You’ve found your ideal business premises. What do you need to know before taking a lease?

Finding the right premises can feel like a major step forward for a new or expanding business. Whether it is a shop, office, industrial unit, salon, workshop or factory, the property often becomes part of the business identity. It may be where customers find you, where staff work, where stock is stored and where goodwill is built.

Before signing a lease, however, it is important to look past the excitement of moving in and understand exactly what you are committing to. Commercial leases are legal documents with long-term consequences. They can affect your cash flow, your flexibility, your ability to sell or grow the business and the cost of leaving the premises at the end of the term.

The length of the lease

One of the first obvious questions is how long are you tied in for?

A short lease may suit a new business that wants to test a location without taking on too much risk. A longer lease may give greater certainty, particularly if you expect to spend money fitting out the premises or building up a customer base in that area.

There is no single right answer. The legal point is to make sure the length of the lease matches your commercial plan. If the lease is too long, you may be left paying rent for premises you no longer need. If it is too short, you may lose the location just as the business is becoming established.

Break clauses

A break clause gives one or both parties the right to bring the lease to an end early. For a first-time tenant, this can be very useful.

The detail matters. You should know when the break date is, how much notice must be given, whether the right belongs to you, the landlord, or both of you, and what conditions must be satisfied before the break is valid.

Some break clauses only work if rent is paid up to date, the premises are given back empty, and all notice requirements are followed exactly. A small mistake can mean the lease continues and the tenant remains liable for rent. This is why break clauses should be reviewed carefully before completion and diarised properly once the lease is signed.

Rent reviews and increases

The rent shown in the heads of terms is only part of the story. You also need to know whether the landlord can increase the rent during the lease.

Commercial leases often include rent review provisions. These may be linked to open market rent, inflation, a fixed uplift, or another formula. Some rent reviews are “upwards only”, meaning the rent can increase but cannot decrease, even if market conditions have changed.

For budgeting purposes, you should understand when reviews take place, how the new rent will be calculated, what assumptions apply and what happens if you and the landlord cannot agree. Rent is usually one of the largest ongoing costs for a tenant, so the review mechanism should not be treated as small print.

Repairing obligations

The repairing obligations in a lease can vary significantly. A tenant needs to understand the extent of their repairing obligations as repairs may be costly. The lease may require the tenant to keep the whole of the premises (including structural elements such as the roof and foundations of the building) in good repair or, in some cases, to put them into repair even if they were not in good condition at the start. This is often misunderstood. A tenant might assume they only need to look after day-to-day matters. The lease may say something much wider.

If you are taking a short lease, the cost of taking on liability for structural repairs to the building as such repairs may be disproportionate to the benefit you will receive from them if you are only going to be occupying the premises for a short period. If you are taking a lease of an older building, or premises which need work, it may be sensible to agree a schedule of condition before completion. This records the state of the property at the start of the lease and can limit your obligation to returning it in no better condition than shown in that schedule. Without this protection, a tenant may face expensive repair or dilapidations claims later.

Use of the premises

You may know exactly what you want to do from the premises, but the lease must allow it.

Most commercial leases contain a permitted use clause. This may be narrow, such as a specific trade, or wider, such as use within a particular planning class. The landlord can usually restrict use through the lease, provided the restriction is properly agreed. It is not enough that the proposed use is legal; it must also be permitted by the lease, planning law and any title restrictions affecting the property.

You should also think ahead. Might you want to expand your services, sell different products, operate different hours, install equipment, or allow another business to use part of the space in the future? If the lease is too restrictive, you may need the landlord’s consent before making changes to how the premises are used.

You must also consider whether the premises has planning permission for the use you require. Otherwise, you may need to obtain planning consent for change of use before you can occupy the premises for your proposed use.

Assignment, underletting and sharing occupation

Businesses change. You may sell the business, move to larger premises, bring in a partner, or decide that part of the space is no longer needed.

The lease should be checked to see whether you can assign it to someone else, sublet the whole or part, or share occupation with another group company or other business. You usually need to obtain the landlord’s consent to assign or sublet, even if this is permitted by the lease, and the landlord may impose conditions to providing their consent. If your lease prevents assignment or subletting, you might be in the unsatisfactory position of having to continue to pay rent even after the premises no longer suit you if you are not otherwise able to bring your lease to an end by way of a break right.

