pays a basic amount plus a share of what they sell. This is more common in leases for shops.
- Rent Deposit: A tenant pays a lump sum to the landlord. This money serves as security. It protects the landlord from possible unpaid rent.
I would always advise you to look beyond your monthly rent cost and assess the other rent areas, such as reviews before you commit to a new commercial lease.
Service Charges and Maintenance
Your next main costs are the service charges or maintenance, these are especially important for those that are in a shared building. These costs are called service charges and might cover:
- Building Maintenance: Money spent to keep the building’s structure outside, and shared spaces in good shape.
- Utilities: Bills for shared services like electricity, water, and heating/cooling systems.
- Security: Money needed for security guards, cameras, or ways to control who gets in.
- Cleaning: Money that is used to clean and take care of common areas such as lobbies, hallways, and bathrooms.
- Management Fees: Charges from the landlord or property management company to run the property.
It’s crucial to read through the service charge parts of your commercial lease contract closely and understand how landlords work out these charges.
Repairing Obligations
As with any building, maintenance and repairs can and do occur, but whose responsibility it is to ensure these issues are addressed is often laid out in the commercial lease contract. The exact duties might change depending on what kind of lease it is, but they fall into these groups:
- Landlord’s Obligations: Most leases make landlords responsible for maintaining the structure and common parts of multi-let buildings. These might include the roof, foundations, and outside walls.
- Tenant’s Obligations: In single occupancy buildings, it is the tenant who usually has the responsibility to keep the property in good shape. This also covers fixtures, fittings, and any changes they’ve made during their stay.
- Dilapidations: When the lease ends, tenants might need to return the property into good condition. This is often referred to as duty “dilapidations.”
- Statutory Compliance: The law might require both sides to ensure the property follows health, safety, and environmental rules. This could include requirements such as fire safety steps and accessibility.
A commercial lease is a legal contract, therefore both parties must understand their obligation to the maintenance and repairs of the building.
Break Clauses and Termination
Although commercial leases are binding contracts, they can often include rules that allow for ending the lease in certain situations. This is referred to as break clauses and they can give both landlords and tenants more flexibility:
- Tenant Break Clause: This clause gives tenants the option to end their lease. They do need to follow certain rules though, such as giving enough notice and paying any rent or fees they owe. Be aware of other conditions that the landlord might be insisting on, as this can make the break difficult to operate.
- Landlord Break Clause: This clause lets landlords end the lease before it’s supposed to be over. They might do this if they want to rredevelop the property or use it for something else.
- Break Notice Period: The amount of time in advance that someone has to tell the other person they’re using the break clause. It’s between three months and a year.
- Break Conditions: These are the things that have to happen for the break clause to work. For example, the rent needs to be paid up to date, the property has to be empty when you leave, or you might need to have repaired anything that needs fixing.
- Break Penalty: A fee or fine that the party using the break clause might have to pay.
Break clauses give no wiggle room. For this reason, it’s worth the time to invest in the break clause section of your commercial lease agreement.
If you are looking to rent a commercial property in the UK, I’m here to get you through the whole process, from making sense of the lease lingo to negotiating for good terms. With decades of experience, I set up The Lease Negotiator to work uniquely for commercial tenants, not landlords. Getting yourself a good commercial lease sets a strong foundation for your business and its long-term success.
