Commercial lease agreements can appear complex, especially for first-time lessees.
These contracts, by nature, involve intricate legal terms and considerable commitment on both sides.
Understanding these agreements can make all the difference between a smooth lease and a potential legal predicament.
Commercial lease agreements: The basics
A commercial lease agreement is a contract between a landlord (lessor) and a business (lessee) that outlines the terms and conditions under which the business can use the landlord’s property for its operations.
This document stipulates the length of the agreement, the rental amount, the payment schedule and the responsibilities of each party during the lease term.
It is important to remember that commercial leases are different from residential leases because the former are subject to fewer consumer protection laws, leaving more room for negotiation.
Additionally, these agreements are typically longer than residential leases, often lasting from five to 25 years.
Key aspects of a commercial lease agreements
Rent and rent reviews
The rent amount is one of the first things to look at in a commercial lease agreement. The rental cost can be calculated per square footage or as a percentage of the business’s profits.
Furthermore, the agreement should specify how often the rent will be reviewed and how these reviews will be conducted. It is common to have rent reviews every three to five years.
Length of the lease (term)
Commercial leases typically run for a significant length of time, typically between five and 25 years. This length of the lease, also known as the term, can be subject to negotiation between the tenant and landlord.
Break clauses are a vital aspect of a commercial lease agreement. These are provisions that allow the tenant or the landlord to terminate the lease early.
The exact conditions under which a break clause can be exercised should be clearly stated in the lease agreement.
Repair and maintenance
The lease agreement should explicitly state who is responsible for repairs and maintenance of the property.
In a ‘full repairing and insuring lease’ (FRI lease), the tenant is typically responsible for all repairs and insurance, while in other types of leases, these responsibilities may be shared.
Use of property
The lease agreement should clearly define the permitted use of the property. This clause often outlines the specific business types or operations that are allowed within the building.
It is essential to be precise and comprehensive as deviations from the specified use without the landlord’s consent could constitute a breach of contract.
The property use must also comply with planning laws and regulations.
Any changes in property use could affect insurance premiums, building service costs and may even require physical alterations to the property.
Therefore, both parties should carefully negotiate and agree upon this clause, taking into account their current requirements and potential future needs.
Subletting and assignment
The lease agreement should stipulate whether the tenant can sublet the property or assign the lease to another party.
Usually, this requires the landlord’s consent.
The lease should outline who is responsible for insuring the property and the type of coverage required.
Legal assistance is key
Given the complexity and long-term nature of commercial lease agreements, seeking legal advice before signing one is strongly advised.
A solicitor can help interpret the terms, negotiate more favourable conditions and ensure the lease complies with all laws and regulations.
Navigating commercial lease agreements can be challenging, especially for businesses new to the commercial real estate scene.
By understanding the key elements of a lease agreement and engaging professional legal advice, you can better protect your business interests and make informed decisions that promote your business’s growth and sustainability.
If you need advice on leasing a commercial property for your business, get in touch today.
Director - Head of Commercial Department
I qualified as a Solicitor having completed my training with Mander Hadley in 1992 and am a member of the Law Society Property Section and The Warwickshire Law Society.