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What is a Commercial Lease Agreement?

By Dean Laming on February 1st, 2022

A commercial lease agreement, as defined in the Landlord and Tenant Act 1954, is a legally binding contract between a landlord and a commercial tenant for the use of property for business purposes in exchange for rent payments. Understanding commercial lease agreements is key for both property owners looking to lease out space and businesses seeking to occupy new premises.

This guide on commercial leasing will cover everything you need to know, including the key terms of lease agreements, rights and obligations for landlords and tenants and different types of commercial leases. 

Examining the Key Terms of Commercial Lease Agreements

A commercial lease agreement gives a tenant the right to use a property for agreed-upon business activities over a set period of time, usually 1–10 years, in exchange for regular rent payments to the landlord.

It is legally binding once signed by both parties. The agreement will specify key terms like the start and end dates, the overall length of the lease term, the amount of base rent, and provisions for any rent increases over the lease period.

Leases over 7 years must be registered with the HM Land Registry. Tenants are typically responsible for costs like utilities and business taxes in addition to rent, referred to as “triple net” leases. 

Understanding Rights and Key Obligations in Commercial Lease Agreements

When entering into commercial lease agreements, both landlords and tenants take on certain rights as well as key obligations that need to be fulfilled under the legally binding contract:

Landlord Rights and Obligations

  • Allowing tenant possession of the property for the full lease term
  • Maintaining overall structure and any common or external areas
  • Meeting all property taxes and building insurance costs

Tenant Rights & Obligations

  • Paying rent plus additional costs like utilities fully and on time
  • Using the property only for the agreed-upon commercial purpose
  • Holding and maintaining their own public liability insurance
  • Securing approval for any changes to layout or exterior signs

What are the Key Obligations in a Commercial Lease?

A commercial lease sets out obligations for both the landlord and tenant:

Landlord obligations include:

  • Allowing the tenant to take possession of the property and use it undisturbed for the lease term
  • Maintaining the building structure and common areas
  • Paying property taxes and building insurance

Tenant obligations typically include:

  • Paying rent and other costs like utilities on time
  • Using the property for agreed purposes only
  • Maintaining valid building insurance
  • Only making approved changes to the premises
  • Vacating at the end of the lease and returning in good order

The lease may also stipulate who is responsible for repairs inside the unit. Many commercial leases are “Full Repairing and Insuring” (FRI) leases, meaning the tenant must pay all operating costs.

How Do You Sign a Commercial Property Lease?

The key steps for signing a commercial lease are:

  1. View the property – Make sure it meets business needs regarding size, facilities, access etc.

  2. Heads of Terms – Agree on core commercial terms like rent, lease length, rent increases etc.

  3. Instruct a solicitor – They check the lease and negotiate final terms.

  4. Sign the lease – Both parties execute the final legally binding document.

  5. Complete additional steps – For leases over seven years, register the lease with the Land Registry.

The best practice is to hire a solicitor experienced in commercial leases to protect your interests and navigate negotiations.

What Happens When You Want to End a Commercial Lease Early?

Ending a commercial lease early usually requires paying fees negotiated in the original lease, such as forfeiture of a rent deposit or penalty payments. The landlord may also claim damages for loss of rent for the remainder of the term.

Tenants that want to exit early should check if the landlord is willing to mutually terminate rather than forfeit, which can damage credit ratings. Subletting to another tenant is another option, but it requires landlord consent.

What Happens at the End of a Commercial Lease Term?

At the end of the lease term, tenants must vacate the property and perform any end of lease reinstatement work stated in the original lease. The landlord will inspect the property and list any repairs.

Many leases contain an option giving tenants the first right to re-lease for an additional term. Landlords may also offer a new lease with revised terms. If the tenant stays past the end date without signing a new lease, the arrangement automatically becomes a periodic rolling lease with notice periods for ending.

What are the Different Types of Commercial Property Leases?

There are several types of commercial property leases with differing cost and responsibility structures:

  • Gross Lease – Tenant pays a fixed rent. Landlord pays insurance, maintenance and taxes.
  • Net Lease – Tenant pays rent plus a share of outgoings like taxes and building insurance.
  • Triple Net (NNN) Lease – Tenant pays all outgoings, operating costs and taxes. Lowest risk for landlords.
  • Percentage Lease – Rent is partly or fully based on tenant’s revenue or sales. Benefits retail establishments.

Choosing the optimal lease type involves balancing costs against risks and operational control. New businesses often prefer net leases, whereas retail tenants gravitate towards percentage leases, benefiting from revenue-based rent.

How Do You Negotiate the Best Commercial Property Lease?

Top tips for tenants negotiating a commercial lease include:

  • Seek longer lease lengths with options to renew – Provides stability and flexibility
  • Negotiate caps on increases for maintenance fees and annual rents
  • Make sure any tenant exit clauses offer feasible exit routes
  • Limit reinstatement works and replacement costs at lease-end
  • Include rights to make future alterations, like signage or layout changes
  • Ensure fair wear and tear clauses reflect reasonable use of premises

Being clear on operational needs and consulting a property solicitor allows tenants to negotiate leases that support their business objectives over the long-term while controlling costs.

Making Sure Building’s Insurance is Included in the Lease

If building insurance is included in your lease, then you won’t need to worry about organising this yourself! If you don’t have it, we strongly recommend ensuring that you and your business are protected.

Fire, floods, and extreme weather are all very real possibilities that could be expensive and cause extensive damage to your business premises. Furthermore, theft, vandalism, and other anti-social behaviour also pose a threat to your business.

If you don’t have the right buildings insurance, and these events occur, you risk exposing your business to serious costs that could see all of your hard work disappear. Choosing business insurance means considering your company’s unique needs and potential risks.

At Brisco Business, we can assist you in evaluating your options and selecting the right coverage for your business. Get bespoke advice for your business today by contacting us.

Dean Laming

Dean is a Chartered Insurance Broker with more than 25 years insurance experience. Through various underwriting, operational and management roles, Dean has built up extensive knowledge of how to run a business and is now Managing Director of Brisco Business, part of the wider Henry Seymour Group.

All articles by Dean Laming

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