Commercial leases – what to understand before you sign

Retailers will be reviewing their post-pandemic property needs

By Austin Lafferty of Austin Lafferty Solicitors

Lafferty: commercial lease know-how

As the retail sector continues its fragile recovery from Covid-19, many business owners will be mulling over whether their current premises will meet their post-pandemic needs. Some more fortunate businesses may have seen growth and therefore need a larger business unit or multiple sites; others may have had a rather different pandemic experience and need somewhere smaller or may not be in need of their existing premises at all if their business has entirely shifted online.

One of the key mistakes made by retailers is that they assume that their commercial lease is akin to a residential lease but that couldn’t be further from the truth. So in their haste to get their brand name over the door, many rush to sign a lease assuming their experience of renting a home will suffice. It won’t.

It’s worth taking a moment to get to grips with some of the key terminologies in commercial lease agreements when either trying to serve notice or when signing up to a new agreement. 

Length of contract and early get out clause

Signing up for a long term lease may give a retailer peace of mind and preferential rental charges, but when the unthinkable happens and business dries up or doubles, as may have happened during the pandemic, being tied in isn’t always a good thing.

However, the terms of an established lease cannot be broken unless the retailer has agreed to an early termination or break option. Even when this is the case, the break clause can only be applied if the tenant is not in breach of any of the terms of the lease. For example, if the landlord asked the retailer to carry out repairs and the retailer refused, or if the retailer paid the rent late on just one occasion, the landlord does not have to accept early termination.

It’s also worth noting that retailers cannot just sneak out of the property on the last day of the agreement. It may sound daft but we’ve seen some attempts! Where no termination is served within the specific ‘period of notice for termination’, the lease will continue for a period of one year under what is known as ‘tacit relocation’. 

Repairs, maintenance and responsibility

Another major difference between a retail and residential lease is that in the former case, the retailer is responsible for the upkeep of the premises and that usually includes the exterior of the property too. Of course, retailers need the outside of the premises to be appealing but if they’re not, the onus is rarely with the property owner.

Before taking possession of a retail unit, shop or retail site, the tenant should consider a building survey to confirm that the rental and other financial considerations being asked or demanded by the landlord are fair, and to also highlight any defects. If perhaps a previous tenant didn’t properly remove their branding or left the premises in disrepair, the new tenant could find that they have to fork out to fund the changes.

However, there is a way to limit the retailer’s obligations and that is to add a photographic schedule of conditions to the lease. These images cover every part of the premises and act as a visual record of its state before the lease starts. So if the previous tenants failed to remove signage or left internal fixtures and fittings in an unfit state, the tenant’s obligation is thus limited to returning the premises to the landlord at the end of the lease in no worse condition than shown in the schedule of condition. 

At the end of the contract, when the landlord has accepted the retailer’s notice of termination, the landlord will serve a schedule of dilapidations which is a list of repairs that are the tenant’s responsibility. A pre-possession survey and photographic schedule of condition are a retailer’s best assistance or defence in seeking to negotiate a limitation on the dilapidations. 

Legal advice

Whether a retailer is starting a new venture or is a long-established business, it’s vitally important to understand a commercial lease agreement before signing it.

A commercial landlord will no doubt have a legal team working on his or her behalf to ensure that they are only required to spend the minimum amount of money on the property – instead, putting appropriate clauses into contracts that make it the responsibility of the tenant.

Given the past couple of years, it makes sense for retailers to really scrutinise their existing contracts to get a real understanding of what it is they have signed up for – especially if they are considering moving at any point soon. Even those who are staying put would be wise to plan ahead.

Landlords aren’t the bad guys; they  simply have legal teams who understand commercial property law like the back of their hand so it’s often beneficial and, in the long term, good value for money, for retailers to seek advice too. 

Here’s hoping the pandemic is nearly behind us but it’s good to know that should a retailer need to exit a property, they can do so without leaving a big hole in their pocket and in the knowledge their commercial lease agreement was a fair and appropriate one.

*Please note that there are differences in the legalities of commercial leases across the UK, we would always recommend seeking local counsel before entering a commercial lease agreement.  

Austin Lafferty of Austin Lafferty Solicitors

Austin Lafferty is a Scottish law firm founded by Austin Lafferty himself – a past President of the Law Society, Scotland. For over 30 years Austin Lafferty’s highly respected team of lawyers and solicitors have been supporting tenants in negotiating fair and robust commercial lease agreements.