Pitfalls to avoid when entering into a commercial lease

Signing a commercial lease for the first time is both a huge and exciting step for your business. It’s easy to get bogged down with the amount of clauses and regulations and this is often why pitfalls can be overlooked, particularly in relation to tenants who aren’t equipped with the right knowledge. To avoid such pitfalls, we’ve collated a range of issues to take into account when signing a commercial lease.

What is a commercial lease?

A commercial lease (also known as a Commercial Tenancy Agreement) is a legally binding document between a business tenant and a landlord. A commercial lease gives the business tenant rights to use a rented space in exchange for money paid to the landlord.

Such commercial leases entail the use of space in (and not limited to) office buildings, industrial estates, retail or warehouses within England and Wales.

Things to consider before entering a commercial lease

Is there a Break Clause?

A break clause allows the tenant or landlord or both to formally end a lease before the end of the term. A break clause generally allows the lease to be terminated after a minimum period, as long as certain conditions are met. Should these conditions not be met, then the right to break may no longer be available for the tenant.

Is there a rent review?

A rent review clause within your lease allows the landlord to increase the pre-agreed contractual rent.

What you need to be aware of is the frequency and amount increase of these reviews.

Review clauses are a very complex element of commercial leases. We highly recommend that a surveyor and a Solicitor advise you on this process.

Security of Tenure

You may or may not have the right to renew your lease. The landlord may request a higher rent to compensate for their tenant having the right to renew their lease.

In addition to the rent required for your commercial lease, it’s also important to note costs that are commonly overlooked which can result in financial hardship if not properly taken into account.

Service charges in a commercial lease

Whilst we offer a comprehensive commercial property legal service, we thought we’d cover some of the costs you may incur during your tenancy. In some cases you will typically be expected to cover part or all of the service charges to maintain a commercial space.

If your landlord is also responsible for insuring the property, there may be a requirement to share this cost.

Repairs and maintenance

Determining responsibility for repairs and maintenance can be quite complex.

It is vital to check the wording within the commercial lease - however in terms of repairs and maintenance it is imperative to check if the tenant has full or partial responsibility for any work that needs carrying out in the property (interior and exterior).

If the property being rented out is part of a larger building, area or estate, then it will generally be the landlord’s responsibility for any repairs to the structure of the building(s) and you will generally be required to contribute to the cost of this.

Tenants will generally be responsible for internal repairs, depending on the terms of outlined in the lease.

Head of Terms should be clearly defined before you enter into a lease and these will help you have a clear understanding of your responsibilities and obligations.

Insurance

Landlords are responsible for arranging insurance cover for their commercial property and generally, a tenant will be responsible for all or part of the premium. In most cases, a tenant will need to arrange their own contents insurance, public and employers liability insurance – however this depends on the terms stated in the commercial lease.

Proposed use of the property - don't make assumptions

It’s imperative to ask for planning permissions to check that what a tenant proposes to use the property for is permitted. Tenants should ask for planning permission to check this over, rather than assuming a landlord is granting them permission for whatever use they intend. The local council must agree on a property’s intended use.

Stamp Duty Land Tax (SDLT)

SDLT is a type of tax paid to HM Revenue & Customs (HMRC) on either a purchase or a lease of certain property based in England, Wales or Northern Ireland.

Current legislation states that the SDLT commercial land and property criteria stands at a threshold of £150,000

SDLT is payable on most leases, depending on the terms of the lease (i.e. the length of term). Your solicitor will be able to calculate the amount of SDLT so you know what’s payable.

SDLT must be paid within 30 days of the effective transaction date – generally the day the lease was completed.

Commonly asked questions about commercial leases

Is permission from the landlord needed to alter the premises?

If you are intending to spend money on a fit-out of the premises, it is very important that you are clear on what the landlord will require to enable this to happen and what costs are involved.

What will your repairing obligation be?

It is very important to establish from the start exactly what you are responsible for once you have completed the lease. You should have a survey done to see if there are any inherent defects with the premises and if a large expenditure is going to be needed to ensure that the premises are kept in a good condition.

Will you be able to terminate, assign or sub-let the lease if you no longer need it?

You must thoroughly read the terms of your lease to ensure that you have the flexibility you require.

Do you require a break clause?

It is advisable to ensure that you have the ability to assign the lease to a new tenant before the end of the term. It should be clear that the landlord cannot prevent an assignment without very good reason.

Is a Schedule of Condition required?

A Schedule of Condition allows for the condition of the premises at the time you take the lease to be documented and the lease can state that you are not obliged to give the property back to the landlord in a better state.

Is a structural survey required?

Structural surveys are necessary if you’re entering into a long-term lease with repairs and insurance liabilities and are highly useful in identifying potential problem areas within a commercial property. There are a variety of structural surveys that can be conducted, depending on the condition, size and intended use of the property which a chartered building surveyor can advise you on.

Is there stamp duty land tax (SDLT) to pay on the rent?

If the rent payable over the term of the lease exceeds £150,000, then there will be SDLT to pay. Your solicitor will be able to advise you on the exact amount.

How much will it be to register the lease at the land registry?

It should be no more than £40 if it is registered online and there is no upfront premium payable.

MHHP Law specialises in commercial property law and can advise both landlords and tenants regarding all or any aspects of your commercial lease. If a dispute should arise then our specialist solicitors can aid you through the process.

For more information please contact Ruth Hayward on 020 3667 4784 or via email ruth.hayward@mhhplaw.com