Commercial property and leases
A business takes a commercial lease when it wishes to rent a shop, office or industrial unit. Commercial leases are much more complex than residential leases, and because both parties are expected to have legal advisers, there is far less government protection and regulation than for residential leases.
What are the key terms in a commercial lease?
Key terms include:
- The address of the property
- The type of property being let and the type of business that can be conducted there
- The term of the tenancy
- The amount of rent payable and how often
- The frequency and limitations of the rent reviews within the term of the tenancy
There will also be consideration given to how the lease renews (and in particular whether the lease is covered by the Landlord and Tenant Act 1954 which allows for automatic renewal), who pays for improvements to the property (and whether this affects the rent), whether the tenant can assign or sublet the property and who needs to insure the property.
Leases are often described as full repairing and insuring leases “FRI leases”, which means that all costs of maintenance, repair and insurance are met by the tenant.
Rent for commercial leases is normally paid quarterly in advance on set rent dates throughout the year – normally 25 March, 24 June, 29 September and 25 December. However, we would always encourage tenants to try to secure monthly rental payments to help smooth out the company’s cashflow (we can help with forecasting cashflow if you need).
Will the landlord grant me the lease?
A landlord will normally try to determine the strength of the financial covenant of the commercial tenant, so they will normally want to see your company accounts. If you can show a history of consistent profitability and can comfortably afford the proposed rent, the landlord should generally be satisfied that no further surety is needed.
However, many small businesses aren’t able to demonstrate a long and profitable trading record. In this case, the landlord may ask for a deposit and / or a personal guarantee from the owner of the company.
Our advice is generally to resist personal guarantees in the strongest possible terms. The whole point of setting your business up as a limited company is so that you aren’t personally liable if things go wrong.
Commercial leases can last 10 – 20 years, and there is a risk that even if the lease is assigned, a future tenant default can cause the landlord to enforce personal guarantee from the original agreement, which can be financially devastating.
Need some help?
Commercial leases are by default very much drafted in the landlord’s favour, so our view is that it is essential to have proper legal representation when negotiating a lease. Equally, it is useful to have an accountant’s view on how you can make the case that a deposit and personal guarantee is not needed.
Drop us a line if you are thinking about entering into a new commercial lease and we’ll be happy to help.