Your Guide To Commercial Property Lease Agreements: Terms, Rents And Service Charges
Renting commercial property can be fraught with legal difficulties if you do not fully understand your obligations to your landlord. There is much more to worry about than simply paying the rent…
How Long Should My Lease Agreement Be?
Commercial property lease terms generally run from two to 10 years. But how long you rent the property will depend on your business circumstances. If you’re a start-up then a short lease may be better: you may wish to expand to larger premises if your new venture takes off faster than you expected.
Or circumstances beyond your control may cause your business to struggle. In which case, you don’t want to be tied to a long, onerous and very expensive lease. Remember…even if your business has ceased trading you are potentially still liable for rent and other payments under your lease agreement.
Lease length (and how much rent you pay) will also determine your Stamp Duty Land Tax liability. You may be liable for SDLT if the lease is new.
Get expert and pragmatic advice from our experienced commercial property solicitors. They are based in Poole but assist clients all over the UK.
What About Break Clauses? What Are The Pitfalls?
Many commercial property leases have ‘break clauses’ that allow you or your landlord to end your legal agreement early.
Some leases contain tenant-only or landlord-only break clauses; others favour both. It depends on the market – you’re more likely to see tenant-only break clauses when the supply of commercial property exceeds demand.
Read the small print carefully when it comes to break clauses – they usually depend on a series of conditions (such as payment of rent, timing, repairs/decoration and service of notice). Fail to meet any of these conditions and you may have to rent your property for the full term.
When Is The Rent Due? What About Rent Reviews And Turnover Rent?
Rent is usually payable on the Quarter Days (March 25, June 24, September 29, December 25) but it can be paid monthly.
Some leases allow for the rent to be reviewed on key dates during your tenancy. These reviews are usually ‘upward only’ so your rent will remain level or increase but never decrease. In rare circumstances you may also be liable for ‘turnover rent’ (based on your profits) on top of your basic rent.
As well as paying the rent, you will also be liable for VAT, outgoings (such as business rates, insurance premiums and utility bills) – so make sure you have budgeted for everything.
What Will The Service Charges Include?
If your lease is for the whole building then you will be responsible for all the outgoings and maintenance costs. If you’re renting part of a building then the landlord will pay all the costs then bill you for your share.
It is vital to ensure you know everything that will be included in the service charges – nasty surprises can be even nastier if you’re liable for years to come under a long lease!
Service charges will include repairs to the building, maintenance, any improvements or alterations, utility bills, insurance premiums, employment of staff (such as cleaners or groundsmen) and the fees charged by the landlord’s property management company. You may also have to pay into a sinking fund to cover large bills in the future.
The landlord should provide you with an estimate of the service charges for the coming year and collect payment quarterly with the rent.
At the end of the service charge year the landlord will send you an account of what has been spent. If it exceeds what you have paid then you will have to make up the shortfall. Any surplus will be carried over to the next year.
Find Out More About Commercial Property Leases
When renting commercial property you will also need to consider:
- rent deposits and guarantors
- insurance risks, fire risk assessments, landlord indemnity
- repairing obligations
- permissible alterations to the building
- lease assignments and underletting
- Landlord & Tenant Act 1954 (and contracting out)
- Disability Discrimination Act 1995
- Control of Asbestos Regulations 2012
- Energy Performance Certificates.