Understanding your commercial tenancy agreement

If you decide to rent commercial premises you’ll be expected to sign a commercial tenancy agreement or lease agreement. Before doing so it is essential that you understand what you are committing yourself to, look for options to negotiate on its terms and fully appreciate under what circumstances you can be released from the agreement.

Here are just some of the aspects of the commercial tenancy agreement you will need to understand:

Payment terms in a commercial lease

Although it may seem obvious, make sure you are clear on when rent is to be paid and that you fully understand any penalties for late payment. If a payment is made slightly late the landlord may overlook this; the next payment is calculated by reference to the previous late payment and the official payment dates in the lease may be forgotten. Paying at the right time is really important, even if the landlord hasn't picked you up on it as many commercial tenancy agreements have punitive interest penalties for late payment (typically 4%-5% above the base lending rate of a named bank). If you have allowed your rent payments to slip by a significant amount over time then you could be leaving yourself exposed to a significant interest claim by the landlord if it changes its stance on your late payment in the future. A classic example of this is where a tenant slips from paying rent quarterly in advance to quarterly in arrears.

Renewal options

Although tenants normally enjoy a statutory right to renew a business lease, there are various grounds which entitle a landlord to oppose the granting of a new lease. One of these is persistent breach of the terms of the commercial tenancy agreement. Persistent late payment of rent, for example, could be used by a landlord as a reason to refuse a new lease. If you are heavily reliant on your premises for the success of your business then you must avoid breaching the terms of the agreement.

Repair obligations

The repairing obligation in a lease has the potential to result in enormous expense for a tenant. You should establish the condition of the property before you sign any commercial tenancy agreement and if necessary employ a specialist building surveyor to prepare a report advising you of any areas of disrepair. Once you have this information your lawyer can negotiate the terms of your repairing obligations in the agreement to ensure that the responsibility for repairs is balanced adequately between tenant and landlord.

Escaping from a commercial tenancy agreement

If your business grows more rapidly than expected and you need larger premises, or if things go wrong and you can no longer afford to pay the rent you may need to extricate yourself from the terms of a commercial tenancy agreement. Many agreements contain a clause allowing you to end the lease early, known as a break clause. There are very often conditions to be satisfied and notices served in a particular way to ensure you don't lose your right to end the lease early. Serving a break notice incorrectly is one of the most expensive mistakes a tenant can make.

Another escape route is via the alienation clauses which give you the right to deal with the lease by either selling it on to someone else or subletting. Provisions tend to vary from lease to lease so it is essential that you understand exactly what your rights are before you search for someone to take the premises off your hands.

There’s a lot of commercial property jargon in most leases, do make sure you understand what it all means before you sign. Leaving it until there’s a problem will be too late and you may already be committed in terms of the length of the lease, how much you have to pay and other terms.

Cousins Business Law provides advice on Commercial Tenancy Agreements, advising on the terms, negotiating on behalf of clients and explaining obligations in plain English. Contact Steve Petty Commercial Property Solicitor for help with your commercial tenancy agreement.

For free advice on this topic please call us on 0845 003 5639.