Commercial Lease Negotiations

Negotiating commercial leases is something that most business people engage in at some point. At the same time, it is not something that likely to need to do on a regular basis unless they are in the property business.

Rent makes up a significant fixed cost for any business. When conducting initial commercial negotiations, the companies should bear in mind a number of important practical and legal points that will eventually be enshrined in the commercial lease agreement.

Principal Commercial Lease Terms

The tenant should be aware that leases are almost invariably drafted by or on behalf of the landlord. As such, the tenant must take particular care in reviewing the lease before agreeing to it or risk being placed in a disadvantaged position, because once signed, there is no turning back. Landlords are highly unlikely to agree to variations of a lease which weakens its position or its rights in the future.

In most circumstances, the lease will be a ‘Full Repairing and Insuring’ (FRI) lease. These leases enable the landlord to hold the tenant responsible for repairs and any insurance issues related to the property during the term of the lease.

Commercial Lease Obligations

Tenants should exercise care during negotiations with landlords. For example, under a typical full repairing and insurance lease, should the landlord carry out repairs on the property, it will charge the cost to the tenant. One way to afford tenant protection here is to appoint a surveyor to list the deficiencies of the property and then agree with the landlord that there is no obligation to improve the property beyond the state set out in that list.

Another issue to consider is insurance. In most cases, the property will be insured by the landlord. Therefore the tenant will have to repay any premium that is owed to the landlord. If the tenant is to insure the building, it will be required to do it to such a level as required by the landlord. In either circumstance, the lease needs to outline what will be insured and by whom.

Agreeing Rent in Commercial Leases

Rent is generally calculated in pounds per square foot, per annum. The landlord may consider implementing rent reviews which take place at intervals set out in the lease. The purpose underlying rent reviews is to prevent the tenant from benefiting from not having to pay an inflationary price rise over time. To maintain the value of the property, rent reviews are typically ‘upwards only’.

Use of Property in a Commercial Lease

It must be clear how any commercial property will be used. Often leases restrict how properties can be used due to a variety of factors including legal restrictions in the title of the property and planning permission for particular planning use classes. Landlords may also place restrictions in the lease to protect their own interests; a primary example of this type of restriction is on sub-letting, which can only normally occur with the landlord’s consent.

Agreeing the Length of a Commercial Lease

The length of a lease can vary from a few months to 15 years. Should the lease be more than 7 years, the landlord needs to register the lease at the Land Registry. Tenants can end the lease in between such times by inserting a break clause. These are important to the tenant, as they provide an opportunity to the tenant to terminate the lease. Alternatively the parties are free to end a lease at any time by mutual consent but this may have cost implications for one of the parties depending on the state of the commercial property market.

Expiration and Renewal

The landlord has no right to recover the property before expiration unless the tenant defaults on its obligations in the lease. The lease may not automatically end on the date of expiration but it can continue after this date. As such, notice must be given by the tenant – sometimes months in advance.

Once the original lease expires, the tenant has an automatic right under the Landlord and Tenant Act 1954 to seek a new lease. However, landlords and tenants often agree to contract out of this provision at the time the original lease is agreed.

It is important to ensure that professional advice is taken at an early stage of commercial lease negotiations to ensure that the correct balance is struck between rights, obligations and potential liabilities. Initial negotiations may take place directly between the parties or with the assistance of brokers but even experienced professional landlords will usually defer the finer points of commercial lease negotiations to professional advisers.

For specialist advice regarding drafting, negotiation or disputes relating to commercial leases contact Charles Burrell.