What should I check for in a Commercial Lease?

Your guide to the key clauses in commercial leases …

Whether you are instructing a solicitor or not in your commercial property transaction, it is important to be aware of the key features of a Lease and how they will impact on your prospective tenancy. This guide will provide you with a brief introduction to those key features which you need to bear in mind when negotiating a Lease.

Term – it may sound obvious, but it is essential that the term of the Lease fits in with your short term and long term commercial objectives. Committing yourself to a long Lease when there is a long term plan to relocate, downsize/upsize or purchase may not be in your best commercial interests. If there is an agreement to ‘contract out’ of the Landlord & Tenant Act 1954 then there is no automatic right for the Tenant to remain in the property at the end of the tenancy.

Insurance – the Landlord will usually insure the premises and recover the cost the premium through the Service Charge. Tenants are usually responsible for insuring their own fittings and contents.

Services and Service Charge –
Tenants may be responsible for payment of a Service Charge; a collective levy of the Landlord for reimbursement of his commitment to carry out the agreed services. For a Tenant it is key, therefore, that the Services agreed in the Lease are as comprehensive as negotiations will permit. A solicitor will be able to tell you if there are any omissions from the services list.

Landlord & Tenant Obligations – these obligations will prescribe the duties of each party during the course of your tenancy and breach of them by the Tenant could result in forfeiture of the Lease. It is therefore important that you negotiate obligations that are attainable and remain conscious of them throughout the term of your tenancy.

Rent Review – the longer the Lease the more likely it is that there will be a Rent Review during the course of the term. Rent Reviews can be very complex and come in a variety of forms. Market value rent reviews operate as a hypothetical letting valuation based on a list of assumptions and disregards. These assumptions and disregards can have a huge impact on your rent when you have it reviewed so it is imperative that the clause is comprehensively drafted. Rent reviews can also be RPI indexed linked but, whatever the form of the clause, it is important from a Tenant’s point of view to be aware of the clause’s existence and plan for the potential increase in rent during the course of the term.

Break Clause – break rights in the Lease will determine the rights of the Landlord and Tenant to bring an end to the Lease. There is no automatic right for a Tenant to break the Lease. It is important for both parties to be aware of the other’s right to break the Lease and the required Notice that the other party will need to serve on you.

Assignment and Subletting – the transaction of transferring a Lease onto an incoming Tenant is called an ‘assignment’ and the Lease will specifiy any conditions that are attached to assignment of the Lease. It is likely that assingment will be subject to the Landlord’s consent and there may be qualifications attached to his consent. It is important for propsective Tenant to check before entering a Lease.

Alterations and Use – Prospective Tenants should ensure that the premises have satisfactory planning permission for their intended use of the property. It is important to check what alterations may be required. Structural alterations are almost always prohibited while internal alterations can be subject to Landlord’s consent.

For more information about Lease negotiation, or to discuss your leasehold transaction, please contact our team.

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