Are you a Tenant considering entering into a commercial Lease? Consider the length of the Term.
When negotiating a commercial Lease there are a number of factors to take into consideration. This article will focus on the importance of negotiating an appropriate Term for your Lease and its implications.
A Lease is the grant of a right to the exclusive possession of land for a pre-determined period of time, and the duration of a Lease needs to be fixed and certain before the Lease takes effect. The length of a Lease Term can range from 1 to 999 years, although typically commercial Leases are granted for a Term between 3 and 25 years.
A Lease is a binding contract, and the Term agreed is the period during which a Tenant will be expected to pay rent and other costs to the Landlord. Leases can therefore create a potentially substantial financial liability for a Tenant without the benefit of them owning an asset.
The Term of a Lease needs to be fit for purpose for all parties involved. A Tenant who knows that they want to relocate or expand in the not too distant future should not take on a twenty-five year commercial Lease that would tie them to one location. Nor would it be appropriate for a Landlord to enter into a one year Lease Term, if it is looking for a longstanding Tenant.
Leases can be sold (assigned) or underlet by a Tenant, but this can be a time consuming and costly process – it also depends on a Tenant being able to locate a new Tenant who is willing to accept the terms that have already been agreed with the Landlord.
There are other issues to take into consideration when negotiating the length of a commercial Lease, such as Stamp Duty Land Tax – the amount of SDLT payable increases according to the duration of Lease. A Lease of over seven years will also need to be registered at HM Land Registry with its own Leasehold Title.
A Break Clause is a provision within a Lease enabling either the Landlord or Tenant (or both) to end the Lease Term earlier than the end date originally agreed. This right may be exercised either on specified dates noted in the Lease or at any time of the term, known as a ‘rolling break’.
Agreeing the terms of the Lease is not a simple task, and there are many surrounding factors to be considered. For more information and advice contact our commercial property team today.