Commercial Leases: What should you look out for as a tenant?

Taking on a commercial lease can be a daunting task, particularly if you are new to the commercial letting world and have never done so before.

Commercial leases are traditionally prepared by a landlord, meaning the lease terms are drafted in the landlord’s favour. It is therefore important that tenants understand the contents of their lease and their obligations under it.

Though the ability to negotiate a lease will depend on the bargaining position of the parties and any heads of terms that have already been agreed, the below sets out some of the key clauses tenants should consider when looking to lease a commercial property.

Repair

Repair obligations can be burdensome on a tenant. A repair clause will usually require a tenant to keep the property in good and substantial repair and condition known as a ‘full repairing’ obligation. You should therefore check how ‘property’ is defined in the lease, and particularly if this includes the exterior of the property and any windows and doors.

It is also important to note that an obligation to ‘keep’ also includes an obligation to ‘put’, meaning a tenant will be required to put the property into repair if there is disrepair at the start of the term. You should therefore inspect the property before you take on a lease to avoid potentially costly repair works. If the property is in disrepair, you may wish to negotiate an amendment to the lease to limit your repair obligations to the condition of the property at the start of the lease, which is often supported by a photographic schedule of condition.

Alterations

Most commercial leases will restrict a tenant’s ability to alter the property. Usually, alterations to the exterior and structure will be prohibited, and the tenant will only be able to make internal non-structural alterations with the landlord’s consent.

It is also common to see leases prohibit any tenant alterations that would affect any buildings insurance in place, involve the installation or re-routing of any service media, or have a negative impact of the property’s EPC rating.

It is therefore important to consider your intended use of the property, as you may need to carry out alterations to use the property as intended and agree these with the landlord as part of agreeing the terms of the lease. You may also try and negotiate with the landlord:

the ability to install and remove non-structural partitioning walls without landlord consent to allow you to quickly change the internal layout of the property; or
the ability to install equipment to the exterior of the property such as air conditioning units and satellite dishes. The landlord may want to limit this right to a specific area, which will be shown on a plan, and reserve the right to move any of the equipment if required.

Rent review

Some commercial leases, particularly those for a longer term, will contain rent review provisions. Rent will usually be adjusted on an upwards-only basis to reflect the rent the landlord could achieve for the property on the open market.

You should ensure the lease clearly sets out the review dates, how the rent review process works, and the ability to apply for independent determination if the revised rent cannot be agreed between the parties by a certain date.

It is also important for you to consider the terms on which the review will be based, whether this is on an open market basis or connected to an index. You will not want any goodwill that your business may generate during the lease or any improvements you make to the property to be taken into consideration, as this will likely increase the revised rent. You may also wish to agree on a minimum and maximum rent increase with the landlord to ensure certainty at the rent review.

Rights granted and reserved

A landlord may grant specific rights in a lease. A lot of these will depend on the physical layout of the property, the facilities, and your intended business use.

Common rights granted include: the right to use any common parts to access the property (if it forms part of a larger building); the right to use parking spaces and cycle racks; and the right to use designated refuse bins.

The landlord may also try to limit the times these rights may be exercised, such as only during trading hours. It is therefore important to consider your intended use of the property and how you will exercise these rights in practice. If you anticipate needing to exercise these rights outside of business hours, you may wish to negotiate this with the landlord.

Rights may also be reserved from the property for the benefit of the landlord. These typically include:

• the right to enter the property at a reasonable time and on giving reasonable notice, (except in the case of emergency) for the purpose of carrying out repairs, or for any other purpose connected to the lease;
• the right to place scaffolding at the property; and the right to develop the building (if a lease of part) or any neighbouring property the landlord owns at the start of the lease or acquires during the lease term.

Though these are fairly standard reservations, and so a landlord will likely oppose their removal, they may cause potential disruption to your use of the property. You may, therefore, wish to qualify these so that any works carried out do not materially negatively affect your ability to use the property for its permitted use.

If you are looking to take on a commercial lease and would like advice on the contents of this article, please do get in touch with our Commercial Property Team by phone on 01603 610911.

Note: the contents of this article are for general information only and do not constitute legal advice. Specific legal advice should be taken in any particular circumstance.