Commercial Leases Explained — A Guide for UK Business Tenants

Taking on commercial premises is one of the most significant financial commitments a business will make. Unlike residential tenancies, commercial leases are largely unregulated and heavily negotiated — what you sign is what you get. This guide explains the key concepts, obligations, and negotiating points every UK business tenant should understand.

1. Types of Commercial Lease

Commercial leases come in several forms, and the type you sign determines your obligations and flexibility.

The most common lease structure in the UK is the full repairing and insuring (FRI) lease. Under an FRI lease, the tenant is responsible for keeping the entire premises — including the structure, exterior, and roof — in good repair throughout the term, and for insuring the building (or reimbursing the landlord's insurance costs via the service charge). FRI leases transfer virtually all property risk to the tenant. They are standard for longer leases of single-let properties.

An internal repairing lease (IRL)limits the tenant's repairing obligations to the interior of the demised premises. The landlord remains responsible for the exterior, structure, and common areas — typically recovering the cost through a service charge. IRLs are common in multi-let office buildings and retail parks.

A licence to occupy is not a lease at all. It grants a personal right to use premises without creating a proprietary interest in land. Licences typically offer short-term flexibility (e.g., for co-working or storage) but provide no security of tenure and can be revoked on short notice. Courts will look at the substance of an arrangement — exclusive possession for a term at a rent creates a lease regardless of what the document is called (Street v Mountford [1985]).

Other structures include headleases and underleases (where the tenant sublets from an intermediate landlord rather than the freehold owner) and agreements for lease (binding contracts to grant a lease once conditions — such as planning or fit-out — are met).

2. Key Lease Terms

Understanding the core financial and operational provisions of a lease is essential before signing.

Rent: The headline rent is usually quoted per square foot per annum (psf pa). Landlords will often offer a rent-free period at the start of a lease (particularly in shell-and-core premises requiring fit-out). Typical rent-free periods range from 3 months (short leases) to 18–24 months (long leases in a soft market). Rent is usually paid quarterly in advance on the traditional quarter days (25 March, 24 June, 29 September, 25 December) though monthly payments are increasingly common.

Term length: Lease terms have shortened significantly — 5–10 year leases are now typical for offices and retail, compared with the 25-year institutional leases of the 1980s. Shorter terms offer flexibility but may not justify the cost of a significant fit-out. Tenants should factor in amortisation of fit-out costs when assessing term length.

Break clauses: A break clause allows one or both parties to terminate the lease at a specified date. Tenant-only break clauses are valuable; landlord-only breaks are risky. Break clauses are typically subject to strict pre-conditions — see the FAQ below for how to exercise them correctly.

Rent reviews: Rent reviews allow the landlord to adjust the rent at set intervals (typically every 5 years). The vast majority of UK commercial leases contain upward-only rent review clauses, meaning the rent can only go up or remain the same — even if market rents have fallen. Open market rent reviews are assessed by reference to comparable lettings. Tenants should instruct a qualified surveyor (MRICS) to negotiate rent reviews.

3. Landlord & Tenant Act 1954 — Security of Tenure

The Landlord and Tenant Act 1954 (LTA 1954) is the cornerstone of UK commercial tenancy law. Part II of the Act gives business tenants a statutory right to renewtheir lease at the end of the contractual term (security of tenure). A lease that benefits from the Act is described as "inside the Act" or a "protected tenancy."

Key provisions:

• The landlord cannot end a protected tenancy simply by letting the contractual term expire — the tenant can remain in occupation and apply to the court for a new lease
• The landlord must serve a statutory Section 25 Notice to terminate, specifying the date of termination (not less than 6 nor more than 12 months ahead) and whether the landlord opposes renewal
• The tenant can request a new lease by serving a Section 26 Notice (at least 6 months before the proposed commencement date)
• If the landlord opposes renewal, they must establish one of the seven statutory grounds under section 30(1)

Contracting out: Landlords routinely require tenants to contract out of the LTA 1954 security of tenure provisions. This can only be done by a specific statutory procedure: the landlord must serve a health warning notice on the proposed tenant (at least 14 days before the lease is granted, unless the tenant waives the waiting period by making a statutory declaration before an independent solicitor), and the tenant must sign a simple declaration (or, if time is short, a statutory declaration before a solicitor). The contracting-out procedure is commonly used for short-term leases and licences, but tenants should think carefully before agreeing to give up their renewal rights.

