The Lease: Your Most Important Document
For any business operating from rented premises, the lease is the single most important legal document you will deal with. It governs your rights and obligations for the entire duration of your tenancy, and the terms it contains can make the difference between a profitable enterprise and a costly mistake.
At Watkins Commercial, we have seen countless transactions where buyers have been caught out by lease terms they did not fully understand. This guide sets out the key provisions you must check and understand before signing.
1. Break Clauses
A break clause allows either the landlord, the tenant, or both to terminate the lease before its natural expiry date. A tenant's break clause provides valuable flexibility, allowing you to exit the lease if the business does not perform as expected or your circumstances change.
However, break clauses typically come with strict conditions. You may be required to give several months' written notice, vacate the premises by a specific date, ensure all rent and other payments are up to date, and leave the premises in the required condition. Failure to comply with any of these conditions precisely can invalidate the break, leaving you committed for the remainder of the lease term.
Key question: Does the lease include a tenant's break clause, and if so, what conditions must be satisfied to exercise it?
2. Rent Reviews
Most commercial leases contain provisions for the rent to be reviewed at regular intervals, typically every 3 to 5 years. The most common mechanism is an "open market rent review," where the rent is adjusted to reflect the current market value of the premises.
Be particularly cautious of upward-only rent review clauses, which are still found in many leases. Under such a clause, the rent can only increase or remain the same at each review; it can never decrease, even if market rents have fallen. This can leave you paying above-market rent during economic downturns.
Key question: How often is the rent reviewed, and is the review mechanism upward-only or to open market value?
3. Repairing Obligations
Your repairing obligations under the lease can have significant financial implications. The two main types are:
- Full repairing and insuring (FRI): You are responsible for all repairs to the property, including the roof, structure, exterior and interior. This can be costly, particularly in older buildings.
- Internal repairing only: Your obligations are limited to the interior of the premises. The landlord retains responsibility for the structure and exterior, though you may contribute towards these costs through a service charge.
Before signing an FRI lease, consider commissioning a building survey to identify any existing defects. You may be able to negotiate a schedule of condition, which limits your repairing obligation to maintaining the premises in their current state rather than bringing them up to perfect repair.
Key question: Are you taking on a full repairing obligation, and if so, what is the current condition of the building?
4. Alienation (Assignment and Subletting)
Alienation clauses govern whether and how you can transfer the lease to someone else (assignment) or sublet part of the premises. When you come to sell the business, the ability to assign the lease to the buyer is essential.
Most commercial leases permit assignment with the landlord's consent, which cannot be unreasonably withheld. However, the lease may impose conditions on assignment, such as requiring the incoming tenant to demonstrate adequate financial standing or provide a personal guarantee.
Key question: Does the lease permit assignment, and what conditions apply?
5. Personal Guarantees
Landlords frequently require incoming tenants to provide personal guarantees, particularly where the tenant is a newly formed limited company. A personal guarantee makes you personally liable for the rent and other lease obligations if your company defaults.
This is a significant commitment. If the business fails, you could be pursued personally for the remaining rent due under the lease. Consider whether the guarantee is time-limited and whether you can negotiate its release after a period of satisfactory trading.
Key question: Is a personal guarantee required, and if so, for how long and to what extent?
6. Service Charges
If your premises form part of a larger building or development, you may be required to pay a service charge towards the cost of maintaining common areas, shared services and building insurance. Service charges can be substantial, and they are often recoverable by the landlord without a cap.
Request details of service charges for the past three years and any known future expenditure. Check whether the lease allows the landlord to recover the cost of major works (such as roof replacement) through the service charge, as this can result in unexpectedly large bills.
Key question: What is the current annual service charge, and what costs can the landlord recover through it?
7. Permitted Use
The user clause restricts the type of business you can operate from the premises. A narrow user clause (e.g., "use as a hairdressing salon only") limits your flexibility, while a broader clause (e.g., "use within Class E") gives you more options. If you plan to diversify or change the nature of the business in the future, a restrictive user clause could be a problem.
Also check whether any change of use would require planning permission in addition to the landlord's consent.
Key question: Does the user clause accommodate your current and foreseeable future plans for the business?
Get Professional Advice
This guide covers the most common lease provisions, but every lease is different. We always recommend that buyers instruct an experienced commercial property solicitor to review the lease before committing. At Watkins Commercial, we can recommend trusted local solicitors and are always happy to explain lease terms in plain English. Call us on 01273 709090 for advice.