Security of tenure

Many business tenants have statutory rights to renew their lease at the end of the term under the Landlord and Tenant Act 1954. This is often called ‘security of tenure’.

However, those rights can be excluded if the correct procedure is followed before the lease is granted. If the lease is ‘contracted out’, you may have no automatic right to stay when the term ends. This can be a serious issue for a business that depends on location, passing trade or local reputation.

If remaining in the premises after the initial term is important to you, this should be addressed at the heads of terms stage, not left until the lease is nearly ready to sign.

Service charges, insurance and other costs

The rent is not always the total cost of occupation.

You may also be responsible for a service charge, insurance contributions, utilities, business rates, VAT on rent, management fees and the landlord’s legal or surveyor’s costs. In a multi-let building or estate, service charge provisions can be particularly important because they determine what the landlord can recover from tenants.

Ask what the likely annual cost will be, whether there is a cap, what works can be charged to you, and whether major expenditure is expected. An apparently affordable rent can become much less attractive when the additional costs are properly understood.

Alterations and fit-out works

If you need to fit out the premises, install signs, put in partitioning, upgrade electrics, install extraction, or make structural changes, check whether landlord’s consent is needed.

Consent may be recorded in a licence for alterations and may require drawings, specifications and reinstatement obligations. You should also consider planning permission, building regulations, fire safety, asbestos responsibilities and whether any signage requires consent.

It is better to agree these matters before you take the lease than to discover afterwards that the premises cannot be adapted for your proposed use.

Legal due diligence

Before completion, your solicitor will normally review the landlord’s title, raise enquiries, consider searches and check whether there are rights, restrictions or obligations affecting the property.

Depending on the property, these may include rights of way, shared access, parking arrangements, estate regulations, planning permissions, environmental issues, drainage, utilities and mortgagee consent. If the landlord does not have the necessary authority to grant the lease, or if the property cannot lawfully be used as intended, the problem should be identified before you commit.

Tax and registration

Some commercial leases trigger a requirement to file a Stamp Duty Land Tax (STLT) return with HMRC and pay SDLT. Whether SDLT is payable on a lease will depend on a number of factors including the amount of the rent and the length of the term.

VAT may also apply to the rent if the landlord has opted to tax the property. In addition, if VAT is payable on the rent the SDLT payable will be calculated on the VAT inclusive rent.

Leases for a term of more than seven years will need to be registered at the Land Registry and certain rights granted in leases of seven years or less will need to be registered against the landlord’s title at the Land Registry.

What Next?

A commercial lease is not just a document that allows you to collect the keys. It is the rulebook for your occupation of the premises.

The best time to negotiate is before the lease is completed, while both parties still expect some discussion. Once the lease is signed, the tenant is usually bound by its terms, whether or not those terms were fully understood.

Taking legal advice at the outset can help ensure that the lease supports your business rather than limiting it. It can also help identify hidden costs, reduce avoidable risks and make sure that, when you do move in, you know exactly where you stand.

The commercial property specialists at Fraser Dawbarns regularly advise local businesses, both landlords and tenants, on commercial leases. For individual advice just call any of our offices or complete the enquiry form below and we’ll be in touch.

How To Contact Us:

To contact a member of our team, you can fill in our online enquiry form, email info@fraserdawbarns.com, or call your nearest office below. If you’d like to speak to a member of our team at one of our offices across Norfolk and Cambridgeshire, visit our offices page.

Wisbech: 01945 461456

March: 01354 602880

King’s Lynn: 01553 666600

Ely: 01353 383483

Downham Market: 01366 383171

In order to protect client anonymity, the initials in the above case study have been changed and do not relate the the client or other parties in any way. This article aims to supply general information, but it is not intended to constitute advice. Every effort is made to ensure that the law referred to is correct at the date of publication and to avoid any statement which may mislead. However, no duty of care is assumed to any person and no liability is accepted for any omission or inaccuracy. Always seek advice specific to your own circumstances. Fraser Dawbarns LLP is always happy to provide such advice.