Commercial Lease Agreement FAQ - United Kingdom-England
From LawDepot Law Library
Commercial Lease Basics
What is a commercial lease?
A commercial lease is a legally binding contract made between a landlord and a business tenant. The lease gives a tenant the right to use certain property for a business or commercial activity for a period of time in exchange for money paid to the landlord. Additionally, the lease outlines the rights and responsibilities of both the landlord and tenant during the lease term. LawDepot provides a written Commercial Lease Agreement.
What makes a commercial property lease different from a residential property lease?
A commercial lease is used by a tenant to rent space for a business while a residential lease is used by a tenant to rent a home or space to personally reside in. Commercial leases are typically viewed as contracts between knowledgeable business people. Consequently, less governmental protection is available for tenants of commercial property than tenants of residential property. Because the parties are knowledgeable business people, the underlying belief is that they should be able to negotiate the terms of the lease to their liking. Consistent with this idea, the parties of a commercial lease typically have greater bargaining power and more negotiating ability than the parties of a residential lease.
Why isn't an oral lease agreement sufficient?
The problem with oral lease agreements is that they can be difficult to enforce. If a dispute arose, a court would have to hear evidence and decide whose version of the story to accept. If there is a written agreement, courts will generally be obligated to uphold the terms of the written agreement even if the courts don't like them. Some jurisdictions require that any contract dealing with land or an interest in land must be in writing to be enforceable.
What are provisions commonly dealt with in a commercial lease?
A commercial lease typically deals with the following:
- the type of property being let;
- the address of the property being let;
- the term of the tenancy and whether the tenancy is for a fixed term or renews periodically;
- the amount of rent payable, how often and when the rent should be paid;
- the type of business that may be conducted on the premises;
- ownership of any leasehold improvements; and
- the provisions of any security/damage deposit.
In addition, a commercial lease may also identify the following:
- provisions for lease renewal;
- landlord improvements and signing incentives;
- tenant improvements;
- whether the tenant can assign or sublet the property:
- notice provisions for termination of the tenancy; and
- insurance provisions.
What is the governing law of my lease?
The governing law is the jurisdiction where the property is located, regardless of the jurisdiction where the landlord and tenant reside.
Who are the parties to the lease?
The parties to a lease are the lessor (also called the landlord) and the lessee (also called the tenant). The lessor owns the property and allows the lessee to use the property in exchange for monetary payments called rent.
What is a guarantor or surety?
A guarantor or surety is a person who agrees to pay any losses directly to the landlord should the tenant be unable to pay the rent, or otherwise breach the tenancy agreement.
The Leased Premises
What is the legal description of a premises?
The legal description of the premises refers to how the property is identified in real estate legal transactions. The description can be found in a deed, mortgage, or other purchase document or may be obtained from a county recorder, land titles office, tax assessor, or other similar official.
What are fixtures?
In real estate terminology, the word "fixture" refers to a piece of property that is sufficiently attached to the Premises so that to move or remove it would damage the property. If the attached part of the property can be removed without significant damage to the property then it is usually not considered a fixture. Examples of fixtures may include built in cabinets, sinks, toilets or wall-to-wall carpeting.
What are chattels?
Chattels are personal property. They are distinct from real property or real estate in that they can be moved from one location to another. Examples of chattels may include blinds or curtains, microwaves, refrigerators, desks and personal computers.
What are leasehold improvements?
A leasehold improvement is an expense incurred for the permanent improvement to the leased property. They are considered fixed assets and depreciate in value over the period of the lease.
How is the tenant allowed to use the premises?
The tenant can only use the leased property for purposes that have been approved by the Landlord. The "permitted use of premises" clause limits the tenant to only engage in certain types of business. Before allowing the tenant to use the property for additional purposes that are not stated in the Lease, the tenant needs to obtain the written consent of the Landlord.
The Lease Term
What does "Automatic Renewal" mean?
Automatic renewal means that the lease continues indefinitely on the agreed upon period (weekly, monthly, or yearly) until either the tenant or the landlord gives notice to the other party that they will be terminating the lease.
Which lease term should I use?