4. Dilapidations

Dilapidations are one of the most contentious areas of commercial leasehold practice. They arise where the tenant has failed to comply with the repairing, decorating, and reinstatement covenants in the lease.

A schedule of conditionis a photographic and written record of the condition of premises at the start of the lease, agreed and appended to the lease. Its effect is to limit the tenant's repairing obligations to putting the premises back into the condition recorded at lease commencement — preventing the landlord from requiring the tenant to remedy pre-existing disrepair. Always negotiate a schedule of condition when taking premises that are not new-build.

A terminal dilapidations schedule(or Scott Schedule) is served by the landlord's surveyor towards the end of the lease — often 6–12 months before expiry — setting out alleged breaches and the estimated cost of works. The Jervis v Harris clause (also known as a self-help clause) entitles the landlord to enter the premises, carry out the works, and recover the cost from the tenant as a debt. This can be a powerful tool as it avoids the section 18 cap on damages.

The section 18(1) cap(Landlord and Tenant Act 1927) limits the landlord's recovery on a terminal dilapidations claim to the diminution in value of the landlord's reversion— the difference in the property's value with and without the disrepair. If the landlord intends to redevelop the property anyway, the diminution in value may be nil. Tenants should always obtain an independent RICS surveyor's assessment of the dilapidations claim and the section 18 cap.

5. Service Charge

In multi-let buildings, the landlord recovers the cost of maintaining and managing common parts — lifts, common areas, building M&E, security, management fees — through a service charge. The tenant pays a proportionate share of the total expenditure.

The RICS Code of Practice for Service Charges in Commercial Property (3rd edition, 2018) sets out best practice but is not legally binding. Its key principles include:

• Landlords should consult tenants and provide an annual budget before the service charge year
• Accounts should be independently certified by a qualified accountant
• Sinking funds and reserve funds should be properly managed and clearly disclosed
• Management fees should be reasonable and disclosed separately

Tenants should negotiate a service charge cap — an absolute limit on their annual service charge liability, usually expressed as a fixed sum per square foot — to protect against unexpected expenditure (such as major roof replacement or lift replacement). A cap of, say, £5 psf gives budget certainty even if the actual expenditure is higher. Caps are typically index-linked to RPI or CPI.

Tenants should also carefully review what is excludedfrom the service charge — major structural repairs, improvements (as opposed to repairs), and the landlord's own costs should generally not be recoverable through the service charge.

6. Rent Deposits

Landlords frequently require a rent depositfrom tenants who cannot provide strong financial references — particularly start-ups, new companies, or tenants with limited trading history. A rent deposit is a sum of money (typically 3–6 months' rent) paid by the tenant to the landlord and held as security against the tenant's default on lease obligations.

Key points to negotiate:

• Deed of deposit: The deposit should be governed by a separate deed of deposit rather than simply being held by the landlord on whatever terms they choose. The deed should specify the circumstances in which the landlord can draw on the deposit, the notice required, and the obligation to replenish.
• Separate account:The deposit should be held in a designated client account, separate from the landlord's own funds, so that it is protected if the landlord becomes insolvent.
• Interest: The tenant should be entitled to the interest accruing on the deposit (after any tax deduction), credited annually.
• Reduction provisions: Negotiate for the deposit to reduce or be returned once the tenant has demonstrated financial strength over a set period (e.g., 3 years of on-time rent payments and audited accounts showing turnover above a threshold).
• VAT: If the landlord has opted to tax the property, VAT is payable on the deposit at 20%, increasing the cash impact on the tenant.

7. Alienation — Subletting, Assignment, and Sharing

Alienationrefers to the tenant's ability to deal with the lease — to assign it to a third party, sublet the whole or part, or share occupation with a group company. Most commercial leases restrict alienation, requiring the landlord's consent, which must not be unreasonably withheld or delayed (Landlord and Tenant Act 1988).

