All you need to know about commercial leases

shu-gen-Commercial-Lease-702865987-1500x1000Drafting 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.

What is a commercial lease?

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:

  • Office buildings
  • Retail buildings
  • Industrial buildings
  • Warehouses
  • Apartment buildings
  • ‘Mixed-use’ buildings, where the property might have a mix of office, apartments and retail

Lease terms

A commercial property lease comprises of various clauses and sections. The following elements must be considered when drafting your commercial lease.

Details of the premises:

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:

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:

  • What is the size of your rental? This may seem simple, however, some landlords include thick walls into their measurement size – a tactic, which can be off-putting to tenants.
  • How much are you going to charge for common areas? Many commercial properties have shared common spaces like parking lots, bathrooms and lobbies. You should include these areas when you calculate the rent, as your tenant can get valuable use from them.
  • Include layout in your pricing: A Commercial space that is expansive and wide is worth more than a small area with tight spaces and narrow corridors.
  • Are you charging a percentage per rent: Commercial landlords for retail property often require tenants to pay them a percentage of profit on top of rent. If you plan on doing this, you do not want your tenants to be overwhelmed with costs to the point that they can’t continue to grow their business. This could result in you getting less percentage rent in the long term.
  • Are you going to ask your tenants to pay for extras? Landlords of commercial properties can ask tenants to cover insurance, maintenance, real estate taxes and operating expenses. These costs must be included when calculating rent.

The total rent figure can be determined with the help of an online commercial rent calculator or through employing a commercial agent.

Payment conditions:

A commercial lease agreement needs to cover:

  • How frequently the tenant will need to pay rent. Rent on commercial properties is usually paid quarterly and in advance, however, you can offer monthly payments as an option.
  • When does your tenant need to pay rent, and if any deadlines apply.
  • Any penalties that can come into effect if the rent is paid late. These can range from eviction and charges to retention of the tenant’s assets.
  • How your tenant needs to pay rent and if there are additional charges.

Payment terms:

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.

What happens if your commercial tenant does not pay?

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:

  • Rent guarantee insurance: This ensures that you will not suffer major financial losses when your tenant refuses to pay rent.
  • Applying for forfeiture: Under this provision, you agree to forfeit the lease and physically deny the tenant from re-entering the property.
  • Seizing your tenant’s goods: If there are goods owned by the tenant in the property, you can follow the condition set out under the Commercial Rent Arrears Recovery (CRAR). This will allow you to seize the goods they have in the property as compensation for unpaid rent. It is usually a good idea to seek legal advice when using this option.

Rent-free period:

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.

Rent guarantees:

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.

Rent reviews:

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.

Lease length:

The lease needs to state how long the tenancy is intended to last for, and can also include.

  • A break clause: This is a clause in the contract that enables you or your tenant to end the lease early. You can make the break clause so that it only comes into effect after a certain amount of time or on particular dates, or so that it can be exercised at any point during the lease.
  • The ability to sublease: This condition allows your tenant to move out and sublease the property to another business when your property no longer suits them.

Demise clause:

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.

Covenants applicable to the landlord and the tenant:

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:

  1. Not to derogate from the lease and make the property less fit for business.
  2. To allow your tenant to enjoy lawful use of the property without interference.
  3. To repair the building or part of it and where the burden of repair falls on you.

Covenants for a tenant can include

  1. To pay rent.
  2. Not to sublet.
  3. To make repairs where reasonable.
  4. To permit entry for inspection.
  5. Not to alter the property’s structure without permission.
  6. To only use the property for specified purposes.

Landlord rights:

As a landlord of a commercial property, certain points will need to be demonstrated in the lease agreement, such as:

  • Rights Reserved: The right to enter your property and inspect it
  • Rights Granted: The right to alter your property, including painting it or altering various structures.

Restriction on planning:

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.

Attestation clause:

This clause states that the lease was signed in the presence of a witness or witnesses.

What is the Security of Tenure clause?

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.

What is the Landlord and Tenant Act, and how does it protect you?

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.

Romain Coleman’s landlord solicitors can help you draft your commercial lease

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.

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