Commercial lease agreement

A commercial lease is usually the second largest commitment a small business makes after payroll, and unlike most contracts it is difficult to get out of. Three things decide what it costs over its life: the repairing obligation, the break clause and whether the tenant has security of tenure. None of them is obvious from the rent.

Security of tenure, and the steps that must happen before signing

Part II of the Landlord and Tenant Act 1954 gives a business tenant the right to remain at the end of the term and to ask the court for a new lease. This template is drafted as contracted out of sections 24 to 28, which is the usual position for a short letting, but contracting out is a procedure rather than a clause. The landlord has to serve a prescribed warning notice on the tenant at least 14 days before the lease is entered into, and the tenant has to make a declaration, or a statutory declaration before an independent solicitor or commissioner for oaths if there is less than 14 days between the two. Both must be completed before the lease is signed. Miss the procedure and the exclusion fails, and the tenant keeps security of tenure whatever the document says.

It is a deed, and length changes what you need

The lease must be signed as a deed and witnessed. Any lease for more than three years has to be made by deed, and any lease for more than seven years has to be registered at HM Land Registry, which this template is not set up for. For a longer term, the document needs adapting rather than completing.

Stamp duty land tax is charged on the rent over the term rather than on a premium, and a return may be required within 14 days of completion even where no tax is payable. It is worth working out before completion rather than after.

Repairs are where the money is

The repairing clause decides who pays for the building. A full repairing and insuring lease puts the whole burden on the tenant, which on an older building can mean handing back premises in better condition than they were taken in. The protection is a photographic schedule of condition agreed and annexed before signing, limiting the obligation to the state recorded in it. It costs very little at the outset and is the difference between a manageable dilapidations claim at the end of the term and a substantial one. A survey is worth the same consideration.

Break clauses only work if the conditions are met

A tenant's break is commonly conditional on rent being paid up to date and vacant possession being given, and sometimes on compliance with all covenants, which is close to impossible to satisfy. Courts read break conditions strictly, and a break that fails leaves the tenant liable for the rest of the term.

What this template deliberately leaves out

A rent deposit and a licence for alterations are documented separately, by a rent deposit deed and a licence, rather than folded into the lease. If either applies, they sit alongside this document.

For a lease of part of a building, anything with a rent review, or any term beyond a few years, the document is worth drafting rather than completing. Our commercial lease solicitors do that on a fixed fee.