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How to negotiate a commercial lease with your landlord

View profile for Richard Ramshaw
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How to negotiate a commercial lease with your landlord

The commercial bargaining power of landlords and tenants often changes in line with market forces , so you’ll need to be up to date with your obligations and rights (especially when it comes to taking or renewing a lease).

In his latest article, Commercial Property Solicitor Richard Ramshaw outlines some tips, strategies and a checklist for negotiating the Heads of Terms of a commercial lease.

Who is responsible for repairs in a commercial property?

For a long time, commercial tenants have accepted the idea of full repairing and insuring ("FRI") leases. These types of leases transfer almost all liability to the tenant to repair – and even rebuild – the premises.

This may have made sense when it was normal to take on a lease for 25-30 years, but short-term leases of 5 years or less are becoming increasingly common and FRI leases don’t make so much sense here.

As a tenant, you should be cautious about taking on a FRI lease which could potential make you liable for completely overhauling a building.

If there are any concerns about the condition of the property, a photographic schedule of condition should be included to the Lease.

What is a photographic schedule of condition?

This essentially involves taking photos of the property to record its condition, highlighting any defects.  Also, an accompanying narrative should be included describing the state and condition of each element of the property.

A provision can then be included in the Lease that states that you are not liable to repair these defects.

Your repair obligations can also be watered down so that the property only has to be kept in no worse a condition than shown in the photos.

How much service charge is payable?

Where there is a service charge payable regarding common facilities enjoyed by the property, you should consider whether your liability should be subject to a financial cap.

Should you really be required to contribute to the cost of items (e.g. the resurfacing of a shared access road) that will outlive your occupation of the property?

Related: Who is responsible for repairs and maintenance in a commercial lease?

What happens to alterations at the end of a commercial lease?

It's commonly accepted that any alterations made to a property by the tenant should be removed when the lease expires, and the premises should be returned to how it was prior to alterations being made.

But should a tenant have to rip out and discard its fit-out, only for a new incoming tenant to reinstall a brand new set of fitting-out works?

On this point, you should ask your landlord to adopt a more collaborative and environmentally responsible approach, which would only require alterations to be removed when needed to secure a new letting.

Who is responsible for a commercial EPC?

Some commercial premises cannot be let if the property does not have a high enough energy rating.

For this reason, tenants need to think about future changes in the law that are anticipated and whether that means that improvements need to be made for their premises to be ‘energy compliant’.

A discussion needs to be had be had between you and your landlord to decide whether you should be liable to pay the cost of making improvements to the property to make it energy efficient.

If, as a tenant, you are liable for this cost; the landlord could unfairly benefit – especially in short leases.

Read about the updates to EPCs in 2023 and 2024 here.

How can a tenant end a commercial lease?

Shorter leases inevitably provide more flexibility for tenants – but even a five year term may be too long if your business needs change.

Break clauses can allow you to end a lease early, and can therefore be valuable – and occupiers may be prepared to pay a penalty.

Break clauses can often only happen if rent is up to date, but arrears or any other payments should not prejudice a break. In addition, compliance with the lease should never be accepted as a precondition of the break – a landlord shouldn't be able stop the tenant breaking the lease due to a minor breach of the lease obligations.

As a tenant, you may wish to assign or sub-let the premises. It's reasonable that an assignee should be able to demonstrate that they can fulfil your obligations – but any lease provisions that require an incoming tenant to be as financially strong as the outgoing tenant should be avoided.

Lastly, beware of  terms which require a sub-lease to charge the same rent or higher than the main lease. If market rents fall below this level, sub-letting is going to be virtually impossible.

Read our article on ending a commercial lease early, which includes break clause options, here.

Related: What to include in heads of terms in a commercial lease

Specialist Commercial Property & Lease Solicitors

Our bright Commercial Property Team have vast experience in assisting both landlords and tenants and advising on negotiating a commercial lease.

We can provide advice that is tailored to your lease and situation, allowing for provisions to be included that are beneficial to you.

You can call us on 01202 499255, or fill out the form at the top of this page, for a free initial appointment.

The content of this article, blog or video is not intended as specific legal advice. For tailored assistance, please contact a member of our team.