LawDepot allows you to choose from several different types of lease terms:
- Fixed End Date
A lease with a fixed end date gives certainty of term for both the landlord and the tenant. It specifies the exact day the tenancy will end. The advantage here is that neither party has to give notice to terminate the lease, it simply ends on the specified date. In a fixed end date lease, the landlord cannot increase the rent, or change any other terms of the lease unless he specifically reserves the right in the lease, and the tenant agrees to the changes. If the tenant remains past the specified date the landlord can either: (a) accept rental payments and have the lease continue as a month-to-month tenancy with the same rules as the expired fixed end date lease; (b) sign a new lease; or (c) start eviction proceedings against the tenant.
- Fixed Number of Weeks/Months/Years
A lease for a fixed number of weeks/months/years gives a start date for the lease and the number of weeks/months/years that the lease will run (for example: the lease could start on September 1, 2005 and then continue for a period of 18 months). The advantage here is that neither party has to give notice to terminate the lease, it simply ends on the specified number of weeks/months/years. In a fixed term lease, the landlord cannot increase the rent or change any other terms of the lease unless he specifically reserves the right in the lease, and the tenant agrees to the changes. At the end of the specified period, the landlord can either: (a) accept rental payments and have the lease continue as a weekly/monthly/yearly tenancy with the same rules as the expired fixed end date lease; (b) sign a new lease; or (c) start eviction proceedings against the tenant.
A periodic tenancy (a weekly/monthly/yearly lease with automatic renewal) will continue until one of the parties terminates the lease. To terminate the lease, the landlord or tenant must give notice of their intention to terminate as specified by statute. A landlord can usually raise the rent, or change the terms of the lease in these types of agreements by providing proper notice as required by statute. At the end of the notice period the tenant must move out or the landlord can start eviction proceedings against the tenant.
When is rent payable?
Rent is usually payable quarterly in advance on the usual quarter days: 25th March, 24th June, 29th September and 25th December. However, there is nothing to prevent a landlord and tenant agreeing to other dates for payment of rent.
What is "Base rent"?
Base rent refers to the minimum or base amount of rent as set out in the lease excluding percentage rents or any other additional or operating costs.
What is a "percentage lease"?
A percentage lease refers to a specific type of rental arrangement that applies mainly to retailers, especially in shopping centers or multiple-tenant malls. In a percentage lease, the tenant pays a fixed or base rent plus a percentage of gross income. To create this type of rental arrangement, have the tenant pay "Base Rent plus % of Gross Profits".
What are "FRI leases"?
An FRI lease means a full repairing and insuring lease where all costs of maintenance and repair and the cost of insurance (whether insured directly or through the Landlord) are met by the Tenant.
What is a Gross rent lease?
A Gross rent lease is a type of commercial lease where the tenant pays the base rent and any specified expenses with respect to the Premises and the landlord pays all other expenses associated with operating and maintaining the property. Operating expenses may include insurance, utilities, maintenance expenses and sometimes taxes.
Land Registry Information for Prescribed Clauses Leases
When do you require a prescribed clauses lease?
If your lease term is 7 years or longer and granted on or after 19 June 2006, then you will most likely require a lease that has prescribed clauses. LawDepot's Commercial Lease automatically comes with the prescribed clauses for leases with a term of 7 years or longer.
What are the prescribed clauses for?
Under the Land Registration Act 2002, leases with a term of 7 years or more must now be registered. With more leases being registered, the Land Registry wants all long term leases to come with prescribed clauses in an effort to create greater standardisation and make the registration process more efficient. The new regime requires 14 prescribed clauses and mandatory headings to be inserted into the beginning of every registrable lease. The prescribed clauses are intended to make leases more user-friendly. Key points are now highlighted at the beginning of the lease thereby ensuring that people do not have to search the entire document to understand the main issues that are contained in the lease.
Do I have to provide landlord title number(s)?
If the landlord's title is registered, you should provide title number(s). If the property is not registered, then you should leave this section blank.
If the prescribed clauses lease is granted between a trigger to first registration of the reversion and its lodgement, no title number(s) is required. The same applies to a lease using the prescribed clauses lodged as part of an application for first registration. Otherwise, if you do not complete this section with the relevant title number(s), the Land Registry will be unable to accept your application where use of the prescribed clauses is compulsory.
Do I have to provide other title numbers?
You must provide other title number(s) when there is any title(s) (other than the landlord's) against which you are applying to make entries on matters relating to:
- rights of acquisition;
- restrictive covenants given in this lease by the landlord in respect of land other than the property;
- easements; or
- an application for a standard form of restriction.
If you do not complete this section with the relevant title number(s), the Land Registry will be unable to accept your application where use of the prescribed clauses is compulsory.
