What You Need to Know About Leasing a Business Property

According to the property data report over half of all commercial buildings in the UK were leased from commercial landlords. Even though, the traditional 15-to-25-year leases with only upward rent reviews no longer dominate. There are many cases in which the tenant or the landlord still require legal advice because leasing a business property remains a complicated matter. That is why the commercial property team at Eatons Solicitors has put together this guide so that tenant and landlords are aware of their rights and responsibilities.

Implications for the Tenant

Legal Rights and Obligations

In many respects, a commercial lease is similar in nature to a residential rental agreement. The tenant must sign a legally binding lease agreement for the business property they are about to occupy. This is a contract between a tenant and their landlord. It sets out the amount of the rent that needs paying, the length of the lease, repair obligations and termination conditions. This means business tenants have statutory rights under the Landlord and Tenant Act 1954 which means unless the landlord has a valid to terminate their lease, the tenant is entitled to renew it. Moreover, the act also specifies that even though rent reviews can be specified within the lease agreement, the landlord is not entitled to arbitrarily increase the rent.

Financial Implications

As in every tenancy when leasing a business property, the tenant is responsible for paying the rent on time. The rental agreement sets the amount and frequency at which the landlord can expect the rent payments (weekly, monthly, quarterly, or in a few cases, yearly). The rent may include a service charge to cover insurance, building maintenance, cleaning, and extra services such as an internet connection or a parking space.

However, whilst the tenant is responsible for the general upkeep of the building, it is the tenant's responsibility to maintain the interior. It means the tenant can be charged for any damages to the building and must return the premises as they were initially found when the lease ends.

Flexibility and Exit Strategies

Even traditional 15-to-25-year contracts are no-longer the norm, it remains important for the tenant to be aware of the length of the contract and if possible, to negotiate exit clauses. These lowers exit costs and means that if the tenant’s business were to outgrow the premises, it is easier for them to leave.

Another exit strategy to consider might be subletting the property but this can only be done if the commercial property leasing agreement allows it. In both cases, you may need to seek advice from a commercial property solicitor should you wish to change premises before the lease ends.

Risks and Liabilities

As with most contracts, leasing a business property carries risks and liabilities. The tenant is liable for paying the rent on time and for any damages to the property. If the tenant fails to comply with these obligations, they are likely to have legal action brought against them which can in the most extreme cases result in eviction.

Commercial Landlord Rights and Obligations

Setting a Commercial Leasing Agreement

When leasing a business property, the landlord is the one who is responsible for drafting the rental agreement. The agreement should specify the amount of rent due and how frequently it must be paid, moreover, service charges and their amounts must also be specified. A business property leasing agreement must also specify who is responsible for the repairs to prevent any dispute.

It goes without saying that the contract must comply with a specific legal framework and, therefore, it is often necessary to seek legal advice.

Rent Reviews

Even though a commercial landlord has no legal right to arbitrarily increase the tenants rent, the commercial lease contract may stipulate how often it is reviewed and should allow for a negotiation period leading up to the rent review date. However, if both parties cannot reach an agreement over a rent increase, the law stipulates that the old rent remains in effect. If you are planning a rent increase, a commercial solicitor can help you during the negotiation process.

Health and Safety Obligations

Beyond those contractual obligations, the landlord is also responsible for compliance with health and safety laws within the property. This includes fire safety regulations and asbestos management as well as having up to date gas and electricity safety certificates and complying with the latest energy efficiency regulations. If a landlord doesn’t comply with these health and safety regulations, they cannot lease their commercial property.

Building Insurance

A commercial landlord is responsible for taking building insurance, but its costs can be passed on to the tenant as insurance rent. This means the cost or part of the cost of the building’s insurance is passed onto the tenant as a service charge during the time they are leasing a commercial property However, this is not strictly a legal requirement because there is nothing stopping the tenant from taking out their own policy, but being insured provides the landlord with a form a financial security as it will cover them in case the property is damaged.

When to Seek Legal Advice?

As we have seen both the landlord, and the tenant have legal rights and obligations they must fulfil when leasing a business property. This means there are situations in which either the landlord or the tenant must seek legal advice.

Lease Negotiations and Drafting

Whilst negotiating the lease on a business property, the tenant and their landlord must ensure they fully understand every clause included within it. Some of these can be complex and might require advice from a commercial property solicitor to clarify them and seek favourable terms on which both parties can agree.

Modifying the Lease

Changing the lease’s terms during a tenancy such as adjusting rent or usage terms requires the landlord to seek legal advice because they must comply with commercial property law. This means those changes must be properly documented to be enforceable.

Terminating the Lease

If a landlord wishes to terminate their tenants commercial lease, they must ensure this is done within the realms of the law and have a good reason to do it. This means the landlord must prove their tenant is in breach of the commercial leasing agreement. Such breaches include defaulting on rent, deliberately damaging the property or subletting the property without prior consent.

In all those cases, it is essential for the landlord to seek legal advice to ensure they avoid any potential liability; particularly if the breach of contract involves evicting the tenant.

Property Damage and Repairs

Even though the responsibility for repairs to property damages is specified within the lease agreement, disputes may still occur, particularly if there is a lack of clarity. This might for example over repairs to air conditioning or plumbing or over any structural damage. To resolve these disputes, legal advice from commercial property solicitors might be required to clarify responsibilities. Once the dispute is resolved, it can lead to changes within the leasing agreement to ensure responsibilities are more clearly defined.

Leasing a Business Property

Leasing a Business Property often requires the tenant and the landlord to seek legal advice from the outset. This is because the lease is a business contract between both parties so they will want the negotiations to turn to their advantage. Moreover, disputes during the lease are easier to resolve if both parties are prepared to seek legal advice.