This is a guide to our Commercial Lease template, which a commercial landlord needs to let business premises to a tenant. This agreement incorporates various options, so it is appropriate where there is or is not:
1. a requirement for the tenant to give an authorised guarantee agreement (or “AGA”) if the tenant later assigns the lease to another person;
2. someone guaranteeing that the lease with be complied with by the tenant; or
3. an option to renew the lease on expiry (called “security of tenure”).
It does not provide for the tenant to terminate it early by means of a “break clause”. However, you can purchase a supplement with them in if you need a break clause: find it here.
Accompanying our template you can download a free copy of the prescribed form of words for contracting out of the right for the tenant to apply for a new lease on expiry under the Landlord & Tenant Act 1954 – see the note on the procedures at the end of this guide and also the note on clause 12 below.
If you need a template AGA, it can be purchased separately from Legalo – see the note about clause 9.3 below.
Clauses in our Commercial Lease
Date – The year can be typed in here but write the rest in by hand when it has been signed.
Party clauses – Please fill in the names & addresses of party 1 (the landlord) and party 2 (the tenant). Where a guarantor for the lease is required, fill in his/its details at party 3, but, if not, delete party 3.
1. Interpretation – We have explained the key terms used here.
• Commencement date – Fill in the date when the lease will start.
• Insurance Rent – Fill in the number of years of rent that you want the insurance to cover.
• Interest – Check the rate and complete the name of the bank you want it linked to.
• Permitted Use – Insert the relevant details of the permitted use of the property, based on the classes of use recognised under the planning law Acts.
• Property – The property’s name and address needs to be filled in here. If you are adding a plan of the premises to make it clearer which areas are being let, then also add the words, “which is shown for identification only as the area outlined in red on the plan attached to this agreement”.
• Rent – Insert the level of the rent. If the rent is not to increase in the future during the lease’s term, delete the other words in square brackets.
• Rent Payment Dates – You have 2 options to choose from here.
• Review Date – If the rent is not to increase in the future, delete this definition. If it is to increase, choose how often, e.g. every 5 years.
• Term – Choose between the 2 options and complete.
2. Grant of Lease – If there is to be no guarantor, delete clause 2.3.
3. Rent – In clause 3.1 check the number of instalments over which the rent is to be paid each year. If the rent is not to increase during the term of the lease, delete clauses 3.3 and 3.4.
4. Insurance – In clause 4.1 if the landlord is setting the value of the buildings insurance required, then keep the wording in the square brackets (just delete the square brackets).
5. Rates and taxes – This clause provides that the tenant shall pay for these sums if due.
6. Utilities – This clause provides that the tenant shall reimburse the landlord for proper utilities costs relating to the property.
7. Interest – This clause provides that the tenant shall pay interest to the landlord if it is late in paying any sum due.
8. Registration of this lease – Where the term of the lease is for more than 7 years, then it needs to be registered at the Land Registry. The tenant should register it. If the term is for less, then the whole clause should be deleted. Before the lease is registered, the tenant should pay the stamp duty land tax due on the grant of the new lease, if any. The amount will depend on the term and the level of rent. This can be calculated on HM Revenue & Customs’ website: http://ldccalculator.hmrc.gov.uk/LDC01.aspx.
9. Assignments and sublets – This clause prevents the tenant from assigning its rights under the lease to a third party without the consent of the landlord. The landlord can assign its interest in the lease, e.g. if it sells the freehold property relating to the lease.
It is now very common that, when a lease is assigned by the tenant, the landlord requires the tenant to stand as guarantor of the assignee, to ensure compliance with the lease by the assignee, e.g. the continued payment of rent. This is generally done by way of setting a requirement, like the one clause 9.3 imposes, for the tenant to sign an authorised guarantee agreement or “AGA”.
The form of the AGA agreement is often set out in full in the lease. If you want to do that, it can be inserted at Schedule 1, so choose the wording for the first of the 2 options. If you do not have suitable wording for an AGA, a draft can be bought from the Legalo website. Alternatively, if you do not want to set the AGA wording out in full here and now, you can choose the wording for the second of the 2 options and then delete Schedule 1.
10. Repairs – Clause 10 obliges the tenant to keep the property clean and tidy and in good repair and condition. If the tenant isn’t under a duty to keep the whole of the property in good repair (e.g. it is only to look after the internal decorative state and is not be responsible for structural issues, e.g. walls and roof), this clause should be modified.
11. Decoration – While clause 10 requires the tenant to keep the property in good repair and good condition, this clause specifies as a minimum how often the tenant must redecorate. If the carpets, etc are not to be replaced by the tenant so long as they are still in a good condition at the end of the term of the lease, then clause 11.4 should be deleted.
12. Exclusion of security of tenure – A right of the tenant (that occupies the property for the purposes of its business) is to apply to continue the lease on similar terms when the lease expires – this is granted by the Landlord and Tenant Act 1954 (sections 24 to 28). To qualify, such a lease must be for a term of a minimum of 1 year and for a set fixed term (with or without a break clause). Almost all commercial leases these days exclude the right. If the landlord does not want to offer the tenant such a right to apply to continue the lease, then the correct procedure must be followed under the 1954 Act to contract out of it. If it is not followed exactly and precisely, then the tenant will still have the right to apply to continue the lease. For further information, see the schedule to this guide below, and download the free forms and notices that you will need to use for this. This area of the law is technical and you should seek independent legal advice on this to ensure the correct procedure is carefully followed to the letter. If security of tenure is being offered, then delete the whole of this clause.
13. Condition of the Property – The onus is on the tenant to carry out whatever searches and surveys and ask whatever questions of the landlord it thinks are needed. Ideally this should all be done before the lease is signed. Afterwards, clause 13 provides that the tenant will not raise additional or late queries.
14. Vacant possession – This clause provides that the leased property will not have any other occupiers, e.g. that the previous tenant is not still in occupation. This includes the landlord’s not being an occupier.
15. Matters affecting the Property – If a search of the Land Registry is being done by the tenant (or ought to be done, as it will reveal encumbrances, such as third party rights of way over the premises) a note should be made in clause 15.1.1 of the time and date when the search was done.
16. VAT – This clause provides that any sums the tenant is to pay are exclusive of VAT and requires the tenant to pay any VAT that might be payable, if any.
17. Landlord’s costs – if the tenant is paying the landlord’s legal costs of issuing this lease, then keep this optional clause and insert the amount to be paid. If not, delete the whole clause.