What are premiums?
A premium is the price a tenant pays to a landlord to purchase a lease. A premium is most often taken in return for the rent being reduced to what would otherwise be payable. For new commercial leases not exceeding 25 years, it is rare to take a premium. Premiums are most commonly used for long leases of residential property.
What does “reversion” mean?
Reversion refers to any interest left over after the lease has come to an end (i.e. the freehold or a superior lease).
What is a restrictive covenant?
A restrictive covenant is a legal obligation which limits/restricts the use of land. The party that is burdened by the covenant is sometimes referred to as a "covenantor" and the party that benefits from the covenant is sometimes referred to as a "covenantee." Often, restrictive covenants are used to preserve and protect the physical, social, and economic integrity of the neighbouring property in a subdivision. They may be used to control lot size, control architectural design, or regulate activities.
What is an easement?
An easement is a right to use the land of another. A common example of an easement is a right of way (e.g. the right to pass over your neighbour's land to empty your bins).
What is an estate rentcharge?
The term 'Estate rentcharge' refers to how rentcharge is defined in s.1(2)(b) of the Law of Property Act 1925. In short, a rentcharge works like a ground rent as a (usually small) annual payment. Rentcharges apply only in certain areas of England. If you are not aware of any rentcharges, select “No” to the question “Are there any estate rentcharges burdening the property?”
What is a standard form of restriction?
A restriction is an entry on the register which regulates how an estate or charge may be entered in the register. In effect, a restriction allows the estate or charge entry on the register only to the extent that the entry meets the terms of the restriction. Applicants may place restrictions for many different reasons. For example, an applicant who has a beneficial interest in a property may want a restriction that no disposition in that property can take place without the applicant's consent.
Standard forms of restriction are those restrictions prescribed by the rules. Applicants who fall within one of the standard forms of restriction do not have to satisfy the registrar that they have sufficient interest in the making of the entry. Standard forms of restriction are set out in the Schedule 4 of the Land Registration Rules 2003.
Note: If the restriction affects only part of a title, you must incorporate a description of the affected part within the wording of the restriction along the lines set out below. As long as the wording is sufficient to identify the part of the title intended to be affected by the restriction, Land Registry will accept it. The description may take the form of either:
- a verbal description (for example, “No disposition of [the part of] the registered estate [known as 22 Smith Street] by the proprietor of the registered estate is to be registered …”), or
- a reference to the plan attached to the lease (for example, “No disposition of [the part of] the registered estate [shown edged blue on the plan to the lease] by the proprietor of the registered estate is to be registered …”).
Land Registry will only accept a verbal description of the property (eg 22 Smith Street) where the precise extent of that property can be clearly identified on the Ordnance Survey map.
What is the difference between a joint tenancy and a tenancy-in-common?
A joint tenancy is a form of joint ownership where all the joint owners have an identical interest in the property. On the death of one owner, their interest passes to the remaining owner(s) by the right of survivorship. A tenancy-in-common is a form of co-ownership of property where each co-tenant owns a separate share in the property. On the death of one of the co-tenants, their share passes to their own beneficiaries by their will or intestacy. Tenancies in common are sometimes implemented in an attempt to reduce inheritance tax.
What is a security/damage deposit?
A security deposit is a sum of money the tenant pays to the landlord to guarantee that the tenant will fulfill all obligations under the lease. The landlord holds the security deposit for the term of the lease to ensure that the tenant does not default on the terms of the lease agreement or otherwise damage the property. Should the tenant damage the property (normal "wear and tear" excluded) or if the Tenant has not paid rent, the landlord is entitled to recoup the debt from the security deposit. Usually the tenant must provide the landlord with the security deposit at the start of the lease term. At the end of the lease term, the tenant will receive the deposit back minus any deductions for repairs/restoration.
How much should the damage/security deposit be?
Damage deposits are usually equivalent to the maximum of one month's rent, but can be any amount that the landlord decides upon in a commercial setting. Security deposits can vary from one up to three months rent depending upon the tenant and industry.
What is a schedule of condition?
The schedule of condition is an inspection report for the let property which is completed at the commencement of the lease. This form contains a description of the condition of the property at the time of the tenant's possession and may also include a portfolio of photographs as evidence of the property's condition. The schedule is used at the end of the lease term as a comparison tool to determine if the tenant caused any damage to the property. The tenant should ensure that all damage is properly disclosed in this report to prevent a landlord from assuming the tenant has caused the damage.
