Commercial Leases – Things To Watch Out For
If you are planning on starting a business, it is most likely that you will want to rent commercial property, such as a shop, workshop, warehouse or office, and sign a commercial lease.
Taking on a commercial lease in England is a much bigger commitment than renting a residential property, where the law generally protects the tenant. As a commercial renter, there are many things to watch out for in a commercial lease and the parties, particularly the tenant, need to be fully aware of the terms of the lease and their obligations under it. The following are a number of things to watch out for.
Use of property
Commercial leases generally restrict how the property can be used so you should check that the permitted use allows you to use the premises for the purpose of your business.
You will have to pay rent but is this inclusive or exclusive of VAT? If you are renting part of a building, you may also be asked to pay a service charge in exchange for the landlord undertaking to provide services, including the repair and maintenance of the structure and exterior of the building and its common parts.
Does the lease contain a rent review clause? Many rent review clauses allow the landlord to increase the rent on a specified rent review date.
Most commercial leases often restrict the tenant’s ability to transfer or sublet the property without the landlord’s prior written consent. Landlords often impose strict prohibitions on subletting, often inserting a guarantee clause stating that if the new tenant doesn’t pay the rent during the rest of the term of the lease, it is you, as the original tenant, who is responsible for it.
Who is responsible for repairs? Most commercial leases impose full repairing and insuring obligations on the tenant (known as FRI leases), relieving the landlord from all liability for the cost of insurance and repairs. In relation to the insurance provisions in an FRI lease, in the majority of cases, the landlord insures the property and the tenant repays the premium to the landlord. The obligation to repair means that the tenant has to put the property into good repair and ensure that the property is properly maintained and decorated. This can be expensive for the tenant. Again, where the lease is for part of a building, the repairs will normally be carried out by the landlord who will seek to recover the costs by way of a service charge.
Many commercial leases contain a “break clause”, which gives you and the landlord the chance to end the lease early in the event that your business fails and you need to close it down. A new business tenant should ensure that such a clause is inserted or they could find themselves personally responsible for the lease when their business has ceased trading.
Ending the lease
Unlike residential tenancies where a court order is required to remove a tenant from the property in the event of any breach of the conditions of the lease, the landlord of a commercial lease can terminate the lease early and peaceably re-enter the property without a court order where the tenant fails to pay the rent within a specified time of the due date. In the case of any other breach, the landlord must first give the tenant notice of the breach and give them time to remedy the breach before applying to the court to terminate the lease.