Commercial leases

Renting a commercial property for your business requires less financial outlay than buying, freeing up your capital to plough into your business and, unless you plan to sell the remaining term on your lease to someone else, falls in property prices won’t affect you. Renting also gives you more flexibility, allowing you to lease the property for a limited period, with break clauses included in case you want to move on before the lease expires.

Types of property rental agreement 

The most common methods of renting commercial property are via a tenancy (a lease) or a short-term licensing agreement.  

Licence

A licence is probably your best option if you want a business premises for only a short time – perhaps to handle a particular order for which you’ll need more space for a finite period. You can take them out for, e.g. a year or even just a few months. They tend to be much more flexible than leases, and although you will need to look after the premises, there will be fewer obligations (for structural repairs, for example) imposed on you, and can usually be terminated at relatively short notice. You don’t have an automatic right to renew a licence though (as you do with a secured tenancy) so be sure that the length of the licence is adequate for your needs before you sign up.

Lease

A lease or tenancy is a legal agreement between you and the landlord allowing you to use the premises, subject to pre-agreed conditions. It can be granted for a set period of time (term of years or fixed term) or for a specific period (yearly, monthly, weekly or daily). If it runs for more than three years, a tenancy must be in writing.

The lease sets out details such as the amount of rent you must pay; the space you will occupy; the length of the lease and how often the rent will be reviewed; and the rights, obligations and liabilities of both tenant and landlord.

Before you sign the lease, it is essentially a blank canvas and it is up to you to negotiate with the landlord to ensure that the terms of the lease are as favourable to you as possible before you agree to sign it.

Length of lease

It’s up to you and landlord to agree how long the lease is to run for. It’s important to include break clauses in the lease – particularly if it’s for a number of years - to allow you some flexibility in case you want to move on earlier than anticipated.

Renewal of lease

Under the Landlord and Tenant Act 1954 business tenants have a right to renew the lease when it comes to the end of its term, unless the landlord wants to move in, redevelop the premises or if the tenant has consistently failed to pay the rent. This right also does not apply to certain business tenants including:

• farm business tenants;
• mining tenants;
• service tenants employed by the landlord;
• tenants with fixed-term tenancies of six months or less (although they do
• security of tenure once they have occupied the premises for more than 12 months).
• tenants who have agreed that the Landlord and Tenant Act provisions will not apply in this particular area.

Assignment and subletting

You should make sure the lease contains a clause allowing you to assign the lease or sub-let the premises to someone else. The landlord usually reserves the right of approval but the relevant clause should state that approval won’t be withheld unreasonably.

Watch out an authorised guarantee agreement in the lease which would mean that you won’t be released from your obligations when you assign the lease but would have to pay up if your successor doesn’t stick to the terms of the lease. The landlord may insist on one of these if the would-be new tenant is of lower financial standing than you (and its guarantor); or is resident or registered overseas. A rent deposit is often an acceptable alterative though.

If subletting is permitted, the sublease rent should be the market rent at the time of subletting.

Rent

The amount of rent you pay will at first depend on what is agreed with the landlord and included in the lease. This will also set out how often it will be payable too. However, leases usually contain clauses allowing the rent to be reviewed and it’s important that you opt for the type of rent review which suits you best. The main ones are:

• Upward only rent review clause. You should try hard to avoid this sort of review clause as no matter what is happening in the market your rent will never go down. It will, however, go up if rents for similar properties in the area rise.
• Fixed increases – the lease will specify how much the rent will rise by and when.
• Up or down market rents – the rent goes up or down depending on the market in your area. Most clauses like this contain a proviso though that the rent will never go below the initial rent outlined in the lease.
• Indexed rents – the rent is altered in line with some form of measurement - the Retail Price Index, for example.
• Turnover rents – the rent increase will be at least partly linked to the turnover of your business.

Non-payment of rent

If you fail to pay the rent there are various options open to the landlord including suing you for the unpaid rent; trying to evict you; sending in bailiffs to seize your goods to whatever value of rent you owe. If you still don’t pay up the landlord could sell the goods and keep the money. If you’re having problems, it’s best to tell the landlord and try to sort out a repayment plan before he takes any of these actions.  

Service charges

You may need to pay the landlord for services such as cleaning, heating and lighting on top of the rent. It may be cheaper if you are allowed to source and pay for these yourself so try and stipulate this in the lease. The landlord should give you estimates of how much they are likely to be during the lease negotiations. You have the right to challenge service charges.

Planning and restrictions

Ensure before you sign the lease that premises you want to rent has the planning permission for what you want to use it for or that you’ll be able to get planning permission if you want to make any changes. You’ll also need to establish if the area you’re premises is in has any restrictions on delivery or loading times that may affect your business. There may be other restrictions or covenants in the lease or dictated by the local authority such as rubbish disposal, parking, noise, lighting, litter, etc.

Land registration

If you’re taking out a new lease - or an existing one is being assigned to you – which has seven years or more left to run it needs to be registered with the Land Registry. You’ll need to submit a scale plan of the premises pinpointing its location, as well as details like the full address and postcode of the premises, a scale measurement bar, a scale location map and a north point.   

Insurance

Buildings insurance for the premises may be ostensibly covered by the landlord, but you’ll probably be paying for it anyway through the service charge. You’ll almost certainly be responsible for contents insurance though so make sure you take out a policy for this.

Repair

Check the repairing clause carefully to ensure that it doesn’t go beyond returning the property at the end of the term in the shape that you initially had it. It’s a good idea to get a survey before you move in to make sure there isn’t some hidden, serious defect which you might get lumbered with fixing.