Signing a Commercial Lease

It is important to understand the main risks and legal obligations involved.  It is important to understand that:

• A lease is a legal document
• A lease will impose obligations on you
• The landlord can enforce the obligations in Court

The Risks

Reducing the Risks

The Risks

Term (Duration/Length)

If you agree a fixed term, you may have to meet all of the obligations (including payment of rent and carrying out repairs) until the lease ends, even if the business fails and the premises is vacated.

Guarantee

You may be required to personally guarantee the obligations for the term of the lease and should the business fail, rent and building repairs may have to be paid for from personal assets.

Rent

Rent is payable at the agreed figure (usually in advance) regardless of your trading circumstances.  Failure to pay rent (or other charges stated in your lease) at the time agreed will usually result in action by the landlord to recover the debt, which could result in court action, bailiffs or bankruptcy, and the loss of your lease.  

Rent Review

There will be periodic rent reviews, unless the lease term is short.  A commercial lease may impose an ‘upward only’ rent review, implying that rental costs cannot fall, even in a falling property market, and regardless of the current market rental value.  

Repairs

The ordinary obligation to repair the leased property can require you to carry out (or pay for) all necessary repairs, even if the disrepair dates from before the lease is signed. To avoid this, special provisions may be inserted in the lease which limit obligation to maintaining the property in its initial condition.

Ending Occupation Early (Alienation)

This is only possible if it is allowed by the lease. It may be by sub-letting or by assignment (selling the lease) to a tenant acceptable to the landlord. Some leases make the original tenant responsible if a subsequent tenant (assignee) fails to meet the obligations of the lease. The original tenant always remains liable for payments if the lease is sub-let.

 Reducing the Risks

Landlords with several properties often use standard contracts that may not suit your business. A solicitor may be able to negotiate any changes you require for your specific business.

If concerned about the obligations in a lease, the landlord can be asked for alternatives. A shorter term may be requested, limitation of the repair liability or an alternative method of rent review. The landlord is not obliged to offer alternatives but if they do, other parts of the lease could change to compensate for this.

In addition to these key points covered, there are other important matters to consider before agreeing to sign a commercial lease, and it is strongly advised that the services of a suitably qualified property or legal professional are sought.  This may be a chartered surveyor, a solicitor or a licensed conveyancer.

Further information is given in ‘A Code of Practice for Commercial Leases in England and Wales’. The Code is available at:

http://www.commercialleasecodeew.co.uk