Commercial Lease Agreements: What to Settle Before Signing
A commercial lease commits a business to a place, a cost and a period, and the clauses that cause the most trouble are rarely the ones negotiated hardest. This note sets out what such a document should settle and where tenants and landlords most often find they have agreed to something they had not considered.
Guide
The parties and the premises
The landlord under the lease should be the person entitled to grant it. Where the premises are jointly owned, held by a firm or a company, or managed by somebody on the owner's behalf, the authority to let should be established rather than inferred from who is negotiating.
The premises should be described so that they cannot be confused with anything else — the extent, the floor, the identifying numbers, and what is included beyond the enclosed area. Parking, storage, terrace access, signage space and shared facilities are all things tenants assume are included and landlords frequently do not.
Term, renewal and ending it early
The period of the lease, when it starts and how it ends should be plain. Where renewal is contemplated, the clause should say on what terms — a right to renew at a rent to be agreed is not a right to renew, because the parties may fail to agree.
Both sides should think about early exit before signing. A tenant whose business changes and a landlord who wants the premises back are both common, and a lease that provides for neither leaves both dependent on the other's goodwill. Where a break right is agreed, the conditions attached to it matter as much as the right itself.
Rent, increases, deposit and outgoings
Rent, when it is payable, and how it is to be paid are straightforward. Escalation is where documents get vague: a lease should state how and when the rent increases, on a basis that can be applied without further agreement.
The security deposit needs its own attention — how much, what it secures, in what circumstances it may be applied, and when and how it is returned. Deposits are the single most commonly disputed item at the end of a commercial tenancy. Outgoings should also be allocated expressly: municipal taxes, maintenance charges, common-area costs, utilities and any charges levied by the building's association.
- Rent, the date it falls due, and the manner of payment
- How and when rent increases, on a basis that can be applied without negotiation
- The deposit, what it secures, and the terms of its return
- Which outgoings are the landlord's and which the tenant's
- What happens on late payment
Permitted use, fit-out and alterations
The lease should state what the premises may be used for, and the tenant should check that the stated use is one the premises are actually permitted to be used for. A commercial use in premises not approved for it is a problem the tenant will encounter, whatever the lease says.
Fit-out and alterations should be dealt with in advance: what the tenant may do, whose consent is needed, who owns the improvements afterwards, and whether the premises must be reinstated at the end. Reinstatement obligations are routinely overlooked and can be a substantial cost at exit.
Repair, insurance and interruption
Who repairs what should be allocated clearly, distinguishing structure from interior and from installations such as lifts, generators and air-conditioning. A clause obliging a tenant to keep the premises in good repair may extend further than the tenant expects, and a schedule of condition taken at the start is the tenant's protection against being asked to hand back something better than they received.
Insurance should be allocated too — who insures the building, who insures the tenant's contents and works, and who bears the risk if the premises are damaged. And the lease should say what happens if the premises become unusable: whether rent abates, and whether either party may terminate.
Assignment, sub-letting and the end of the term
Whether the tenant may transfer the lease or sub-let, and on what conditions, matters to a business that may be sold or restructured. An absolute prohibition may be acceptable to a tenant on a short term and unacceptable on a long one.
The end of the term should be planned in the document: what condition the premises must be returned in, what must be removed, how the deposit is dealt with, and what happens if the tenant stays on. Holding over without an agreed basis creates uncertainty for both sides, and the lease is the place to resolve it.
Checklist
Practical Checklist
- Authority to grant the leaseThat the landlord is entitled to let, and that anyone signing has authority to do so.
- A precise description of the premisesExtent, location and everything included beyond the enclosed area.
- Term, commencement and renewalIncluding renewal terms capable of being applied without fresh agreement.
- Break rightsWhether either side may end the lease early, and on what conditions.
- Rent and escalationStated on a basis that can be applied without further negotiation.
- Deposit termsAmount, what it secures, and precisely when and how it is returned.
- Allocation of outgoingsTaxes, maintenance, common-area charges and utilities, each assigned to one party.
- Permitted useStated, and checked against what the premises are actually permitted to be used for.
- Fit-out, alterations and reinstatementWhat may be done, whose consent is needed, and what must be undone at the end.
- Repair obligationsStructure, interior and installations, allocated separately.
- Schedule of conditionA record, with photographs, of the state of the premises at handover.
- Insurance and damageWho insures what, and what happens if the premises become unusable.
- Assignment and sub-lettingWhether permitted, and on what conditions.
- Exit obligationsCondition on return, removal of works, deposit, and the position if the tenant stays on.
- Registration and stampingConfirmed for the document and the term, since requirements vary.
Cautions
Common Mistakes
- Negotiating rent and ignoring everything elseThe clauses that cost money later are usually repair, reinstatement and the deposit.
- Not recording the condition at handoverWithout a schedule of condition, a tenant may be asked to return the premises in better condition than they received them.
- Accepting a renewal 'at a rent to be agreed'That is not a right to renew; it is a right to negotiate.
- Overlooking reinstatementAn obligation to restore the premises can be a significant cost that appears only at exit.
- Assuming the permitted use is permittedWhat the lease allows and what the premises are approved for are separate questions.
- Leaving outgoings unallocatedMaintenance and common-area charges are real sums and should not be left to be argued about.
- Not checking who is signingA lease granted by someone without authority to grant it is a problem for the tenant, not the signatory.
- Assuming the document need not be registeredRequirements depend on the term and the document, and should be confirmed rather than assumed.
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About this note
Published by H.R. Legal Associate, advocates, Lucknow, for general information.
Date published
Date reviewed
Important
Disclaimer
This note is general information about an area of law. It is not legal advice, it is not an advertisement or a solicitation of work, and reading it creates no advocate–client relationship.
Whether a lease of a particular term requires registration, how it must be stamped, and what statutory protections apply to the premises depend on the applicable law and on where the property is. These should be confirmed for the specific document before it is executed.
Procedures, limitation periods, court fees, stamp duty, government charges and tax rates change, and what applies depends on the facts of the particular matter. Nothing here should be acted on without advice taken on your own documents, and no outcome is promised or predicted.
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