If you are planning to lease commercial premises, you need to give careful thought to the legal documents that set out how the building can be used, as well as your rights and obligations. Here, our commercial property leasing solicitors provide guidance on some of the essential points that should be considered when entering into a commercial lease.
What Is a Commercial Lease?
A commercial lease is a contract between a commercial landlord and business tenant. The lease affords the tenant the right to use the premises for business purposes for a prescribed period in exchange for an agreed rent. The lease also sets out the rights, responsibilities and obligations of the landlord and tenant.
What Is the Difference Between a Commercial Lease and a Residential Lease?
The most obvious difference is the purpose of the lease. Commercial leases are used by a tenant to rent premises for business purposes while a residential lease is used by a tenant to rent a house or flat to live in.
The way that these leases are viewed in a legal context also differs – commercial leases will usually be seen as contracts entered into by experienced business people and, as such, there are less statutory protections for tenants and courts will be less likely to step in if a tenant decides that the terms of their lease are unfair. Parties entering into a commercial lease are expected to be able to negotiate the terms of their contract more effectively than those entering into a residential lease.
What Will Usually Be Covered in a Commercial Lease?
Commercial leases will typically deal with:
- The type of property being leased
- The address of the property
- The term of the tenancy (how long it will run) and whether the tenancy is for a fixed period or will renew periodically
- The type of business that can operate from the premises
- Ownership of leasehold improvements
- Arrangements for the security deposit
Depending on the individual lease, other points that may be addressed include:
- Lease renewal provisions
- Signing incentives and landlord improvements
- Tenant improvements
- Rules regarding subletting of the premises
- How much notice must be given for termination of the lease
- Arrangements for insurance
Obtaining a Schedule of Condition
One tool which can assist in qualifying a tenant's repairing obligation is a Schedule of Condition. The provision of a Schedule of Condition is a vital part of the commercial lease process, where a comprehensive and thorough survey with photographic evidence records the condition of a property before agreeing a commercial lease. Usually the insertion of the Schedule of Conditions is accompanied by a clause in the lease which states that the property will be returned in the same state as recorded in it, no better or worse and that the Tenant is not responsible for any element of betterment. This is important where the Tenant is taking on a full repairing and insuring lease.
The Schedule of Condition is quite distinct from a schedule of dilapidations. The latter is produced usually at the end of the lease by the Landlord who will wish to ensure the condition of the property.
Who Are the Parties to the Lease?
The parties are the lessor and the lessee. The lessor is the landlord – the owner of the property – and the lessee is the tenant who rents the property.
How Can the Tenant Use the Premises?
Tenants can only use commercial premises in ways approved by the landlord. The lease will set out permitted uses, and written consent must be sought from the landlord before the property can be used for any additional purposes not detailed in the lease.
The Lease Duration– What Options Are Available?
There are several types of lease durations– what option is most appropriate will depend on your business and circumstances.
Fixed End Date
A lease with a fixed end date sets out the time that the tenancy will end. This provides certainty for both parties, with neither being required to give notice for termination of the lease. The landlord cannot increase the rent or make changes to the terms unless the right to do so is expressly reserved in the lease, and the tenant agrees to any changes. Once the lease expires a new one may be signed, or the landlord may choose to allow the lease to continue on a month-to-month basis with the same rules.
Fixed Number of Weeks/Months/Years
Similar to a lease with a fixed end date, this type of lease provides a start date for the tenancy and will then run for an agreed period. Neither party needs to give notice to terminate the lease, and the landlord cannot increase the rent or change its terms without reserving the right to do so and seeking agreement from the tenant. Again, at the conclusion of the lease, a new one may be signed, or the lease may continue on a weekly/monthly/yearly basis with the same rules applying.
Periodic
A periodic tenancy continues until one of the parties chooses to terminate the lease. It may run on a weekly, monthly or yearly basis and will automatically renew if neither party gives notice to terminate. Landlords will generally be able to increase the rent or change the terms of the lease if they provide appropriate notice.
How Long Can a Commercial Lease Run?
Commercial leases can run for a maximum of 175 years. After this time the lease will automatically end, even if the term stated in the lease is longer.
Terms of a Commercial Lease
What Is 'Base Rent'?
Base rent is the minimum amount of rent as detailed in the lease. This excludes percentage rents or other additional costs.
What Is a 'Percentage Lease'?
A percentage lease refers to a rental agreement whereby the tenant pays a base rent plus a percentage of their gross income. This type of lease typically applies to retailers, particularly shopping centres.
What Is a 'Gross Rent Lease'?
Under a gross rent lease, the tenant pays a base rent plus specified expenses in respect of the premises. The landlord will pay all other operating costs and maintenance expenses.
What Is an 'FRI Lease'?
FRI stands for full repair and insuring – under this type of commercial lease all repair and maintenance costs, along with any insurance costs, must be covered by the tenant. Getting a surveyor to prepare a Schedule of Condition is especially important under a full repair and insuring lease.
What Is the Legal Description of the Premises?
This is how the property is identified for the purpose of legal transactions. Details can be found in the title deeds, mortgages or other legal documents.
What Are Fixtures?
Fixtures are parts of the property that cannot easily be removed without causing damage. Examples may include sinks, toilets and built-in cabinets.
What Are Chattels?
Chattels are personal property separate from the building itself. Examples may include desks, computers and curtains.
You can find more information on our webpage ‘Things to Consider Before Signing a Commercial Lease’.
Expert Commercial Property Leasing Solicitors Clarkston, Newton Mearns, Giffnock, Netherlee, Eaglesham, Carmunnock, Stewarton & Southside Glasgow
Whatever the nature of your business, speak to one of the specialist commercial property solicitors at Claphams for expert guidance on all matters concerning commercial leases.
We act for many local landlords and tenants. Our solicitors will help you negotiate the best possible terms for your lease and allow you to concentrate on growing your business.
Call us today on 0141 620 0800 or fill out our online enquiry form.
