11 Jan Top 10 things landlords need to consider when preparing a commercial lease
A commercial lease is a legally binding contract between a landlord and a tenant that outlines the terms and conditions of renting a commercial property. Landlords need to be aware of some important aspects when preparing a commercial lease for their tenants. A generic lease is unlikely to cover everything that is needed. This can lead to unwanted disputes between the landlord and the tenant.
Here are the top 10 things landlords need to consider when preparing a commercial lease:
The type of lease.
There are different types of commercial leases, such as leases where the rent is inclusive of rates, services and/or utilities, leases where the rent is exclusive of rates, services and/or utilities, and fixed rent and turnover rent leases. Each type of lease determines how the rent and other expenses are divided between the landlord and the tenant. Landlords should choose the type of lease that best suits their property and business goals.
In a lease where the rent is inclusive, the tenant pays a flat fee to the landlord that covers all the costs associated with the property, such as insurance and maintenance. The landlord is responsible for paying these costs from the rent.
In an exclusive rent lease, the tenant pays a base rent plus some or all the costs associated with the property. This could include insurances, utilities, repairs and other expenses.
In a fixed rent lease (whether that is an inclusive or exclusive rent), the tenant pays a fixed rent (which is normally subject to review after 3 to 5 years) whereas in a turnover rent lease the tenant pays a base rent plus a percentage of their gross sales over a certain threshold. The landlord is responsible for paying the costs associated with the property from the base rent. This type of lease is common for retail spaces in shopping centres.
The rent and rent reviews.
Landlords should set a fair and competitive rent amount that reflects the market value of the property and any expenses associated with the premises. Landlords should also specify how and when the rent will be reviewed. For example, will an annual percentage increase follow the rate of inflation? Or will it be a market rent comparable to other local premises?
The rent deposit.
Landlords may require a rent deposit from their tenants to provide security against damage or rent arrears. The payment should be held in a separate bank account. Landlords should also state how and when the rent deposit will be returned or withheld.
The term and renewal options.
A commercial lease gives the tenant a length of tenure and a right to continue to rent the property at the end of the term (Landlord and Tenant Act 1954). Landlords should decide how long they want to lease their property and whether it is appropriate to request that the tenant opts out of the Landlord and Tenant Act. The term and renewal options should be clearly stated and the lease agreement should also include any conditions or renewal fees.
Repairing liability.
Landlords should define who is responsible for maintaining and repairing the property. The lease should clearly state the tenant’s obligations to keep the property in a good condition and what they are responsible for fixing during their tenure. Also included is the tenant’s responsibility for essential building services such as plumbing, heating and air conditioning.
Insurance – who pays?
Landlords are normally responsible for organising the building insurance on their property. If the landlord is passing the costs of building insurance onto the tenant, this must also be clearly stated in the lease. A lease should also leave the tenant responsible for obtaining insurance coverage for their business operations and personal property.
The subleasing and assignment rights.
Within the lease, landlords should include whether the tenants can sublease or assign their lease to another party, and the conditions that apply. Subleasing means that the tenant rents out part or all the property to another tenant while still being liable for the original lease. Assignment means that the tenant transfers all their rights and obligations under the lease to another tenant who becomes liable for the original lease.
Usage terms.
The landlord should specify how the property can be used and any restrictions that apply. These terms protect the landlord against any changes to the use of the property during the rental term. Restrictions could include the hours of operation, the type of business, the signage or noise levels.
The default and termination clauses.
The commercial lease should explain what actions may be taken in the event of the tenant breaching the terms of the lease. For example, most leases will include clauses giving the right to the landlord, in the event of a breach, to terminate the lease, enter the property to carry out urgent repairs, charge interest for late payment and use the rent deposit.
Break clause.
A break clause states the conditions of how or when the landlord or tenant can end a fixed term tenancy earlier than initially agreed. It should be fair and consider the needs of both landlord and tenant.
Commercial property law is complex, and the needs of each landlord will differ. Therefore it is highly recommended to work with a commercial property solicitor who can help you draft, review, and finalise your commercial lease agreement. By doing so a landlord will also minimise the risk of lengthy legal disputes further down the line.
For more information
Commercial leases for landlords and tenants
For legal advice
- Email info@hrjforemanlaws.co.uk
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