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8 Steps to follow before taking out a Commercial Lease

Great, you have worked hard to get your business off the ground and now it is time to take up a commercial lease for the business premise.

You have looked through online conveyancing websites for guidance on what to do next but it's all very confusing and makes little to no sense.

Does the above sound familiar? Do not worry as you are not alone. Leasehold residential properties themselves are extremely complicated – let alone commercial leases which are a breed if their own.

We have therefore prepared an 8 point guide for what you need to look out for, especially when negotiating the original heads of terms (HoT's) and subsequently, the grant of the commercial lease.

Who is your Landlord?

Are you being granted a lease for the property by the Freeholder (the owner of the land where the property is built upon) or a Lessee already occupying a premise? If it is the later, then you are in fact being sub-let part of the premise. This might seem usual but a sub-lease comes with a number of challenges of its own.

It is important to remember that your immediate landlord in this case would be the current tenant of the premise. You will also have to ensure that the current tenant is not in immediate financial difficulty as if they are and they fail to pay their rent, the Freeholder will forfeit both their lease and yours.

Rent Payable and Rent Review

Agreeing a rent goes without saying. However, depending on the length of your lease, you will have to consider (and negotiate) appropriate rent review mechanisms. This is especially applicable if you are entering into a long term lease. Most commercial leases tend to have lease terms anywhere between two and half years to 20 years (sometimes, even more).

It is therefore usual for the Landlord's in this case to set in place rent review dates (between reasonable intervals) which means that the rent will increase in line with various market conditions.

You may wish to give considerable thought to whether the rent review mechanisms are commercially feasible for you and your business.

Other Costs

You as the tenant will most likely be liable for all business rates and other costs. It is usual (as with a residential lease) for the Landlord to insure the property but recoup a proportion, if not all of the cost from you.

The lease will also most likely impose obligations on you as the tenant to carry out various maintenance obligations as window cleaning and general redecoration of the property.

VAT (Value Added Tax)

Has the Freeholder or your Landlord opted for VAT? If so, your rent will also attract VAT whether you are VAT registered or not. This is an additional sum of twenty percent on top of the rent agreed and can be a significant strain on your monthly cash flow, especially if you are a small business operating under the threshold.

Authorised Use

It is your responsibility as the Tenant to ensure the property has the relevant Planning Permission, allowing you to operate your business. For instance, a premise with planning use class for B1 (Business) cannot run and operate a Take Away (A4). More details on various planning use classes can be found here.

Securities

Depending on the caliber of the Tenant (strength of covenant), the Landlord will most likely require a rent deposit. This is could typically range from 3-6 months' worth of rent in advance. Do not forget to account for this money. It is also worth remembering that your conveyancing solicitor will charge additional legal fees in preparing and agreeing a suitable Rent Deposit Deed.

Security of Period

Unless specifically excluded from the lease, the tenant will usually have Security of Tenure by way of Landlord and tenant Act 1954.

What this means is that at the end of the term of your lease, your Landlord will not automatically be able to obtain possession of the property unless they have followed the appropriate procedure or you as the Tenant has breached various, qualifying conditions of the lease. Even if they do so, you will still have the right to apply to the courts to challenge the Landlord's decision and request a renewal of the lease.

It is therefore important to pay particular attention to this provision on the lease.

Break Terms

Can the lease contract be ended by either the tenant or the landlord before the full term of the lease hasn't run? Yes, you may be able to thanks to a break clause on the lease.

As with anything conveyancing related, there is a strict process to follow to ensure you do not unknowingly do something you shouldn't. It is however comforting to know that this is an option available to you, should you ever have a need for it.


This article has been prepared by making significant reference to Express Conveyancing.

Disclaimerour articles are designed to give you guidance and information. There is no substitute for proper direct advice, particularly as everyone's circumstances are different. If anything in this article may affect you, please contact us for advice that is specific to your circumstances.

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