Five Areas to Consider When Renting a Commercial Property
The UK commercial property rental market is expected to prove strong for at least the next five years. The latest figures from Statista forecast rental growth between 2023 and 2027 across all sectors, from industrial and offices to retail, shopping centers and warehouses. Perhaps surprisingly to some, with the increase in working from home, office space rentals are expected to be among the highest with an increase of 1.1% expected during this period, while rents for l Industrial real estate are leading the way with expected growth of 3.3% per year. 2027.
This is all very encouraging, but it is worth noting that whether you are an experienced commercial landlord or are in the process of purchasing your first rental property, commercial leases are more complex than residential leases. They come in various forms, each with their own terms and conditions. Therefore, below we have outlined several factors to consider in a commercial real estate lease that both the landlord and tenant should be aware of.
The basics of a commercial lease
A commercial lease is a legally binding contract between a professional tenant and its landlord. There are usually two parties involved. The “landlord,” who is the owner and owner of the property, and the “tenant,” who is the tenant and is allowed to use the property in exchange for rent.
The lease gives the tenant the right to use the property for commercial purposes for the duration of the lease in exchange for regular payment to the landlord. Any agreement reached, whether financial or otherwise, must be recorded in writing for future legal reference. If there is a lease dispute, a court will hear the evidence and usually confirm a written agreement over anything verbal. Additionally, commercial leases have less government protection than residential leases because businesses are expected to be able to negotiate on their own. However, this also means that the tenant and landlord have more bargaining power.
The duration of the lease
When working with a commercial conveyancing lawyer, consider the length of your lease, which is the length of time the tenant has agreed to rent the property. This may differ depending on the agreement concluded. It must generally stipulate a “fixed term”, i.e. when the lease begins and ends on specific dates, but either party can terminate the lease earlier if there is a right of termination in the lease.
Additionally, attention to detail in the contract is essential, as the landlord cannot increase the rent or change the terms of the lease unless they have reserved the right to do so in the terms of the lease. When the term of the lease expires, the tenant may have the legal right to renew under the Landlord and Tenant Act 1954. However, a lease may evade the Landlord and Tenant Act, this which means there is no renewal right. This means that after a fixed-term lease ends, the landlord can evict their tenant or agree to a monthly payment basis for them to stay. Alternatively, a new lease can be signed.
If you have a periodic tenancy, this will continue indefinitely until the tenant or landlord gives notice to terminate the tenancy. At the end of the notice period, the tenant must move out or the landlord can begin eviction proceedings. In a periodic lease, the landlord is generally able to increase the rent and change the terms of the lease provided notice is given.
Financial payments
Stipulating in your lease the amount of rent that will be paid is essential for the security of the tenant and the owner. Rent can be paid on any date agreed between the landlord and tenant, but is usually paid monthly or quarterly during the financial year. This minimum rent, excluding additional or operating costs, is called “base rent”. Commercial leases may also include a rental agreement called a “percentage lease,” common in shopping centers and similar premises, in which the tenant will pay a base rent in addition to a percentage of their gross income.
Certain types of leases come with specific rental conditions. In a “FRI” lease, the tenant covers the costs of maintenance and repair of the property, as well as insurance (whether insured directly or through the owner). A “gross rent” commercial lease only requires the tenant to pay base rent while the landlord pays all other expenses, including operations, taxes, maintenance, utilities and insurance.
Check service charges
Whether you have a gross rent or other commercial lease, be sure to check the lease for service charges, which is the cost of maintaining and repairing a property that the landlord may charge to the tenant. Negotiate these as part of the lease before signing, following the advice of a specialist conveyancing lawyer, as these expenses can extend beyond repairs and maintenance, to insurance premiums and the employment of staff such as gardeners and cleaners. Check as there may also be a ‘sinking fund’ in the lease which allows landlords to collect money for any unexpected costs such as roof repairs.
Security deposit
Finally, think about your security deposit when drafting a commercial lease. This is a sum of money that the tenant must pay to the landlord at the start of the lease, used to cover possible property damage or shortfalls in rent during their stay. In a commercial transfer, this sum may be the amount requested by the owner, so be sure to negotiate. The remainder of this deposit will be returned upon the tenant’s departure.
If you need help and support on matters relating to a commercial lease, our team of commercial conveyancing solicitors at Thomas and Thomas Solicitors offer a full range of services. For further support and advice, please contact us here.
