Planning to lease your first commercial premises

There are several steps to consider when leasing commercial property. Laura Saul, Director in the Commercial Property team at Wake Smith Solicitors, looks at the key issues.

This article includes:

• Instructing a solicitor
• Property investigations
• The lease
• Registering the lease
• Stamp Duty Land Tax (“SDLT”)
• Your next move?

Instructing a solicitor

Once you have found suitable premises and agreed the main terms (“heads of terms”) with the landlord, usually through a commercial agent, a commercial property solicitor should be instructed to act on your behalf. You may, however, wish to instruct a solicitor whilst agreeing the heads of terms to ensure you understand what you are agreeing to from the outset.

Commercial leasing requires careful consideration due to its often long, and complex, nature. There are obligations and responsibilities for tenants, landlords and guarantors, and all parties need to be separately advised. Your solicitor will also need to investigate the title to the premises and raise any necessary enquiries of the landlord, whilst also advising you to ensure you understand the terms and also to help to avoid unexpected costs or obligations later on.

At this early stage, we would also recommend instructing a surveyor to inspect the premises and advise of any issues.

Property investigations
When leasing commercial premises, your solicitor will carry out investigations by:

1. reviewing the title documentation - we check the title documents for the premises to ensure that the landlord owns the premises and also to be clear on any restrictions affecting the use of the premises, any requirements for third party consents to your lease and any rights of a third party to use any part of the premises;
   
   
2. raising enquiries of the landlord – the landlord will supply responses to Commercial Property Standard Enquiries (“CPSEs”) which provide further details including any disputes, works carried out, the VAT position and if any covenants or planning matters exist or have been breached. We can then ask for more information on any of the items disclosed, if required; and
   
   
3. commissioning property searches – usually a Land Registry index map search (to check the registered title number(s) of the property), a local authority search (which reveals planning information and consents, local authority proposals and notices and financial charges registered against a property), a coal mining search (to establish whether a property may be susceptible to any issues relating to coal mining), a drainage and water search (to check mains connections to water supply and drainage, location of public sewers and drains) and an environmental search (to establish the risk of land being contaminated or at risk of flooding).

The lease
The landlord’s solicitor will issue a draft lease to us in line with the agreed heads of terms and we will then review and amend the draft lease as necessary to ensure that your interests are protected.

See our article on lease requirements here which covers topics including rent, lease termination, break clauses, repairs, rent reviews and alterations. However, the following points are important to understand:

1. Rent and other costs – rent is usually an annual amount payable in four quarterly instalments, although some landlords agree monthly payments, if required. Some landlords offer a rent free period at the start of a commercial lease to allow for a tenant to carry out their fitting out works before rent becomes payable.

Other costs such as business rates, insurance, utilities, internet and services provided by the landlord (as part of service charge arrangements) may be included or may need to be factored in on top of rent payments. We will explain what costs you will have to pay on top of the annual rent, and whether VAT is payable on these sums.

A rent deposit may also be required by the landlord at the start of the lease. This is typically three to six months’ rent but it is down to agreement between the parties. The landlord will hold the deposit throughout the term of the lease and will be able to draw on this if you do not pay rent or fulfil your other obligations under the lease;

2. Liabilities – landlords are not always liable for environmental issues so you must be aware of any potential problems such as costly remediation for land contamination, inherent defects or flood risks. These risks can be mitigated by careful drafting in the lease setting out the agreement on who is to be responsible for such matter, for certainty, and by carrying out environmental searches, as above;
   
3. Security of tenure – leases of commercial premises have the benefit of the security of tenure provisions of the Landlord and Tenant Act 1954 (“the 1954 Act”), meaning that at the end of the term of the lease, you would have a statutory right to a renewal lease on similar terms as your existing lease. However, some landlords may wish to exclude these provisions to retain flexibility, meaning that you would not have this statutory right to a renewal (although the landlord may agree to one, if they are happy to at the time). This is something that would be agreed in the heads of terms so a tenant would usually try to avoid agreeing to this exclusion;
4. Utilities – you will need to make sure that the premises are supplied with water, drainage, electricity and (if relevant) gas. We can ask the landlord to confirm but would also recommend you carry out testing of the required services prior to completion of the lease. If any connection or maintenance issues arise after completion, you may have to pay the cost in dealing with any such issues and so it is vital to be fully aware prior to committing to the lease; and
5. Your obligations – the lease will set out obligations on both the landlord and the tenant in relation to the premises. Key obligations on the tenant are usually:
   1. to pay the rent and other agreed costs (as above);
   2. to keep the premises in good repair and condition, except where damage is covered by the landlord’s insurance. You could also ask the landlord to include a schedule of condition to limit the repairing obligation and ensure you do not have to keep the premises in any better state than as they were at the date of completion of the lease;
   3. (if applicable) to contribute towards the repair and maintenance of any parts of the building not let to you (e.g. the roof and structural walls), usually by way of a service charge;
   4. not to alter the premises without the landlord’s prior written consent i.e. a formal licence/letter of consent that must be entered into before the alterations are started;
   5. not to transfer or sublet the premises to anyone else without the landlord’s prior written consent i.e. again, by a formal licence/letter of consent that must be entered into before the transfer or subletting is completed;
   6. not to use the premises for any illegal purpose and only to use them for the permitted use expressly set out in the lease, so you must ensure that this permitted use fully covers the use you require; and
   7. to leave the premises at the end of the term of the lease (or on the break date, if a break date is agreed to allow you to terminate your lease early) in a good state of repair and cleared of all of your possessions, signage and (usually) alterations.

Registering the lease
Following completion of the lease, if the term of the lease is more than seven years, we will need to register it at the Land Registry. Leases of shorter terms than seven years cannot usually be registered (although there are some exceptions) but can be noted on the landlord’s title so your interest is clear to potential purchasers etc. 

Stamp Duty Land Tax (“SDLT”)
The grant of a commercial lease is subject to SDLT. We will check if your lease falls within the threshold for an SDLT liability and, if it does, a sum would need to be paid to HMRC to settle the SDLT payable. This must be done within 14 days of completion of the lease, along with the filing of an SDLT Return, to avoid late payment and/or late filing penalties.

Your next move?
Professional legal advice should always be sought before taking any action.

For further advice on leasing commercial properties contact Commercial Property associate Laura Saul on 0114 266 6660.

Find out more about commercial property law services

published 13/12/22