Leasing a commercial property is a significant step for any small business. Whether you’re opening a retail shop, office, or industrial space, the lease agreement you sign will govern your rights and responsibilities for the duration of your occupation.
For many small businesses, navigating these leases can be a bit of a minefield. In this Blog, we highlight the top 5 pitfalls to watch out for when leasing commercial premises, and how to avoid them.
How do I Lease a Commercial Property?
To lease a commercial property for use as a business premises it’s advisable to employ the assistance and expertise of a solicitor or lawyer who specialises in commercial property leasing. The commercial property solicitor will ensure that the lease agreement you are intending on signing is fair and transparent and provides you, as the prospective tenant of a commercial property, with the necessary protections which includes fully understanding the terms of the commercial lease, your obligations as a tenant of a commercial property, any clauses relating to ending the commercial property lease agreement early and rental reviews.
Pitfall #1 – Not Understanding the Terms of the Lease
Commercial leases are often lengthy and filled with complex legal jargon. Some businesses can fall into the trap of not fully understanding key clauses such as rent reviews, service charges, and break clauses. Rent reviews, for example, may be based on market rates or RPI, which could result in unexpected increases.
How to avoid it: Engage a solicitor to review the lease and explain it to you in plain English. Make sure you understand your obligations as a tenant, particularly in relation to rent increases and any additional costs.
Pitfall #2 – Overlooking Repair and Maintenance Obligations
Many commercial leases include a “full repairing and insuring” (FRI) clause, which means that the tenant is responsible for the upkeep of the property, including structural repairs. This can lead to significant and unexpected costs, especially if the property is older or requires substantial work during the lease term.
How to avoid it: Always inspect the property thoroughly before signing the lease. It is also a good idea to negotiate for a schedule of condition, which limits your repair responsibilities to the condition the property was in when the lease started. Your solicitor can help you push for more favourable terms.
Pitfall #3 – Failure to Negotiate Break Clauses
A break clause gives the tenant the right to terminate the lease early, typically after a set period. Many small businesses don’t realise they can negotiate this clause, which can be vital for maintaining flexibility, particularly in uncertain economic times.
How to avoid it: When negotiating the lease, ensure a break clause is included, and check the conditions attached to it. Most break clauses can only be triggered if the tenant has fully complied with all terms of the lease, so it is essential to understand these conditions from the outset.
Pitfall #4 – Unclear Provisions for Rent Reviews
Commercial leases often contain rent review clauses, which allow the landlord to increase the rent at set intervals. However, the method for calculating the new rent can vary and may not always be transparent. Some small businesses are surprised by steep rent increases that they didn’t anticipate.
How to avoid it: Ask for clarity on how the rent review will be calculated and, if possible, try to negotiate for fixed rent increases or cap the amount by which it can be raised. Having a clear understanding of the rent review process before signing can prevent financial surprises down the line.
Pitfall #5 – Ignoring the Impact of Assignment and Subletting Restrictions
As your business grows or your needs change, you may want to assign (transfer) the lease to another party or sublet part of the premises. Many commercial leases contain strict restrictions on assignment or subletting, which can leave you stuck with premises that no longer suit your business.
How to avoid it: Ensure the lease terms give you some flexibility to assign or sublet if needed. This can be a vital safeguard if your business circumstances change, and it can offer a potential exit strategy if you need to either downsize or move to larger premises.
Demystifying Security of Tenure: Understanding the Landlord and Tenant Act 1954
In commercial property leasing, the Landlord and Tenant Act 1954 stands as a cornerstone statute, particularly concerning security of tenure – a concept that holds significant implications for both landlords and tenants. Let’s delve into what security of tenure entails under this landmark legislation and why it’s frequently excluded from commercial property leases.
A Blog by Stuart Knox. Partner and Head of Commercial Property
Final Thoughts
Leasing a commercial property can be one of the most significant financial commitments for a small business. By understanding and negotiating key lease terms, you can avoid common legal pitfalls and protect your business from costly surprises. Consulting with a solicitor experienced in commercial property law is essential to ensure your lease works for you, not against you.
A break clause is a provision in a commercial lease that allows either the landlord or the tenant to end a lease early without facing a penalty.
A break clause would typically specify the conditions for when it can be activated including any notice period for either party to exercise their right to terminate the lease and conditions that must be met to allow either party to exercise their right to terminate the lease, such as all rent payments must be up to date.
A rent review clause is an entry in a commercial lease agreement that specifies the frequency of any rent reviews that may take place. It provides the landlord with the opportunity to review the rent being charged on the lease and change the rent accordingly. A rent review clause specifies that the rent will increase during the term of the lease upon certain predetermined rent review dates. The new rent can be a fixed and certain sum, or the lease may state that the new rent shall be determined by reference to some formula or uplifted to current market value.
A Full Repairing and Insuring lease places the responsibility upon the tenant for the upkeep of the property and includes structural repairs. It also requires the tenant to either arrange the buildings insurance for the property or, more commonly, to cover to landlord’s costs for keeping the property fully insured.
Need help with a commercial lease?
Our team at Thornton Jones is here to assist. Get in touch with us today to discuss your leasing needs and ensure your business is protected from the start.
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