Landlord Improvement/Signing Incentives
What is a signing incentive?
A signing incentive is an incentive or concession given to the tenant to enter into the lease, such as a month's free rent.
What is subletting a lease?
Subletting the lease refers to when the rights to use the property (or a part of the property) under a lease, is transferred by the current tenant to a third party for a portion of the remaining term of the lease.
What is assigning a lease?
Assigning the lease refers to the complete transfer of all rights to occupy the premises for the rest of the term from the current tenant to a third party.
What additional clauses does the long version include?
Some of the additional clauses in the long version include clauses that set out the basic terms and definitions in the lease as well as clauses detailing the parties' insurance obligations and repairing obligations.
When would the tenants have to have the carpets professionally steam cleaned?
The tenants will be required to have the carpets professionally steam cleaned before the final move-out inspection occurs.
I do not know when the lease will be signed. Can I fill in the date later?
Yes, by selecting 'Unsure' as the date the agreement will be signed, a blank line will be inserted into the lease so that you can add the correct date after printing the document.
Who should sign the lease?
Both the landlord and the tenant should sign the lease. Having witnesses to the parties' signatures provides greater evidence that the parties entered into the lease.
Security of Tenure
What is “security of tenure”?
Security of tenure refers to the tenant's right to remain in the property. More specifically, the Landlord and Tenant Act 1954 provides commercial tenants security of tenure by giving them the right to renew their tenancy when their lease comes to an end.
What does “contract out” mean?
Contracting out of the Landlord and Tenant Act 1954 allows the landlord and tenant to agree that that the tenant will have no security of tenure. This means that when the lease has expired, the tenant will be unable to apply to the court for a new tenancy (under the Landlord and Tenant Act 1954 tenants with business leases for more than one year generally have security of tenure when the lease expires). If the Landlord and Tenant do not contract out of the Landlord and Tenant Act 1954, then special notices (Section 25 Notice or Section 26 Notice) will have to be filled by the landlord and/or tenant in order to extend the lease.
What is a “break clause”?
Leases may include a provision known as a break clause which allows either the tenant or the landlord (or both) to end the lease at a specified date without waiting for the full term of the lease to expire. This may be beneficial to the party who wants to end the lease early – such as a landlord who wants to redevelop or a tenant who wishes to leave without finding a subtenant or assignee– however early termination may result in problems and/or loss to the other party.
What is the “Warning Notice”?
The Warning Notice is a prescribed form that the landlord must serve on the tenant at least 14 days before the tenant signs the lease. The warning notice sets out the rights the tenant is giving up by contracting out. LawDepot provides this warning notice with our commercial lease form.
What is the “Simple Declaration Made by Tenant”?
The Simple Declaration Made by Tenant is a form for tenants who are contracting out. The form is used after the 14 day warning period has elapsed. It contains a declaration to be signed by the Tenant stating that the Tenant is entering into a tenancy agreement with the landlord that will exclude security of tenure, the tenant has received the warning notice at least 14 days before entering into the agreement and the tenant is aware of the consequences of entering into the agreement. LawDepot provides this simple declaration with our commercial lease form.
What is the “Statutory Declaration Made by Tenant”?
The Statutory Declaration Made by Tenant is a form that can be used when both parties want to enter into an agreement excluding security of tenure but cannot wait until the 14 day warning period has elapsed. The form contains a declaration to be signed by the Tenant stating that the Tenant is entering into a tenancy agreement with the landlord that will exclude security of tenure, the tenant has received a notice explaining the rights that are being given up when contracting out and the tenant is aware of the consequences of entering into the agreement. As an additional safeguard, the declaration must be signed before an independent solicitor or commissioner of oaths. LawDepot provides this statutory declaration with our commercial lease form.
Can the tenant apply to the courts to renew the lease if the tenant has already agreed to contract out the Landlord and Tenant Act 1954?
No, if the landlord and the tenant have already contracted out then when the lease has expired, the tenant will be unable to apply to the court for a new tenancy.
What are the forms for renewing and terminating the lease?
Assuming that the parties have not contracted out of the Landlord and tenant Act 1954, each party will need to use a specific form to end or renew the tenancy. Landlords must use a Section 25 Form while tenants must use a Section 26 Form. If the Landlord has already proceeded with a Section 25 Form, the tenant cannot use the Section 26 Form. Similarly, if the Tenant has already commenced with a Section 26 Form, the landlord cannot use the Section 25 Form.
