What to check before signing a commercial lease

7 days ago
3 min read

Updated: 11 hours ago

Introduction

A lease arrives, drafted by the landlord's solicitor. It is forty pages, the tenant wants the premises, and the pressure is to sign quickly before somebody else takes them. It is signed essentially unread.

Everything in that document was negotiable on the day before signature and none of it is negotiable afterwards. Commercial leases are drafted in the landlord's interest, which is entirely proper, and the tenant's protection is to read them and ask. Most small businesses sign the longest financial commitment they will ever make without advice. The document was drafted by somebody acting for the other party, which is normal and worth remembering.

1. What to check before signing a commercial lease starts with the term and any break

The two most consequential figures.

How long you are committed for, and whether you can end it early. A break clause is the single most valuable protection a tenant can negotiate, and its conditions matter as much as its existence. A break nobody can satisfy is not a break at all.

2. Read the repairing obligation carefully

Where the largest unexpected costs arise.

A full repairing obligation can make you responsible for the entire condition of the building, including elements that were already deteriorating. A schedule of condition agreed at the outset limits this and is straightforward to arrange.

3. Establish what the rent actually is

And what else you will pay.

Rent, service charge, insurance rent, business rates and any other contributions. Service charge is frequently uncapped, and asking for historic figures for the last three years is a reasonable and revealing request. A landlord reluctant to provide the figures has told you something useful.

4. Understand the rent review mechanism

How the cost changes.

Whether reviews are upward only, how frequently they occur, and on what basis. Upward-only reviews are common in some markets and mean the rent can never fall regardless of conditions.

5. Check the permitted use and whether it can change

Both for now and later.

Whether the lease permits what you intend to do, and whether it permits a wider use should the business change. A narrow use clause also restricts who you could assign the lease to.

6. Establish whether you can assign or sublet

Your exit route if there is no break.

Most leases permit assignment with the landlord's consent, subject to conditions. Understanding what those conditions are is what tells you whether the flexibility is real or theoretical.

7. Look at what happens at the end

Two separate issues.

Whether you have a right to renew, which varies considerably by jurisdiction, and what condition you must return the premises in. Both have significant financial consequences and are decided by the lease.

8. Check for personal guarantees

Frequently required and frequently overlooked.

A landlord may require the directors to guarantee the lease personally, which removes the protection of limited liability for the entire term. This is negotiable, sometimes to a capped amount or a limited period.

9. Get it reviewed by a property solicitor

The one piece of advice worth taking.

The cost is small relative to a multi-year commitment, and a specialist will identify in an hour the handful of clauses that matter. Signing an unreviewed lease is the most expensive economy small businesses make.

Negotiate before you commit emotionally. Landlords expect points to be raised, most leases are agreed with amendments, and a tenant who has already decided they must have the building has given away the only leverage they had.

Conclusion

Read and negotiate before signature, because nothing is negotiable afterwards.

Check the term and whether a break clause exists along with its conditions, read the repairing obligation and agree a schedule of condition, establish the total cost including uncapped service charge, understand the rent review basis and frequency, confirm the permitted use is wide enough, find out whether assignment and subletting are realistically available, establish your position at the end of the term including reinstatement, check whether personal guarantees are required, and have a property solicitor review it.