Last updated: 18 May 2022
If you're setting up a business, or looking to expand to larger premises, you need to find the best property available to suit to your needs.
We've put together the following comprehensive, downloadable guide, to help businesses entering into a commercial property lease:
Before starting your search for property through a commercial agent, you'll need to decide:
- how much space you need
- what the use of the property will be
- your financial position
Then you can decide if you want to purchase or rent (lease) a property.
A property can be leased in the following ways:
- a lease of part
- a lease of whole
- an agreement to share space
- a sublease
To lease a property, you'll need to sign the appropriate agreement. Some lettings may be on a short-term basis, while others may be for a longer time.
The term of a lease can vary between two to 25 years, but usually runs between three to five years. A short-term lease usually runs from between one to three years. A short lease with options to renew may be more suitable than a longer lease with break clauses.
Under a short term lease, you'll usually only be responsible for the interior of the property. The landlord usually remains responsible for the exterior, dependent on the type of property and the terms offered. You'll also be able to negotiate with the landlord over any aspect of the lease. The Code for Leasing Business Premises aims to provide fairness between a landlord and tenant in negotiating the terms of a lease.
Heads of terms
Once basic terms have been negotiated, the landlord or the landlord’s agent will draw up the heads of terms. These are the main details of the proposed letting arrangement.
You will need to pay:
- Business Rates
- utilities, including broadband
- our legal and surveyor's fees
- VAT may be payable on top of rent
- the lease may contain a rent review
Rent reviews are usual in leases of three years or more. If it's an 'upwards only' rent review, it means that you won't benefit from any decrease in market rent levels.
Security of tenure
If the lease is ‘excluded’ from Part II provisions of the Landlord and Tenant Act 1954, you will have no automatic right to stay at the end of the lease.
A lease with protection means you have a right to request a new lease, subject to the provisions of the Landlord and Tenant Act 1954. Your landlord can only refuse on certain grounds.
Seek legal advice
We strongly recommend that you seek legal advice. Entering into a lease commits you to a legally binding contract with the landlord. You will be legally and financially obligated under the terms of the lease and it's vital that you fully understand those obligations prior to signing a lease.
Key points to consider
You'll need to think about these key points and negotiate them with the landlord:
- Tenant details: you'll need to provide the landlord with references and financial information to the landlord, so they can be satisfied you'll be able to pay the rent.
- Property: the full details of the property should be included along with any additional rights the landlord is granting, such as the right to park a car, or access to a cycle store.
- Repairs: the 'heads of term' will set out who's responsible for keeping the property in a good state of repair, and what condition you need to hand the property back in, at the end of the term. You need to consider and understand the potential costs at the end of the lease, as you may be liable for putting the property back in a certain condition at the end of the lease
- Rent: commercial leases are usually an annual sum paid monthly or quarterly in advance. Rent can be paid on completion of the lease, or the landlord may decide that the tenant can have a rent-free period so rent payments will start on a future date.
- Term: you need to agree how long the lease will run. Depending on the length of the term, other clauses, such as a break clause, may be relevant.
- Assignment and underletting: depending on the length of the term, the landlord may allow you to 'assign' or 'underlet' the whole of the property. An assignment allows you to pass on the lease to someone else; an underlease allows someone else to use the property, but you, as tenant are still responsible for the property.
- Permitted Use: the use of the property must be recorded so that you know what you can use the property for.
- Break clause: the landlord needs to decide whether they, you, or both of you will be able to end the lease early on notice to the other. If a break clause is included, the date and any pre-conditions should be listed.
- Security of tenure: short-term leases are usually excluded from the statutory right to a new lease when the current lease ends.
- Rent deposit: if the landlord is concerned about whether you'll be able to pay, they can request that you provide a rent deposit as security. If so, the amount to be paid should be recorded in the heads of terms.
- Compliance: you, as the tenant, will be responsible for health and safety compliance.