What you need to know when taking a new commercial lease

Whether you are a start up or an established business, attempting to navigate a new commercial lease can be a daunting process for tenants.

Whether the property in question is an office, retail or industrial unit, commercial leases are complex documents that typically run to dozens if not hundreds of pages long. As is the case with most legal agreements, the devil is in the detail. It can be difficult for tenants to understand nuances in the drafting of their lease and what practical implications this may have them going forward.

This article sets out some key points for tenants to bear in mind when taking on a new commercial lease, and the potential pitfalls for tenants who don’t fully understand their obligations.

Can I get out of my lease early?

Commercial leases are usually long term commitments with limited flexibility for the tenant to leave early if things do not work out as planned.

A commercial tenant will only be able to terminate their lease before the end of the term if:

• the lease contains a break clause which the tenant can trigger to bring the lease to an end; or
• the landlord agrees to let the tenant surrender its lease early.

Tenants should not enter into a new lease hoping to rely on option B as a commercial landlord is under no obligation to let the tenant surrender early. Landlords are usually only prepared to allow this in return for payment of a hefty surrender premium by the tenant.

It’s therefore crucial for tenants who need flexibility to exit the lease early that the lease includes an appropriate break clause. It is also essential that tenants understand what they need to do in order to trigger a break clause in the lease. Generally, the tenant will need to serve notice on the landlord by a specific deadline stated in the lease which is usually 3-6 months before the break date. The lease will specify how this notice needs to be served on the landlord and may impose additional conditions on the tenant in order for the break clause to be triggered.

Tenants that don’t fully understand the small print in their break clause may be in for a nasty surprise when they try to trigger the right to terminate, only for their landlord to reject this on the basis the notice was late or the tenant has not fulfilled any preconditions for exercising the break.

Am I obligated to repair damage to my property caused by a previous tenant?

Most commercial landlords will try to get new tenants to sign up for a ‘full repairing’ lease. A full repairing lease is a lease which puts the onus on the tenant to carry out all necessary maintenance and repairs required to put the property into a good state of repair.

It’s crucial for tenants to understand that an obligation to keep the property in good repair includes an implied obligation to put the property into good repair, if it is not already in good repair at the start of the lease. Practically, this means that if a tenant takes on a full repairing lease of a property with some existing defects/ disrepair, the new tenant is accepting liability to fix these issues at its own cost. In the context of a commercial lease, the tenant does not benefit from a general carve out for ‘fair wear and tear’.

When the tenant vacates the property at the end of the lease, if there are any issues with the condition regardless of how/ when these may have arisen, the tenant could be pursued by the landlord for the cost of repairing or remedying these. These claims are known as dilapidations claims, but despite the name may suggest can be brought for relatively minor or cosmetic issues, not only when the property is significantly damaged so as to be unfit for occupation.

Dilapidations claims can often run into the tens of thousands of pounds (or more!) so it is critical for tenants hoping to avoid an eyewatering bill at the end of their lease to understand what they are signing up to when taking on a new lease of a property that has some existing wear and tear.

The best way for tenants to limit their repairing obligations so that they do not become liable to remedy historic issues with the property is by including a ‘Schedule of Condition’ in the lease. A Schedule of Condition is a set of photographs attached to the lease which document its condition at the beginning of the lease and confirm that the tenant is not required to put the property into any better state than what is shown in the photographs.

Can my landlord increase the rent during my lease?

It is normal for commercial leases for 5 years or longer to include a rent review clause allowing the landlord to increase the rent during the term on a specified date.

There are different methods used to review the rent, the main ones being:

• Market rent review which involves comparing the property with other similar properties in the area and assessing its current rental value at the time of the review.
• Index linked rent review which will increase the rent in line with either RPI or CPI.
• Stepped rent review which involves increasing the rent by a fixed amount agreed at the outset of the lease on a specified date.

Tenants will want to ensure they understand when the rent reviews under their lease will take place and the basis on which the new rent will be assessed.

Tenants may benefit from asking to impose a cap on the amount by which the rent can be increased, though landlords will often only be prepared to agree a cap if there is a corresponding minimum increase, known as a ‘collar’.

In recent years the courts have heard a number of cases relating to unfavourable rent review clauses that resulted in rents spiralling out of control over the term of a lease. Rent review is a complex area and the outcome of this can often turn on small details and nuances in drafting. Therefor it is vital for tenants to take legal advice before committing to a new lease which includes a rent review.

If you are considering taking on a new commercial lease, we can help you to understand your obligations as a tenant to minimise the risk of any nasty surprises. Please feel free to contact our Commercial Property Team for an initial no-obligation chat to discuss your options on 01603 610911 or email info@leathesprior.co.uk.