Commercial Leases: What you need to know

What to look out for

So, what are the common commercial lease clauses that can affect your business the most? A seemingly minor provision can become extremely important when circumstances change. Getting the lease right in the first place can protect the long-term future of your finances and the business itself. Rather than simply negotiating the lowest starting price for rent, it’s important to focus on the overall risk profile of the agreement.

The initial draft lease will usually be issued by the landlord’s solicitor and may be heavily weighted in their favour. It is therefore imperative to negotiate lease terms to better suit your business and to be fully aware of your commitments before signing.

As a business owner, the rent amount is usually the first thing you look at. But it’s important to consider the way it can change over the lifetime of the lease. The terms may contain a rent review clause, which allows the landlord to increase the rent at certain intervals: perhaps linked to open-market rental value, inflation, fixed increases, or turnover. A landlord will generally want this to be on an ‘upwards only’ basis, not always taking into account market conditions. For a small business, an affordable rent at the start of a lease can become more expensive over time.

Another element to think about is service charges, which can be an additional cost, particularly where a business occupies part of a shopping centre, office building, or other multi-let property. A service charge may cover items like communal cleaning, security, lighting, and management for shared areas. It's important to establish whether major works, improvements, or management costs can be passed on too.

Next, what are your repair and maintenance obligations? Some leases ask for responsibility only for the internal parts of a property, while others can place much broader obligations. Leases are often drafted on a ‘full repairing’ basis, meaning (irrespective of the condition when the tenant first took occupation) there will be the requirement to return the property in a good state of repair at the end of term. This means tenants can find themselves responsible for costly repairs far beyond what they expected.

Many businesses need to adapt premises to suit their operations. For example, a restaurant may need specialist equipment, an office may benefit from extra meeting spaces, while a shop requires signage. It’s important to establish what changes are permitted, which require landlord consent, and whether alterations must be removed at the end of the lease. Thinking early on about what you might need and getting agreement from the landlord before entering the lease will save you from potential issues and operational delays later on. A permitted use clause determines what you’re allowed to do at the premises, and this can have a major commercial impact. How you intend to run your business may evolve, so make sure future business development is considered too.

A landlord may ask the owner or director of a small business, particularly when newly established with limited assets or trading history, to provide a personal guarantee. This can potentially make an individual responsible for obligations that the company itself fails to meet. Any guarantor needs to be properly advised on the liabilities that they, personally, will be taking on.

What happens when you reach the end of your commercial lease? It might seem odd to consider leaving a lease when you’re just entering one, but it’s important to sort out how it will end and what it will entail. Firstly, do you have security of tenure? This valuable addition means you may have a legal right to remain in the premises and seek a new lease when the existing one expires, rather than automatically having to leave.

Perhaps you’re ready to move on from your commercial premises? Once the lease has been signed, you may be committed to paying rent for the full term. A break clause can provide valuable flexibility. It allows the tenant to end the lease before its contractual expiry date - which can become vital if trading conditions deteriorate, the business changes direction, or the premises are no longer suitable.

Lisa explains, “We live in a changing world where the global economy has fluctuated and can be challenging at times. Especially with a new business, your strategy may evolve. You may find that your business isn't going as well as hoped or that it would be better to let a property in a different location. But if it’s hard to get out of the lease (either by breaking it or assigning the lease to someone else), it can be very difficult for the tenant - particularly if turnover and profit aren't as high as they hoped.”

She concludes: “From the start, having the involvement of a commercial property solicitor helps to keep a positive landlord-tenant relationship. This can make such a difference in a transaction, because you know that good relationships are being fostered. It also makes it easier to negotiate the lease because trust is being built up, which is really key to achieving a smooth and positive process.”

For local businesses, a commercial lease is not simply an agreement to pay rent. It is a long-term commitment that can influence the future success of your enterprise. Getting it right from the start is a far better option than trying to renegotiate terms or manage disputes at a later date. A trusted legal team can provide tailored advice to your situation, helping you to achieve the best possible outcome for you and your business.