Drafting a watertight commercial lease is a critical step towards protecting your property, and saving you time, money and effort if any tenant issues arise.
Property, whether it is residential or commercial, can be a sound investment opportunity, but commercial property, in particular, offers excellent earning potential, more objective price evaluations and more flexibility in contract terms. Although, when it comes to letting out your commercial property, your responsibilities as a landlord will differ from those associated with renting out a residential property, and there are various factors that you need to consider when putting together your contract. This contract, also known as a lease agreement, needs to contain certain terms and conditions so that the appropriate rights are given to you and your tenant.
At Romain Coleman, we have years of experience in drafting commercial leases and are well equipped to help legally protect you and your property. With the guidance of an expert solicitor, you can rest easy knowing that your tenant will concede to a watertight lease that puts you as the landlord in a secure and comfortable position. In the case that any tenant issues do arise, our specialist property dispute solicitors can assist you with seeking a prompt resolution.
A commercial lease is a contract that is signed between a business tenant and a landlord.
This lease is legally binding, and it gives the tenant the right to use the property for commercial activity for a decided period at a given fee. In the lease, the rights and responsibilities of both the tenant and landlord are outlined for the duration of the agreement.
Commercial leases tend to be more complicated than residential leases, as the terms can be negotiable, and vary greatly from lease to lease. Therefore, it is essential that you understand how your lease terms define the rights and responsibilities of you and your tenant before proceeding with letting your commercial property.
Commercial properties may refer to:
A commercial property lease comprises of various clauses and sections. The following elements must be considered when drafting your commercial lease.
Although this might be obvious, it is important that you specify the unit/address of the premises that you are referring to, particularly if there are other units to let at the same property.
Rent for a commercial property can be complicated to determine, as a range of factors contribute to the overall rental price. As a landlord, you want to make sure that you get the best rental price, but if the price is too high, your property could remain vacant for months.
To calculate the optimal rental price for your commercial property, you first need to understand its value.
Critical variables that you need to consider include:
The total rent figure can be determined with the help of an online commercial rent calculator or through employing a commercial agent.
A commercial lease agreement needs to cover:
The payment terms are the method in which payments will be made for the commercial property you lease to a tenant. In the UK, the safest and most common method is direct debit. With a direct debit, you can ensure that the rent you are owed will be paid on the agreed date, and you will receive a notification when the amount has been transferred into your bank account – an ideal system if you are managing different tenants. Direct debits can reduce the time it takes to check up on your tenants and allows you to obtain your rental income more frequently and consistently.
If the case arises that your tenant does not pay their rent, you can’t just lock up their business and hold their goods hostage. Instead, you need to adhere to the law and follow the correct legal steps. Employing the assistance of an experienced solicitor to advise you is recommended; Romain Coleman can help you abide by the regulations and find the best solution for you.
Some possible steps can include:
In your lease, you can decide if you want to offer your tenant a rent-free period. A rent-free period refers to a period of free rent, usually at the beginning of the lease term. This is often offered by landlords under the terms of a commercial lease with a view of encouraging the prospective tenant to sign a new lease or to encourage an existing tenant to remain in occupancy of the property.
You can ask your tenant to provide a rent guarantee to prove that they can consistently meet the cost of renting before you lease your property to them. In many cases, a bank guarantee or financial accounts are acceptable, but you can also request a cash deposit.
Your commercial lease should mention a rent review, meaning that the amount of rent your tenant pays is subject to review. Rent reviews normally occur every three to five years so that you can adjust the rent amount to match the market conditions.
The lease needs to state how long the tenancy is intended to last for, and can also include.
In property law, ‘demised premises’ refers to the part of the premises that your tenant is allowed to occupy. For instance, if you own a storied building, you could rent only the second floor to one tenant. It is important that the details of the demised premises set out in the lease correctly reflect both parties understanding of what the tenant is permitted to occupy.
This may be set out in terms of an address and a plan or plans with the demised premises clearly edged in black or red. For instance, it can indicate whether the tenant has leased the basement, loft, car park, or any other part of the property. The plan will also specify ‘common areas’, which are areas shared with other tenants. This clause should explain whose responsibility it is to repair and maintain parts of the premises.
Leasehold covenants are agreements made between you and the tenant. As a landlord, you have the right to request that your tenant fulfils their responsibilities, and your tenant has the right to request that you carry out yours.
Covenants for a landlord can include:
Covenants for a tenant can include
As a landlord of a commercial property, certain points will need to be demonstrated in the lease agreement, such as:
This clause ensures that your tenant will have to make an application to the local council for planning permission in altering the demised premises or carrying out any development or works on the property.
This clause states that the lease was signed in the presence of a witness or witnesses.
A Security of Tenure clause means that once the lease expires, the tenant can request for a new lease on the same terms (subject to agreement on commercial terms, such as the amount of rent and any updates in the law). You can only refuse if you have statutory grounds on which to do so, such as a tenant’s failure to pay rent. However, you can also ask for the rights of Security of Tenure to be excluded from the lease – allowing you to retain strict control over the occupation of your commercial property. As a result, when the lease period expires, you can simply ask your tenant to vacate.
The Landlord and Tenant Act is a law in the UK that deals with the relationship between a landlord and a tenant. This law follows various general principles, ensuring that the rights of both parties are protected. When a tenant breaches the requirements of a lease, you, as the landlord, have the right to take legal action to evict your tenant or to seek compensation. This act also applies when your tenant fails to pay rent on time or does not pay rent at all.
If you plan to rent out your commercial property, you need to ensure that you have a watertight lease in place. With the assistance and guidance of Romain Coleman’s expert commercial property solicitors, the process of drafting a commercial lease agreement is made more straightforward, and you will understand what every clause and condition means in terms of your rights and responsibilities.
To speak to an experienced property dispute solicitor now, call us on 0208 520 4555 or contact us online, and we’ll be happy to help.
This article was first published in 2016 and has been updated on 14/08/19.
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This post is not legal advice and should not replace professional advice tailored to your specific circumstances. It is intended to provide information of general interest about current legal issues.