What is a Commercial Lease?
A commercial lease is a legally binding contract between a property owner (landlord) and a business entity (tenant) regarding the occupation of commercial property to be used by the tenant to conduct a business. A lease sets out the rights and responsibilities of each party and outlines the agreed terms and conditions of the arrangement. The agreement should be in writing and include provision to protect the parties if there is a dispute.
Disputes under commercial leases often arise because the agreement has not been adequately prepared or the parties are unclear about their rights and obligations. Disputes could involve unpaid rent and/or service charges, damage, or a possession claim for not vacating the property on time after the lease has concluded or has been forfeited or terminated.
Typical provisions of a Commercial Lease
A lease should include a description of the property, usually the address and legal description of the premises and its intended use, including opening hours, parking rules and use of amenities, as relevant.
The lease will state the term – the length of the lease, which may be fixed, a specified number of weeks, months or years, or periodic. The consideration including the deposit and the rent, which is usually paid monthly, payment of service charges and rights of forfeiture/termination for each party should also be included.
The lease should also set out subletting or assigning rights, who is responsible for repairs, and for insuring the property and contents.
If the lease has not reached its conclusion, the landlord can only end it if the tenant has failed to pay the rent or has not fulfilled any other part of its obligations under the lease. The lessor should either negotiate with the lessee for them to pay the rent or remedy the issue. Alternatively, they could serve a Notice to Quit on the lessee giving them a specified amount of time to vacate the property. The time to vacate upon a notice being served, should have been included in the lease. If it has not, then the notice period given must be 40 days or more if the lease term is over 4 months. If the lease term is less than 4 months the notice must give at least 28 day’s notice. If the tenant does not vacate then the lessor can commence possession proceedings in the County Court.
An initial inspection should be carried out by both parties to agree on the state of the premises at the outset, and then negotiate any work required and determine who should carry out that work. Any agreement reached should be contained in the lease.
Types of Commercial Lease:
A percentage lease is a lease under which the lessee pays an agreed rent every month and then pays a percentage of their profits. This can be advantageous for a lessee, particularly when starting out, as the lessee does not have to pay the percentage if they have not made a profit. The lessor benefits from this when the business is doing well and must trust that the lessee is transparent in the information and receipts provided. It is best for both parties to agree on a nominated accountant to deal with the receipts on sales and calculate the profit upon which to base the percentage payable.
A gross lease means that the lessee usually makes one payment to the lessor which could include everything payable under the lease, i.e., rent, service charges, utilities, repairs, insurance, tax etc. This type of lease is beneficial to both parties in that everything is incorporated into one payment. However, it may be that the repairs and utilities end up being more than expected. It really depends on each individual situation and costs should be carefully assessed at the outset so see if this type of lease is feasible.
Single Net Lease
A single net lease is one under which the lessee is obliged to pay for rent and property taxes.
Double Net Lease
A double net lease is one under which the lessee is obliged to pay for rent but also property taxes and insurance premiums.
Triple Net Lease
A triple net lease requires the lessee to pay all the expenses under the lease, including tax, insurance and maintenance.
Before parties enter into a commercial lease, they must ensure that their interests are protected and the provisions serve their individual needs and circumstances. Commercial leases can be complex, so it is invaluable to get advice from a solicitor.