Signing a commercial lease is a pivotal moment for a business owner and can be an exciting new adventure. However, there can be serious repercussions if you sign a bad lease, such as paying too much or finding yourself in a space that isn’t fit for purpose for years to come, or both.
Commercial lease documents are complex, and before signing on the dotted line it’s crucial to ensure you completely understand what you’re agreeing to.
Here are some of the most important clauses to familiarise yourself with.
Security of tenure
‘Security of tenure’ is the tenant’s statutory right under the Landlord and Tenant Act 1954 to be granted a new lease of their business premises once their current lease expires.
This clause can be a real advantage as it facilitates business continuity and can help ensure you aren’t forced to relocate to another space. This is especially important if you have spent thousands of pounds on a fit out, or if you are a retailer and your customers have come to know where your shop is located.
‘Contracting out ‘
It’s important to understand that your right to security of tenure can be contracted out. If this happens, you’re essentially agreeing to give up your automatic right to a new lease when your current one ends. This means your landlord won’t be legally required to offer you a new lease, and you may need to vacate the premises unless you negotiate a new agreement.
Whether this is a problem really depends on your situation. If you have a good relationship with your landlord, they may still be happy to offer you a new lease, even though they’re not obligated to. On the other hand, if your business is growing and you’ll soon need larger premises, then this becomes less of an issue.
While contracting out does remove some security, it’s not always a disadvantage. The key is to consider how it aligns with your long-term plans and to fully understand the implications.
Break clauses
A situation may arise where your business needs flexibility and the power to exit your lease before the agreed term is up. This is where a break clause becomes important.
A break clause is a contractual provision that allows either the landlord or the tenant to terminate the lease prematurely, usually before the end of the fixed term. It provides an opportunity for either party to exit the lease by giving notice within a specified timeframe, subject to certain conditions which are set out in the lease
Your lease isn’t guaranteed to contain a break clause – it’s subject to negotiation between you and your landlord. However, walking away from a commercial lease without the inclusion of such a clause can present considerable challenges. Not only will you be bound to fulfil the lease terms, but you may also be required to proactively engage in negotiations with your landlord to secure an early termination.
It’s crucial to note that walking away from a lease can potentially expose you to financial penalties and legal consequences, so it’s advisable to approach such situations diligently and seek appropriate legal guidance to safeguard your interests.
Service charges in shared buildings
A service charge is usually a charge your landlord requires you to pay for shared areas, sometimes known as ‘communal’ areas or ‘common’ parts of the property you occupy. It is in addition to your rent payment and provides for the costs and expenses your landlord incurs for keeping these spaces in good repair and condition.
There should be a specific provision in your commercial lease which contains all the details about your service charge. This should set out which services it includes, how your proportion payable is calculated, whether third parties will carry out the services the service charge covers, and whether the service charge is limited, or you requested a cap on this at the start of the lease.
Dilapidations
Your lease is also likely to have a clause covering your responsibilities regarding items of disrepair, also known as ‘dilapidations’. It’s vital to understand your liabilities regarding dilapidations to ensure you avoid a potential claim brought against you by your landlord for breach of covenant.
Dilapidations refer to any damage you have caused to the business premises you lease, as well as damage to belongings or fixtures of your landlord that you have allowed to fall into disrepair.
As part of the repairing clause, you will be required to repair or ‘make good’ any damage you’ve caused. You may also have to return the property to how it was when you took on the lease if you have, for example, carried out extensive alterations to the property.
Your lease will also usually contain dilapidations clauses requiring you to ensure the property complies with all relevant legal obligations. For example, you may need to ensure your property complies with health and safety regulations.
If you fail to carry out repairs required of you during the term of your lease, this may put you in breach of the terms and your landlord can then make a dilapidations claim against you.
Final thoughts
Understanding a new commercial lease can feel like a minefield, but taking the time to familiarise yourself with the key terms and implications can save you from unexpected challenges down the line.
Don’t be afraid to ask questions or seek professional advice, whether from a solicitor, surveyor, or commercial property expert. These professionals can help you identify any potential pitfalls and negotiate terms that work in your favour. Jonathan Hand is founder of The Lease Negotiator