Section 25 Form
- The Section 25 Notice is a form that can be used by a landlord to either:
- end a tenancy with a proposal to start a new tenancy or
- end a tenancy with reasons for refusing a new tenancy.
- If the Landlord wishes to end the tenancy, the landlord must send the Section 25 Notice stating the reasons for refusing the new tenancy to the tenant. The tenant then has 2 options. First, the tenant can do nothing in which case the tenancy will come to an end on the date specified on the Section 25 form. Second, the tenant can apply to the court to renew the tenancy in which case the landlord will have to come to court and provide reason(s) for why the landlord wishes to end the tenancy. The reasons must meet one or more of the specified grounds of s. 30(1) of the Landlord and tenant Act 1954.
- If the Landlord wishes to renew the tenancy, the landlord must send the Tenant a Section 25 Form which ends the tenancy and provides the terms for a new tenancy.
Section 26 Form
- The Section 26 Notice is a form that can be used by a tenant to request a new tenancy. The form sets out the Tenant's proposed terms for a new tenancy. The form must be sent to the landlord. Upon receipt, the landlord has 2 months to decide whether he/she wishes to continue granting the tenancy. If the landlord opposes the tenancy, the landlord can apply to court to end tenancy stating one or more of the specific grounds for ending the tenancy under s. 30(1) of the Landlord and tenant Act 1954.
What are the prescribed grounds under which a landlord can oppose granting a new tenancy?
Under s. 30(1) of the Landlord and tenant Act 1954, the grounds on which a landlord may oppose an application for a new tenancy are:
- where under the current tenancy the tenant has any obligations as respects the repair and maintenance of the holding, that the tenant ought not to be granted a new tenancy in view of the state of repair of the holding, being a state resulting from the tenant's failure to comply with the said obligations;
- that the tenant ought not to be granted a new tenancy in view of his persistent delay in paying rent which has become due;
- that the tenant ought not to be granted a new tenancy in view of other substantial breaches by him of his obligations under the current tenancy, or for any other reason connected with the tenant's use or management of the holding;
- that the landlord has offered and is willing to provide or secure the provision of alternative accommodation for the tenant, that the terms on which the alternative accommodation is available are reasonable having regard to the terms of the current tenancy and to all other relevant circumstances, and that the accommodation and the time at which it will be available are suitable for the tenant's requirements (including the requirement to preserve goodwill) having regard to the nature and class of his business and to the situation and extent of, and facilities afforded by, the holding;
- where the current tenancy was created by the sub-letting of part only of the property comprised in a superior tenancy and the landlord is the owner of an interest in reversion expectant on the termination of that superior tenancy, that the aggregate of the rents reasonably obtainable on separate lettings of the holding and the remainder of that property would be substantially less than the rent reasonably obtainable on a letting of that property as a whole, that on the termination of the current tenancy the landlord requires possession of the holding for the purpose of letting or otherwise disposing of the said property as a whole, and that in view thereof the tenant ought not to be granted a new tenancy;
- that on the termination of the current tenancy the landlord intends to demolish or reconstruct the premises comprised in the holding or a substantial part of those premises or to carry out substantial work of construction on the holding or part thereof and that he could not reasonably do so without obtaining possession of the holding; and
- on the termination of the current tenancy the landlord intends to occupy the holding for the purposes, or partly for the purposes, of a business to be carried on by him therein, or as his residence.
What should the tenant do to end a tenancy?
A tenant can bring the tenancy to an end by ensuring that he/she has moved out of the premises by the end of the fixed term end date specified in the lease. If the landlord allows the tenant to remain in occupation after the end date, the tenant will have to continue paying rent. In these circumstances, the tenant can only end the tenancy by providing the landlord with 3 months' notice.
When should the forms be sent to the other party?
The parties can send a form to the other party no less than 6 months and no more than 1 year prior to the end of the tenancy. Neither party can ask for the tenancy to end prior to the end date specified in the lease.
What if neither party has submitted a notice?
Assuming that the landlord and tenant have not come to an agreement and notice has not yet been served (or it has been served but it expires after tenancy expiry), then the Landlord and tenant Act 1954 provides that the tenancy is continued until it is brought to an end either by a section 25, 26 or 27 notice, by court order, by the grant of a new tenancy, or by forfeiture or surrender.