What are some of the key terms that need to be covered in a commercial lease? (Part 1)

When a landlord and tenant agree a commercial lease, each will have a clear aim.  The landlord will want to generate a reliable income stream from their investment.  The tenant will want premises that accommodate their business effectively and at a cost they can predict and afford with repair liabilities that they are willing to accept.  These two objectives lie behind all the detailed provisions of the lease.  In the first of three guidance notes we explain the key terms that need to be covered so that it is clear:

  • what will be let;
  • by whom and to whom;
  • for how long;
  • at what price; and
  • what for.

Definition of premises to be let

The premises to be let must be clearly identified by a description and in some cases by reference to a plan.  If the Lease will need to be registered at the Land Registry you should bear in mind that the Land Registry has detailed requirements in relation to lease plans so you should take advice from your solicitor before settling on the plan to be used.  If the premises to be let are part of a larger building, the definition should make it clear which, if any, parts of the structure are included in the let and also show any common parts that the tenant will have the use of.

Identity of landlord and tenant

 The lease must set out clearly the names of the landlord and tenant.  If they are companies, it should include company numbers to avoid confusion if there is a change of name.  Where the tenant is part of a group of companies, the landlord should think carefully about which company in the group should be the tenant.  If the lease is granted to a subsidiary company, the landlord will often ask the parent company to act as guarantor.

Length of lease

 The length (or term) of the lease will usually have been agreed during initial negotiations.  If flexibility to end the lease early is needed then provision for a break clause should be included to allow the lease to be brought to an end before expiry of the agreed term by the service of a notice.  The break clause might be exercisable on a fixed date only or on a rolling basis, for example, “at any time after the third anniversary of the commencement of the term”.  Advice on any conditions that must be satisfied before the break can be exercised should be taken as this is a frequent source of dispute.

Right to renew the lease

 Agreement will have to be reached about whether the tenant will have the benefit of the right to renew the lease at the end of the term, as provided in the Landlord and Tenant Act 1954 or whether the lease should be contracted out of this provision so that it comes to an automatic end when the contractual term expires.

Rent and rent review

 Another key part of the pre-lease negotiations will be the yearly rent.  The tenant may be able to bargain for a rent-free period at the start of the lease, which is usually intended to reflect the cost to the tenant of fitting the premises out for the purposes of their business.  If the lease is longer than five years, there will usually be provision for the rent to be reviewed, typically at three or five yearly intervals.  The new rent may be settled by reference to open market rents at the relevant time or it may be index-linked by reference to one of the official published price indices, the Retail Prices Index or the Consumer Prices Index.  The purpose of rent review is to ensure the landlord’s investment value keeps pace with the market during the life of the lease.

Rights granted and permitted use

 The landlord will want to control the types of activity and business carried on at the premises and the tenant must be sure that the premises can be used for the purposes of its business, so the lease will set out the permitted use.  This could be very specific or refer more generally to one of the use classes set out by planning law.  Landlords should beware of making the use too restrictive as this could reduce the potential rent at rent review.  Importantly most leases will stipulate that no warranty is given by the landlord that the property has the relevant planning consent for the permitted use, so the tenant will need to ensure that the appropriate planning consent is in place or is being obtained before completion.

It will also be important for the tenant to have any rights over areas not included in the lease that are required for the property to be used.  Examples include rights of way over access roads and shared areas and rights to place air conditioning and communications equipment on the outside of a building.

It is important that if you are considering entering into a lease you seek the advice of a commercial letting agent that has experience of similar lettings in your area, to ensure that the best possible lease terms are negotiated on your behalf.

For advice on commercial leases, or any other commercial property matter, please contact Jonathan Frayling on 01225 755621.

The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.

Securing a good commercial tenant
What are some of the key terms that need to be covered in a commercial lease? (Part 2)
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