If you’re going to invest in commercial property, then you need to understand commercial leases. The way that they work will shape your rights and responsibilities as well as the profits you make from your building. The differences between commercial and residential leases are sometimes slight but always significant, so here is our guide commercial leases.
1. Fixed Terms
Commercial leases run for set terms and are usually relatively long compared with new residential leases. Break clauses and renewals can affect the actual period of occupation, but these are still built around fixed terms.
2. Right to Renewal
By default, commercial leases in the UK are governed by the Landlord and Tenant Act 1954. Under this act, the tenant has a right to a new lease at the end of the original term, unless certain specific conditions are met. These include repeated late payment of rent, the landlord being able to provide an alternative, or the property being substantially restructured.
To not be governed by this part of the Act, you have to meet strict standards. These include serving formal notice to the tenant and including careful wording in the lease. Unless you have specific reasons for wanting to avoid the act, it’s usually best to accept the right of renewal.
3. Use Clauses
A commercial lease should include a use clause. This sets out what sort of business the tenant can carry out at the property. It’s important in giving you some control over what happens on your property, avoiding damage, disruption, and legal problems.
4. A Warts and All Agreement
Under a commercial lease, the tenant accepts the building as is – if they later find defects or features they didn’t know about, these don’t provide an excuse to alter or escape the contract. For this reason, smart tenants will often seek a thorough survey before signing the lease.
5. Repair Rights and Responsibilities
The contract should cover rights and responsibilities for maintenance of the property, including repairs for any damage. Unlike in residential rentals, this will often be the responsibility of the tenant.
This is where a pre-contract survey can also work in your favour, as it will provide evidence of any damage that the tenant needs to make good.
6. Upkeep, Maintenance, and Insurance Charges
If maintenance is your responsibility as landlord, then you may want to include maintenance fees in the contract, to make sure that tenants are covering their costs in this area. Fees from the tenant to you for general upkeep of the building and appropriate insurance can also be included.
7. Paying the Bills
Similarly, responsibility for bills should be set out in the lease agreement. This includes utilities and business rates. As with residential property, it’s usual for these to become the responsibility of the tenant. If a property has been empty for a long time, it may even be worth offering a low rent at first to get someone in paying the bills.
8. Energy Efficiency Standards
Since the 1stof April this year, landlords have a legal obligation to ensure that commercial properties have an energy efficiency performance certificate rating of E or above. Costs for achieving this can’t simply be offloaded onto tenants until April 2023. It’s therefore essential to get an energy efficiency assessment, do any necessary work to improve it, and factor the costs of this in when setting your rental price.
9. Retaking Possession
It’s easier to deal with troublesome tenants in commercial property than a residential one. If rent goes unpaid, then you can take possession without needing to seek a court order first. How long the rent goes unpaid before you can do this should be set out in the contract.
10. Right of Re-Location
If you have other properties and you think that you might need to move the tenant out at some point then you can include a clause creating a right of relocation. This won’t be suitable for some properties, as the exact location is more important to a shop than to an office or warehouse. If such a clause is included, it should set out details of the sort of alternative property you need to provide for the tenant.
11. Offering Benefits
There are some benefits that you can offer to a tenant during negotiations, to balance things you want to put into the contract. These include a rent-free period at the start of the contract – an excellent way to get a long-empty building occupied – and a break clause giving the tenant an early way out of their contract.
12. Assigning the Lease
If a client’s circumstances change then your property may become unsuitable for them. One way they can move on is by assigning the lease– finding someone else to take over residence. Like everything else about commercial property, this has to be done in line with the terms of the lease.
Within that limit, it can be a good way for you and the tenant to both get what you need in a situation that no longer works for you both.