Ten Things you should know about Commercial Leases
The Stages and Terms involved with Commercial Leases
A commercial lease is a legally binding agreement covering a relationship between a landlord and tenant of commercial premises, outlining precisely what both parties are able or unable to do during the term of the lease.
Real Estate Senior Solicitor Izabela Treacy specialises in drafting and negotiating commercial leases. She outlines some of the most common initial questions posed by commercial clients, an explanation of typical terms, and the different stages involved in the process.
When are commercial leases used?
Commercial leases are used when a property is being rented by a landlord to a tenant to be used for business purposes. They allow landlords to get a return on their investments while providing flexibility for occupiers to occupy a space for a period of time without incurring the cost of purchasing a space.
What is a rent-free period?
This is as it sounds, a period where the tenant does not pay rent to the landlord. Usually, a rent-free period is included as an incentive to allow the tenant a period to fit out the property and prepare it for their intended use. The rent-free period tends to be between two and six months, but any length of time can be agreed between the parties.
What does ‘security of tenure’ mean?
If a tenancy meets all the requirements and falls under the protection of The Business Tenancies (Northern Ireland) Order 1996 (“BTO”), it will be afforded a security of tenure. This means that tenancy will continue, even if the term of the lease has ended, until it has been terminated by either party in accordance with procedures set out within the BTO. Unlike in England and Wales you cannot contract out of the BTO and therefore most tenants in Northern Ireland will benefit from security of tenure.
How should I decide the duration of the lease term?
The duration of the lease depends on the nature and needs of your business. Most leases are between five and ten years. Longer leases tend to have break clauses in them to provide an exit at specific points in time.
What does a ‘full repairing and insuring lease’ mean?
Full repairing and insuring means the tenant is responsible for repairs, upkeep and maintenance as well as the cost of insuring the property. Any works that need to be carried out to the property to keep it in a certain standard would usually be carried out at the tenant’s cost. The majority of leases are on a full repairing and insuring basis or if it is a lease of part contain a service charge for the repair and maintenance of the structural and common parts.
What is a break clause?
A break clause is a provision that allows parties to terminate the lease before the term has come to an end. It will usually specify a specific date for the break and conditions which must be satisfied in order for the break to be effective. Break clauses need to be properly negotiated as the terms are strictly applied and even though there may be a break clause you may not be able to rely on it if the conditions are too onerous.
What is a rent review clause?
Rent review provisions allow the parties to recalculate the rent at set points in the lease term. The common methods are by Open Market or Index Linked and the provisions are usually upwards only meaning the rent will never reduce below existing rent. The relevant provision in a lease will set out in detail, when and on what basis the rent is to be reviewed.
What happens at the end of a lease?
Put simply either, the parties agree to renew the lease or the tenant vacates the property. In reality it can be a lot more complicated with the parties having to serve notices under the BTO or there being significant dilapidations claims by the Landlord for lack of repair to the Property. It is important to take legal advice early to try and to protect your position if you are landlord or mitigate repair liabilities if you are a tenant.
What are the key stages involved in drafting or reviewing a commercial lease?
First key stage is understanding the heads of terms agreed between the parties. It is also very important to understand your client’s needs and the nature of their business.
When drafting or reviewing a commercial lease you need to make sure that the heads of terms are reflected in it as intended by the parties.
A draft commercial lease will very rarely be acceptable to all parties in the initial form, therefore a key stage is negotiating it with other parties to ensure a final form of the lease can be mutually agreed. At this stage it is also important to advise the client of the content of the commercial lease so they can provide their opinion / instruction, raise any queries and approve any changes made or proposed by the other party.
Once the final format of the lease has been agreed it can be completed and then depending on the circumstances registered at the Land Registry and Stamp Duty Land Tax paid.
What is your best advice when approaching a commercial lease?
Make sure that heads of terms are clear and agreed by all parties. This will help all involved understand what has been agreed and will also avoid any unnecessary negotiations during the drafting process. Also when agreeing heads of terms and deciding to enter into a commercial lease ensure that it meets your business’ needs.
Get in touch
Izabela and our expert Real Estate team can guide you through the lease process and offer you an overview of your standpoint and options before drafting you a bespoke lease that protects you and your business.
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