A commercial lease is one of the most significant financial commitments an SME will make. It is also one of the most commonly misunderstood. Many business owners focus on the rent and the length — the two headline figures — and sign without fully understanding what they have agreed to.
Before You See a Draft: Heads of Terms
Most commercial property transactions start with agreed heads of terms — a non-binding summary of key commercial points: rent, term length, break clauses, rent-free periods, permitted use, fit-out contributions. The most important time to have legal advice is at the heads of terms stage. Once heads are signed, renegotiating fundamental points becomes significantly harder.
1. The Landlord and Tenant Act 1954 — Security of Tenure
A lease "inside" the Act gives you statutory security of tenure: when the lease term expires, you have the right to remain in occupation and request a renewal tenancy on reasonable terms.
A lease "outside" the Act — contracted out — means the lease simply ends when the term expires. The landlord has no obligation to renew. Many landlords routinely seek to exclude security of tenure. Do not agree to contracting out without understanding what you are giving up.
2. Rent and Rent Review
- Open market review: typically every five years, almost always upward-only — rent cannot go down even if market rents fall
- RPI or CPI-linked review: predictable, indexed increases — check cap and collar provisions
- Fixed increases: set amount or percentage at agreed intervals
- Rent-free period: the headline rent in heads of terms does not reflect this — understand what triggers full rent
3. Break Clauses
A break clause gives one or both parties the right to end the lease early. Most break clauses require the tenant to satisfy specific conditions — serving notice in the precise form and window, paying all rent due, giving vacant possession. Courts have consistently held that even minor failures — a trivial rent arrear, a single item left on the premises — invalidate the break. Before signing, understand exactly what conditions attach and whether they are realistically achievable.
4. Repairing Obligations
A full repairing and insuring (FRI) lease makes the tenant responsible for maintaining the premises in good repair throughout the term and insuring the building. Before signing an FRI lease:
- Commission a Schedule of Condition — a photographic and written record of the state of the premises at lease commencement, limiting your repairing obligation to maintaining the premises no worse than shown
- Understand whether the obligation is internal-only or extends to structure and exterior
- Understand dilapidations — your obligation at the end of the lease to return the premises to the required condition. Dilapidations claims by landlords at lease-end are one of the most common sources of commercial property disputes.
5. Permitted Use
The lease restricts use to a specific use class or description. Using the premises outside the permitted use is a breach of covenant that can give the landlord grounds to forfeit the lease. Check that the permitted use reflects how you actually intend to use the premises — including likely evolution of your business.
6. Subletting and Assignment
If your circumstances change — you grow out of the space, want to downsize, or need to exit — you will need to either sublet or assign the lease to a third party. Most commercial leases require landlord consent. Before signing, understand what flexibility you have to exit if circumstances change. A lease with no practical exit mechanism is a greater financial commitment than the headline figures suggest.
7. Alterations and Fit-Out
Most commercial leases require landlord consent for structural alterations and many non-structural ones. If you intend to carry out significant fit-out works before trading, agree the position in writing — ideally through a Licence to Alter — before the lease is signed and before works begin.
8. Service Charge (Multi-Let Buildings)
In a multi-let building, you pay a service charge — your proportionate contribution to maintaining and managing common areas. Before signing, review: the current service charge budget; history over the past three years; any planned major capital works; and how disputes are resolved under the lease.
Bonsai Law advises commercial tenants and landlords across the UK on lease negotiation, heads of terms, and commercial property transactions. Contact us before you agree terms.
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