Commercial leases: what are you really signing up for?
Key Takeaway: Signing a commercial lease is a major commitment. Rent may be front of mind, but the real cost depends on far more than the headline figure. Tom Leigh of Mogers Drewett highlights the key terms every tenant should know before signing.
Look beyond today’s needs
Don’t judge a lease solely on what your business needs now. Think three, five or even 10 years ahead. Will the premises still work if you take on more staff, expand or change your business model?
Make sure the basics match what you agreed:
- Premises: check the location, size, boundaries and measurements.
- Lease term: how long are you committing for, and are there renewal options?
- Rent: what is the starting rent and how can it increase?
If any of these details don’t match your expectations, resolve them before proceeding.
Understand your total occupancy cost
Rent is rarely your only expense. You may also pay service charges, insurance contributions, utilities, property taxes or other operating costs.
For service charges, check what the landlord can recover, how your contribution is calculated, whether increases are capped and whether you could contribute towards major works. Also ask to see previous budgets and accounts.
Review your renewal and exit options
Check how much flexibility the lease gives you:
- Renewal: can you extend the lease, and when must notice be given?
- Break clauses: can you end the lease early, and on what conditions?
- Expiry: what happens if you stay after the term ends?
- Expansion: can you take additional space if available?
- Relocation: can the landlord move you elsewhere within the property?
These provisions can give you flexibility – or leave you tied to premises that no longer suit your business.
Know who is responsible
Make sure the lease clearly sets out who is responsible for repairs and maintenance, alterations, insurance and liabilities, and for reinstating the premises when the lease ends.
Knowing what falls to you – and what remains the landlord’s responsibility – can help avoid disputes and unexpected costs.
Consider assignment and subletting
Your business may grow, relocate or be sold. Check whether you can assign the lease to another tenant or sublet the premises, and when your landlord’s consent is required.
If you assign the lease, the landlord may require an Authorised Guarantee Agreement (AGA), which could leave you liable if the new tenant defaults.
Watch for hidden costs
Look closely for costs that are easy to miss, including uncapped service charges, major repair obligations, after-hours heating or air conditioning charges, management fees and reinstatement costs.
A single overlooked clause could add significantly to your total occupancy cost.
Take advice to keep ahead and think long term before you sign
A commercial lease is a long-term business commitment, not simply a property agreement. Make sure you understand its financial and operational impact, and the flexibility it gives you.
Ultimately, taking professional advice at the outset can help prevent costly problems later.
If you have any questions, please contact Tom Leigh, Partner in the Commercial Property team.
Tom Leigh, Partner – Commercial Property