Essential Factors to Consider when Leasing Commercial Property for Your Business

The lease term represents how long your business will occupy the premises.  It could range from a few years to several decades, depending on the type of property and the level of security that aligns with your long-term business plan.  Make sure you agree your preferred term clearly with the landlord to ensure it suits both your business needs and future goals. 

Some landlords may charge VAT on top of rent, but they can only do so if they have opted to tax the property.  It is important to check with your landlord before signing a lease.  Typically, a landlord must have formally elected the property for VAT purposes, and your lawyer should ensure that the necessary paperwork is in place if your landlord intends to charge VAT. 

This is also a good opportunity to consult your accountant to determine whether becoming VAT-registered would be beneficial for your business, especially if your landlord applies VAT to the rent.  

After deciding on your lease term and duration, it is important to prepare for any potential changes, whether unforeseen challenges or growth, such as needing larger premises.  A break clause allows either you or the landlord to terminate the lease early, providing flexibility if your business outgrows the space or circumstances change.  

Break clauses are often included in longer leases to provide both parties an exit option if they need it. 

A tenant-only break clause offers additional security for tenants to remain in the property for the full contractual term, but gives them the ability to exit after a set period of time upon providing written notice to the landlord.   It is typically three or six months in advance of the agreed date. 

For example, a 10-year lease may include a break clause on the 3rd, 6th, and 9th anniversary of the lease, with at least six months' prior written notice required. 

If there is a mutual break clause, the landlord also has the right to ask you to vacate the premises on the break date without giving a reason, as long as they provide you the requisite notice.  A landlord-only break clause is generally not recommended for tenants, as it lacks security for your business.   

Many leases include rent review provisions.  Ensure these reviews are scheduled well in advance of any break clauses, allowing you to evaluate whether the new rent is manageable and giving you the option to exit if the rent becomes unaffordable.  

For example, a rent review in year 4 of a lease containing a break clause at year 5 enables you to assess the rent increase before deciding whether to activate a break clause.  Failure to account for this can leave you locked into a higher rent than anticipated without the option to exit the lease due to missing the opportunity to exercise your break clause.  

You may hear commercial property lawyers refer to leases as being 'inside' or 'outside' the Act, but what does that mean, and how does it affect you?  

If your lease is 'inside the Act', you are protected by the security of tenure provisions of the Landlord and Tenant Act 1954.  Simply put, this gives you the right to renew your lease at the end of the lease term, provided you continue to meet your obligations outlined in the lease. 

However, if it is 'outside the Act', your lease will automatically end when the term expires, without the right to renew.  Once your contractual term concludes, you must either vacate the property or negotiate a new lease with your landlord.  Failure to do so could result in your business trespassing, and the landlord may take legal action to remove you from the property.  Tenants with a lease 'outside' the Act are required to sign a declaration, usually in front of a lawyer, confirming their understanding that they have no automatic right to renew or extend the lease.  

Many commercial leases are Full Repairing and Insuring(FRI) leases, meaning you/your business, as a tenant, are responsible for maintaining the property from the date you take occupation.  It is advisable to survey the property before signing a lease to assess the condition and identify any areas of disrepair.   

If necessary, negotiate a photographic schedule of condition to limit your repairing obligations under a mutual agreement.  This involves taking a set of photographs of the property, either by you or an appointed surveyor, and document the state of repair and condition of the property before you move in.  This can provide a clear reference point for your responsibilities.  

Landlords often require a rent deposit from tenants, typically equivalent to three or six months' rent, with an additional amount covering VAT if applicable.

This deposit is paid when you take occupation of the property, so be sure to account for this upfront cost and understand how the deposit will be managed and returned at the end of the lease. A Rent Deposit Deed outlines the terms for holding and returning the deposit, similar to how deposits are handled in residential rentals.

If you fail to meet your obligations during the lease, such as paying rent and insurance or maintaining the property, the Rent Deposit Deed allows the landlord to notify you of the outstanding issues. If not resolved within the specified period, the landlord can withdraw funds from the deposit to cover the necessary work and then request that you top up the deposit.

At the end of your lease, the landlord will assess the property and any outstanding costs. Depending on the state of repair and the terms of the deed, they may return the deposit in full (with or without interest) or retain some money for necessary maintenance to restore the property to the agreed conditions.

Be sure to confirm whether your landlord requires a security deposit early on so you can plan for these additional costs in advance.

There are other important aspects of a commercial lease to consider, such as restrictions on making alterations (some leases even prevent tenants from putting nails in the walls) and whether you are allowed to sub-let or transfer the lease to another party if needed.