By the time a lease reaches a solicitor, the rent, the length of the term and perhaps a rent-free period have usually been agreed in heads of terms. Those are important, but they are rarely where the difficulties arise. Problems tend to come from the parts of the lease that seemed technical at the time: who repairs the roof, whether you can leave early, or whether you can sell the business with the lease.

These are the five areas we usually look at most closely on behalf of a tenant.

1. Security of tenure and the 1954 Act

Many business tenants in England and Wales have what is called security of tenure under Part II of the Landlord and Tenant Act 1954. In broad terms, this means that when the lease ends, the tenant can usually stay on and has the right to ask for a new lease. The landlord can only refuse on certain grounds set out in the Act, such as wanting to redevelop the premises or occupy them for its own business, and in some cases compensation is payable.

Landlords and tenants can agree to contract out of these protections. To do so, a formal procedure must be followed before the tenant is committed to the lease: the landlord serves a warning notice explaining what the tenant is giving up, and the tenant makes a declaration confirming they understand. If the procedure is not followed correctly, the contracting out may not be effective.

Contracting out is common, especially for shorter leases, and it is not necessarily a reason to walk away. But it does mean that when the lease ends you may have no right to stay. If the premises are central to your business, that risk should be weighed carefully, and it may affect how long a term you want. Some very short leases fall outside the Act altogether.

2. Repair and service charge

Repairing obligations are one of the most expensive areas of any lease, and they often catch tenants out at the end of the term.

Repair

Many commercial leases are on full repairing terms. Depending on the wording, a tenant can be required to put the premises into repair, even if they were in poor condition at the start, and to hand them back in that condition. When the lease ends, the landlord may make a claim for the cost of any work not done, often called a dilapidations claim.

If the property is not in good condition, a schedule of condition can help. This is a record, usually with photographs, of the state of the premises at the start, and the lease can limit the tenant’s obligation to keeping them no worse than that. It is worth arranging before you sign, not after.

Service charge

If the premises are part of a larger building or estate, you will usually pay a service charge towards the landlord’s costs of maintaining shared parts and services. Check what the landlord can include, whether major replacement or improvement works can be recovered, how your share is calculated, and whether there is a cap. The professional statement published by RICS on service charges in commercial property sets out good practice and can be a useful reference in negotiations. Ask to see recent service charge budgets and accounts.

3. Break clauses and their conditions

A break clause allows one or both parties to end the lease early, usually on a specified date and by giving a set period of notice. For a tenant, it can be a valuable safety net if the business grows, shrinks or needs to move.

The detail matters. Break clauses are usually interpreted strictly, and they are often subject to conditions. Common conditions include having paid all rent and other sums due, giving vacant possession, and sometimes having complied with all the tenant’s obligations under the lease. A condition that looks harmless can be very hard to satisfy exactly. A small unpaid sum or a few items left behind could, depending on the wording, mean that the break fails and the lease continues.

Where possible, tenants should aim for conditions that are limited and objective, for example payment of the main rent only and returning the premises without any occupier. The notice itself must also be served correctly, in the right form, on the right person and on time.

4. Rent review

Longer leases usually contain a rent review clause. There are several common types:

  • Open market review, where the rent is reset to what the premises would let for on the review date, based on assumptions set out in the lease;
  • Index-linked review, where the rent increases in line with an inflation index, sometimes within an agreed minimum and maximum;
  • Fixed increases, which are agreed in advance and give certainty on both sides.

Many reviews are upward only, meaning the rent cannot go down even if the market does. On an open market review, the assumptions and disregards matter, for example whether the value of improvements you have paid for is ignored. Understanding how the mechanism works now makes budgeting easier later.

5. Alienation and permitted use

Assignment and subletting

The alienation provisions control whether you can transfer the lease to someone else (assignment), sublet all or part of the premises, or share occupation, for example with a group company. These rights are important if you might sell the business, need to downsize, or want flexibility if the premises no longer suit you.

Most leases allow assignment only with the landlord’s consent. Check any conditions attached to that consent. A common one is that the outgoing tenant must guarantee the new tenant’s performance under an authorised guarantee agreement, which can leave you with a continuing liability.

Permitted use

The lease will set out what the premises can be used for. A tightly drawn permitted use clause can prevent you from changing or expanding what you do, and can make the lease harder to assign. Separately, the use must be allowed under planning law. The lease permitting a use does not mean planning permission exists, so both should be checked.

Before you sign

Alongside these five checks, we would usually review the landlord’s title, any restrictions affecting the property and the tenant’s tax position. Stamp duty land tax can be payable on some leases, depending on the rent and term, and your accountant should be involved.

If you are taking a lease as part of buying a business, our guide on what to consider before buying a business covers how the two fit together. You can read more about our lease work on the commercial property page, and if a disagreement arises with a landlord later, our commercial dispute resolution team can help.