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What is a commercial lease?

16th August 2023 by What is a commercial lease?

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A commercial lease is a legally binding contract made between a landlord and a business tenant. 

A commercial lease gives a tenant a legal right to the exclusive possession of a property and/or land to be used for a business or commercial activity, for a determinable period of time in exchange for money paid to the landlord, i.e. rent.

In other words, a landlord will grant a tenant a lease of a property, like a shop unit, for a period of say 10 years and in return, there is a payment of annual rent from the tenant to the landlord.

How does this differ from a residential lease?

A tenant will enter into a commercial lease for commercial reasons.  A tenant may want to sell from a shop unit or to run their company from the property as office space.

The principles of a commercial lease are largely the same as those of a residential lease. However, there are some important differences.  These may include: –

  1. A shorter term than one would see in a residential lease
  2. A higher annual rent than one would see in a residential lease
  3. Security of tenure for a tenant by virtue of the Landlord and Tenant Act 1954 (which can, in certain circumstances, give a tenant an automatic right to a further lease at the end of their current term thus allowing a tenant to continue operating from the property, should they wish, without having to move their business)

Some key provisions to think about in a commercial lease:

  1. How much rent is payable?
  2. How long is the term?
  3. Is a rent deposit required by the landlord?
  4. Will the landlord require the tenant to have a guarantor?
  5. Will the rent be reviewed and if so, in what way and when?
  6. Will the tenant be able, under the terms of the lease, to assign the lease and/or sublet and if so, on what terms?
  7. How about allowing for a break clause? For example, the lease is for ten years but the tenant is able to terminate the lease at year five if the tenant’s business needs change.
  8. Who maintains what at the property and is there a cost for doing so. For example, from a tenant’s perspective, are they expected to contribute towards buildings insurance for the building that the shop they are renting forms part?
  9. What is the permitted use? From a tenant’s perspective, they may find a shop unit that has previously been a hairdresser, yet they would like to use it as office space. They will need to consider if using the property as office space is permitted.

Documents to run alongside the commercial lease to consider:

There are various additional legal documents that might need to be entered into alongside a commercial lease. For example, if a tenant wishes to make alterations to the property and the landlord agrees, a licence to alter the property may need required.

How Laceys can help?

If you’re planning to put up a commercial property for lease, a retail space for lease, or a warehouse space for rent, and would like further advice, please contact Aisling Scott on 01202 377805 or email a.scott@laceyssolicitors.co.uk 

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.

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