Commercial lease guide for small businesses

Whether you’re a new business or looking to expand, choosing the right premises will be crucial to your future success.

Once you’ve found a premises that fits the bill, you’ll need to sign a lease agreement with the landlord. Read on to find out how lease agreements work, key things to consider before signing, and why it’s important to get expert legal advice.

What is a commercial lease?

A business premises or commercial property is a space that’s solely used for business purposes.

Whether you’re looking to rent an industrial warehouse or a small bookshop, you’ll need to sign a commercial lease. This document is essentially a tenancy agreement for a commercial property.

As with a residential tenancy agreement, a commercial lease will set out the details of the rental agreement such as how much rent you’ll need to pay and when it’s due.

In the UK, all commercial properties fall into one of these five categories:

Leisure
Healthcare
Retail
Industrial
Offices

What is a commercial lease agreement?

A commercial lease agreement is the legally binding contract between you (the tenant) and the property’s owner (the landlord).

The agreement gives you the right to use the property for business purposes. However, it’s important to note that the responsibilities of each party tend to be agreed on a lease-by-lease basis.

A standard commercial lease agreement is likely to include the following information:

property address
type of property being let
type of business using the property
amount of rent due and when
tenancy term
provisions for renewing the tenancy (if applicable)
security deposit details
who’s responsible for property improvements

What are the heads of terms in a commercial lease agreement?

The heads of terms is a document that outlines all the key information agreed by the prospective commercial tenant and the landlord.

This document isn’t usually legally binding and tends to be drafted ahead of the actual lease agreement.

A heads of terms can be viewed as an agreement in principle or a document outlining the intent between both parties. It can be useful in speeding up an agreement, but also in making sure time isn’t wasted drafting a lease agreement if either side isn’t happy with the terms.

What is a forfeiture of commercial lease?

A forfeiture of commercial lease is when the landlord can evict a business tenant from their property if they break the terms of the lease agreement.

As in residential tenancies, some of the reasons for the landlord terminating the contract could include damaging the property, subletting illegally, or failing to pay rent.

In this guide, we’ll cover what you should expect about any initial startup costs – as well as how often (and how much) you may get paid.

What are the different types of commercial lease agreements?

There are several types of lease agreements. Firstly, your lease agreement will be either a:

a lease of part
a lease of whole
an agreement to share space

Your lease agreement may also be a:

long-term lease agreement – usually for a term of three years to 25 years
short-term lease agreement – usually for a term of three months to three years

And when it comes to how the rent is paid, your lease agreement may be a:

sublease – paying rent to another tenant who’s subletting the property
base rent lease – sets out a base rent paid by the tenant
percentage lease – the tenant pays a base rent plus a percentage of their income
full repairing and insuring (FRI) lease – the tenant is responsible for all the property’s maintenance and insurance costs
gross rent lease – the tenant pays the rent and any specified expenses, with the landlord liable for all other costs

Getting a commercial lease agreement – how does it work?

A commercial lease agreement is likely to be for a fixed term, which could last up to 25 years.

As well as the rent, the tenant usually has to pay a service charge to cover things like:

general cost of maintaining and repairing the property
cost of cleaners and gardeners
insurance costs
contribution to a sinking fund to cover unexpected costs

The lease agreement will also set out the landlord’s responsibilities. These are likely to be:

keeping the property structurally sound and being responsible for any major repairs
maintaining any communal areas
making sure communal areas comply with health and safety regulations
providing the tenant with a valid Energy Performance Certificate (EPC)
reporting and managing any risk of asbestos in the building

Meanwhile, the tenant’s responsibilities are likely to be:

maintaining the property’s interior
completing any non-structural repairs
making sure non-communal areas comply with health and safety regulations

The Landlord and Tenant Act (1954) is the law that covers responsibilities between commercial landlords and tenants.

Signing a commercial lease agreement – key considerations

Signing a commercial lease agreement shouldn’t be taken lightly. It’s important to make sure you’re happy with the proposals at the heads of terms stage before the agreement is drafted.

Here are some of the main things to think about before signing your lease agreement:

Is it a sublease? This is a common type of agreement. However, it’s important that you’re aware it’s a sublease and that you know the details of the original agreement between the landlord and tenant.

What is the permitted use class? The permitted use for the property will determine what can be done there. For example, cafes are Class A3. If you need to change the permitted use, you’ll be required to get it signed off by your landlord as well as planning permission.

Is there ‘break right’ in the lease? A break right is like a break clause – it allows you to terminate the lease before the end of the full term. Many businesses will look for a break right as it provides increased flexibility.

Are you happy with the rent? As well as the amount of rent due and type of agreement, look out for a rent review clause. It’s also important to note when the rent is due as commercial leases often require it to be paid in advance.

Should businesses use a commercial lease solicitor?

It’s likely that your prospective landlord will use a commercial lease solicitor to draft the agreement. This means it could be in their interests, so it’s crucial you have your own solicitor review the contract.

Solicitors can also complete useful checks before you sign the agreement, such as:

Local Authority Searches
confirming the landlord owns the property
checking the property has the right planning permission

Having legal representation can help you to negotiate for a better deal, while also offering you the necessary protection before signing an agreement.

Do you have any unanswered questions about commercial lease agreements? Let us know in the comments below.

More guides for small businesses

Photograph: markobe/stock.adobe.com

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