Commercial lease agreements may appear daunting, especially for newcomers. By their very nature, these contracts entail detailed legal terminology and substantial obligations from both parties.
Comprehending these agreements can spell the difference between a seamless lease and a potential legal headache.
The foundations of commercial lease agreements
A commercial lease agreement is a binding contract between a property owner (lessor) and a business entity (lessee) defining the terms for the business’s use of the owner’s property.
It outlines the duration of the lease, rent amount, payment schedule, and the obligations of each party throughout the lease.
It’s essential to note that commercial leases differ from residential ones, as they fall under fewer consumer protection laws, opening more room for negotiation.
Moreover, these agreements usually span longer durations compared to residential leases, typically ranging from five to 25 years.
The key Elements of a commercial lease agreement include:
Rent and rent reviews
One of the foremost things to scrutinise in a commercial lease agreement is the rent. This cost can be computed per square footage or as a proportion of the business’s earnings.
The contract should also indicate the rent review frequency and the process for conducting these reviews, typically every three to five years.
Lease duration (term)
Commercial leases are often of substantial duration, typically spanning between five and 25 years. This duration, also known as the term, can be negotiated between the lessee and lessor.
Break clauses
Break clauses are a crucial element in a commercial lease agreement. These provisions provide an avenue for the lessee or lessor to terminate the lease prematurely.
The specific circumstances that permit exercising a break clause should be explicitly stated in the contract.
Repairs and maintenance
The contract should clearly delineate who holds the responsibility for the property’s repairs and maintenance.
In a ‘Full Repairing and Insuring Lease’ (FRI lease), the tenant typically shoulders all repair and insurance costs, whereas other lease types may share these responsibilities.
Property use
The lease agreement should specifically outline the property’s permissible use, generally stating the exact business operations or types that can function within the premises.
Any deviation from the specified use without the landlord’s approval could be deemed a contract violation. The property use must also adhere to planning laws and regulations.
Alterations to property use can impact insurance premiums, service costs, and might even necessitate physical modifications to the property.
Therefore, both parties should carefully negotiate this clause, bearing in mind current needs and potential future requirements.
Subletting and lease assignment
The contract should specify whether the tenant can sublet the property or transfer the lease to another party, typically requiring the landlord’s consent.
Insurance
The lease should stipulate who is accountable for insuring the property and the necessary coverage types.
Legal advice
Given the intricate and long-term nature of commercial lease agreements, it’s sensible to seek legal advice before signing a new contract.
A solicitor can assist in interpreting terms, negotiating more favourable conditions, and ensuring legal compliance.
Understanding commercial lease agreements can be a hurdle, particularly for those new to the commercial real estate landscape.
However, by comprehending the key components of a lease agreement and procuring professional legal advice, you can safeguard your business interests and make informed decisions that bolster your business’s growth and longevity.
If you require advice on leasing a commercial property for your business, please reach out to us today.
