Key considerations before signing commercial lease

This is one of the most important documents a business will ever sign, so it deserves careful scrutiny. Here is a structured overview of the key areas to check before committing.

The demise and plans:

Make sure the lease clearly defines exactly what you are taking. Check whether the demise includes common parts, car parking spaces, storage areas, or external signage positions. Review the plans attached to the lease and walk the property with the plans in hand to confirm they match reality.

The term and break clauses:

Check the length of the lease and whether there is a break clause allowing early termination. If there is a break clause, look very carefully at the conditions attached to it. Break clauses often require strict compliance with conditions such as giving vacant possession, being up to date with all payments, and serving notice in a precise form and within a precise window. Failing to comply exactly can invalidate the break, leaving you locked in.

Rent and rent review:

Check the initial rent, when it is payable, and how rent reviews work. Understand whether rent reviews are upward only, which means the rent can never fall below the current level even if the market drops. Check whether there is a turnover rent element or a fixed uplift mechanism instead.

Service charge:

If you are taking space in a multi-let building, there will usually be a service charge. Check what it covers, whether it is capped, whether the landlord must provide accounts, and whether you can challenge unreasonable charges. The RICS Code for Service Charges in Commercial Property is a useful benchmark, and you should check whether the lease requires compliance with it.

Repairing obligations:

This is critical. Check whether you are taking on a full repairing and insuring lease, which means you are responsible for the entire structure, or an internal repairing obligation only. For older or larger premises, a full repairing obligation can be extremely costly. Consider obtaining a schedule of condition at the outset and negotiating that your repairing obligation is limited to the condition shown in that schedule, so you are not obliged to hand the building back in better condition than you found it.

Dilapidations:

Linked to the above, check what the lease says about the condition in which you must return the premises at the end of the term. Dilapidations claims by landlords at lease end can be very significant. A schedule of condition annexed to the lease is one of the best protections available.

Alterations:

Check what you are and are not permitted to do. Most leases distinguish between structural and non-structural alterations. Understand what requires landlord consent and whether consent can be unreasonably withheld. If you need to fit out the premises, negotiate consent for your initial works as part of the lease transaction itself.

Alienation (assignment and subletting):

Check whether you can assign the lease or sublet all or part of the premises. Understand the conditions attached to any assignment or subletting, as these often include a requirement for the outgoing tenant to guarantee the new tenant through an authorised guarantee agreement.

User clause:

The lease will restrict what the premises can be used for. Make sure the permitted use covers everything you need, including any future changes in the nature of your business. A narrowly drafted user clause can also affect the value of the lease on assignment because it limits the pool of potential assignees.

Insurance:

Check who insures the building. Usually the landlord insures and recovers the premium from the tenant. Check that the insured risks are comprehensive and that there is a rent suspension clause so you do not have to pay rent if the building is damaged and unusable.

Guarantees and rent deposits:

Check whether the landlord is requiring a personal guarantee from a director or a rent deposit. Understand the extent of any guarantee liability and whether the rent deposit deed allows the deposit to be returned and on what terms.

Security of tenure:

Check whether the lease is contracted out of the security of tenure provisions in the Landlord and Tenant Act 1954. If it is contracted out, you will have no statutory right to renew the lease at the end of the term. This is extremely common in modern commercial lettings but it significantly affects your long-term security. If the lease is to be contracted out, the correct statutory procedure under the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003 must be followed before completion.

Forfeiture:

Check the events that entitle the landlord to forfeit the lease. These typically include non-payment of rent, breach of covenant, and insolvency. Understand what notice periods apply and whether there are any grace periods.

Side agreements and documents:

Check whether there is a licence to alter, a rent deposit deed, an agreement for lease, or any side letters. These all form part of the overall transaction and should be reviewed together.

Practical steps before signing:

1. Walk the premises with the lease plans and check they match.
2. Commission a building survey if taking on any repairing obligation.
3. Obtain and annex a schedule of condition with photographs.
4. Check planning permission and building regulations compliance for the intended use.
5. Run title searches and check for restrictive covenants or third party rights that could affect your use.
6. Review your business plan against the financial commitments in the lease, including the total cost over the term, not just the annual rent.
7. Negotiate heads of terms before instructing solicitors, so the key commercial points are agreed in principle.
8. Make sure any incentives such as rent-free periods or capital contributions are properly documented.

A commercial lease is not like a residential tenancy. It is a serious long-term financial commitment, often with personal liability through guarantees, and the costs of getting it wrong can be severe. Taking time at this stage to negotiate properly and understand every obligation is always worthwhile.