Understanding the contents of a commercial lease

What is a commercial lease?

It is an agreement or contract between the Landlord and the Tenant for a lease of business premises. Lease is a grant of a right for a period for which the Landlord agrees to let or to grant exclusive possession of the property for the benefit of  the Tenant. This grant of a right is subject to rent payments and performance of the covenants in the lease. A legal lease which is for 3 years and over must be made by a deed. This agreement can be complex and contains many essential definitions which have to be checked before you as a Tenant   decide to proceed with a lease. Below are the main provisions and clauses which can be found in a commercial lease. A commercial lease is protected by the Landlord and Tenant Act 1954 unless this is specifically excluded. The tenant therefore has the right to renew the lease after the expiry of the term for which it was granted. If the parties agree to the exclusion of such a protection there should be a reduction in rent as a result of a loss of significant rights given to the Tenant by this protection.

Contents of a lease

Every lease will contain general provisions relating to the name of the parties, property, demise, rent amount, date, definitions section, interpretation provisions, tenant’s and landlord’s covenants, rights granted, rights reserved, attestation and any other provisions e.g. restriction on planning.

Service charge

This mostly applies to the lease of a part of a premises. The Landlord will be responsible for maintenance of the common parts of the building, used by all tenants, and will want to recover a cost of this in the form of a service charge payment.

Alterations

This clause specifies what alterations can be carried out on the property. If the works constitute improvements, the Landlord may require consent with respect to these and  by the operation of the Statute, this consent should not be unreasonably withheld or delayed.

Repair and Decoration

Repair of the premises means restoration or replacement. The clause should specifically state what replacements are sufficient but they must be reasonable in all the circumstances. Renewal means the whole reconstruction. An obligation to keep the premises in repair generally requires the tenant to put them in repair if they were in disrepair at the time of the letting. Decorating premises should be defined and state how often the Landlord wishes the Tenant to decorate. This must be a reasonable requirement and should not require the Tenant to decorate in at least the last year of the term of a lease if he complied with previous dates.

Rent review and Rent free period

Rent review clause specifies the date for review of the rent. It can be upwards or downwards. it is important to check the provisions of a contract so that they do not damage the Tenant. Some of the clauses may be drafted in such a way that they damage the tenants position and the tenant may end up paying more. E.g. Rent free period can be negotiated  but it is important for it to be disregarded by the rent review.

VAT

The Landlords sometimes decide to charge VAT in order to recover the same on the costs of developing the property. The Landlord therefore opts to tax and waives  the exemption in relation to it. It may be difficult for prospective tenants to recover VAT therefore this provision in the lease may be less attractive to them.

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For more information on:

  • Alienation- assignment, subletting
  • Assignment
  • Subletting
  • User
  • Break clauses
  • An example of such a condition
  • Forfeiture and other remedies
  • Insurance clause
  • Code for Leasing Business Premises