Commercial Leases and Lease Management

The length of the term and the level of rent are usually the first points to be negotiated. You need to strike a balance between locking in the your occupation of the premises for a sensible period and keeping enough flexibility to respond to changes in your business.

In the retail sector, it is usual for a relatively short lease to be agreed for a start-up tenant. This provides short-term certainty for both landlord and tenant, but can also cause challenges if the tenant wants to extend their lease of the premises.

Many tenants now want more certainty over future rent increases, and as a result there’s been a shift away from traditional rent review methods towards fixed or capped reviews.

Alongside rent, commercial leases often include additional charges such as insurance, maintenance costs and the upkeep of shared areas (usually referred to as service charges).

Utility costs are typically the tenant’s responsibility, but it’s worth checking exactly how these are calculated: are they individually metered, or split between tenants based on square footage? Understanding how these costs are worked out can help you budget accurately and avoid surprises.

Repairs are usually the responsibility of the tenant. Agreeing to an FRI (Full Repair and Insuring) lease can require the tenant to place the premises in a better condition than the tenant originally receives.

It’s therefore important for tenants to understand the full extent of their repair obligations before contracts are signed.

Heads of terms set out the key principles of the deal and are typically agreed between the parties’ agents or surveyors before solicitors are involved.

The more detailed the heads of terms, the fewer issues there tend to be to negotiate once lawyers are instructed, so it’s often worthwhile bringing us in at an early stage to help shape them.

If it is permitted in the terms of the lease, a tenant may potentially be able to do so through assignment which allows them to exit a lease before it expires by transferring it to another party.

However, the landlord may place conditions on the tenant’s option to assign/sell the lease. A prudent tenant will therefore consider this aspect when originally taking the lease from the landlord.

If it is permitted in the terms of the lease, subletting allows the current tenant to bring in a tenant of their own while remaining responsible for the original lease.

Most leases restrict a tenant’s ability to alter the premises without permission.

Where alterations are needed, a licence for alterations is usually required, granting formal consent to carry out specific improvements or work. This is typically arranged at the start of a lease, when a tenant is fitting out the premises to suit their needs.

Many commercial leases include a break clause, giving either the landlord or the tenant the right to end the lease early, before the contractual term is up.

For tenants, a well-drafted break clause provides an exit strategy if the premises cease to meet their business needs. However, tenants must ensure that they can relocate within the notice period and comply strictly with any conditions attached to the break right. f the conditions are onerous, they can effectively prevent the tenant from using the break at all.

It’s essential that the lease clearly sets out exactly what steps need to be taken to exercise the break successfully.

A rent-free period is an agreed time at the start of a lease when the tenant doesn’t pay rent. They are a common feature of commercial leases, typically granted to allow tenants time to fit out and prepare the premises for occupation.

Such periods can also be advantageous for the landlord, as where the tenant makes improvements, they can enhance the property’s long-term value.