Signing a commercial lease is often the first big financial commitment that a business makes. It is a legally binding contractual agreement between a business tenant and a landlord, which gives the tenant the right to use the property for business operations. In return for this, the tenant pays a fee and agrees to comply with certain other obligations.
There are many different types of commercial leases and each come with their own costs and responsibilities. There isn’t a ‘one size fits all’ approach to commercial leases, and each business should negotiate an agreement that best matches their business model. Before any business signs a lease agreement, they should make sure that they’ve asked the following three questions:
How long do I need to pay the lease for?
You must continue to pay your monthly lease agreement until the contract is ended. Therefore, it is essential that you are satisfied with the length of the commitment to which you are signing up.
There is no such thing as a ‘usual term of a lease’. The term is one of the points that would need to be negotiated between the parties. Often, a start-up business might be more reluctant to sign up to a very long term at the outset, until they have had the chance to test the waters with the new business. Equally, an established business might want the certainty of being able to trade from the premises and may prefer a longer term.
It is therefore important that you discuss your requirements with a solicitor early on, who can advise on this point. There may also be a possibility of negotiating a break option in your lease. A ‘break clause’ is one where the lease can be terminated earlier than its contractual expiry date if certain trigger events are met.
It is also important to consider whether there are any renewal rights at the end of the contracted term of the lease. What happens when the lease ends and you want to renew the lease? You may have built up goodwill by virtue of being in the premises for a long time and you may want to be able to preserve that. A lot of this depends on whether your lease is one that is protected under the security of tenure of the Landlord and Tenant Act 1954 or ‘contracted out’ of it. A tenant of a lease that is protected under the 1954 Act provisions will generally be able to renew the lease on the same terms (except for rent) as the existing lease.
What are my repair obligations in the lease?
This depends on the type of lease you have signed up to:
Full Repairing and Insuring Lease
Commonly known as a ‘FRI lease’, this is one where the tenant takes on the responsibility to repair and insure the building. A tenant of a FRI lease will generally be under an obligation to keep the property in a state of repair, regardless of the state it was in when they took it over. It can therefore be an onerous obligation as the cost of repairing a property can be significant and not something that the tenant may have anticipated when signing up to the lease.
Effective FRI Lease
This is similar to a FRI Lease and is common when the property forms part of a multi-let building. In such leases, the tenant would be responsible for keeping their own property in repair and the Landlord is responsible for repairing the main structure, for which the tenants pay a proportionate contribution by way of service charge.
Internal Repair lease
This type of lease is less common than the above two. In an IR lease, the tenant is responsible for repairing their own property and there is no obligation to pay towards repair of the main structure. Usually, such a lease would command a higher rent to compensate for the fact that there is no ongoing liability for repair.
Can I legally operate my business within the commercial lease agreement?
There will be specific clauses in your lease that restrict the business activity that can occur on the premises. Many tenants assume that so long as the lease allows the tenant’s business to be carried out, this is fine. Unfortunately, it is not as simple as that. A tenant should also consider what impact this will have on you if your circumstances change in the future. A tenant needs the permitted use to be wide enough to allow its business to grow, adapt and change in a changing business environment. The permitted use of premises is also a key factor if the lease may need to be assigned to a third party in future.