Key alienation provisions to watch:

• Assignment: The tenant transfers the whole of its interest to a new tenant (the assignee). The outgoing tenant is typically released from future liability, but in leases granted after 1 January 1996 (under the Landlord and Tenant (Covenants) Act 1995), the landlord will often require the outgoing tenant to enter an authorised guarantee agreement (AGA)— guaranteeing the assignee's performance.
• Subletting:The tenant grants a sublease of the whole or part of the premises. The tenant remains liable under the headlease. The sublease must not be granted at a rent below the passing rent (to protect the landlord's reversionary value) and must replicate the key covenants in the headlease.
• Sharing with group companies: Most leases permit sharing occupation with companies in the same group (as defined by the Companies Act 2006) without consent, provided the group company does not obtain security of tenure. This is useful for intra-group reorganisations.
• Landlord's conditions for consent: The landlord may impose reasonable conditions, such as requiring a rent deposit from the assignee or sublessee, references, and a deed of covenant directly with the landlord.

8. Planning & Change of Use

Before taking on premises, tenants must confirm that the property has planning permission for their intended use. Commercial uses in England are governed by the Town and Country Planning (Use Classes) Order 1987 (UCO), as amended. The key class for most business and retail occupiers is:

• Class E (Commercial, Business and Service) — introduced September 2020, combining the former A1 (retail), A2 (financial and professional services), A3 (restaurants), B1 (offices and light industrial) uses into a single flexible class. Changes between uses within Class E do not require planning permission.
• Class F.1 (Learning and Non-Residential Institutions) — schools, libraries
• Class F.2 (Local Community Use) — small local shops (under 280m²), swimming pools, skating rinks
• Sui generis — uses that do not fall within any class, including pubs, takeaways, nightclubs, petrol stations — always require planning permission for a change of use

Permitted development rights may allow certain changes of use without a full planning application, but are subject to conditions and prior approval requirements. Tenants should also check the lease — it will typically restrict use to a defined permitted use, and operating outside that use is a breach of covenant even if planning permission exists.

9. Business Rates

Business rates are a tax on the occupation of non-domestic property. They are assessed on the rateable value (RV) of the property, set by the Valuation Office Agency (VOA) at each revaluation (the most recent was 1 April 2023, with the next expected in 2026). Rates are calculated by multiplying the RV by the Uniform Business Rate (UBR) multiplier set annually by central government.

Key reliefs available to commercial tenants:

• Small Business Rate Relief (SBRR): 100% relief for properties with an RV of up to £12,000; tapered relief from £12,001 to £15,000. The tenant must have only one UK business property (or, if more than one, additional properties must have an RV below £2,899 each). Claimed through the local billing authority.
• Retail, Hospitality and Leisure Relief: A 75% discount (capped at £110,000 per business) for eligible retail, hospitality and leisure properties in 2024/25.
• Transitional relief: Limits the annual increase in rates bills following a revaluation. The 2023 transitional scheme phases in large increases over 3 years.
• Empty property relief: Rates are payable on empty commercial properties after a 3-month exemption period (6 months for industrial properties).

Tenants who believe their RV is too high can challenge it through the Check, Challenge, Appeal (CCA) process on the VOA website. Specialist rating surveyors can advise on the prospects of a successful challenge.

10. Negotiation Tips

Commercial leases are negotiated documents — most terms are open to negotiation, particularly in markets where landlords are competing for tenants. Key principles:

Heads of terms: Before instructing solicitors, agree commercial terms in heads of terms (HoTs) — a non-binding summary covering rent, term, break clauses, rent-free, service charge cap, fit-out, reinstatement obligations, and alienation. HoTs set the framework for solicitor negotiation and should be agreed in writing. Once HoTs are agreed, deviation by either party carries reputational risk (though not legal liability, as HoTs are usually expressly stated to be non-binding).

Instruct a specialist solicitor:Commercial property law is technical. A specialist solicitor (ideally accredited by the Law Society's Conveyancing Quality Scheme) will identify unfavourable non-standard clauses, negotiate amendments, and ensure the landlord's title is good. The cost of a solicitor — typically £1,500–£5,000 for a straightforward lease — is minor compared with the risk of a poorly drafted or unfavourable lease.

Red-flag clauses to watch:

• Personal guarantee:Avoid guaranteeing the company's lease obligations personally — this exposes your personal assets.
• Full FRI on a shell building: Taking FRI obligations on premises in poor condition without a schedule of condition is high-risk. Always obtain a building survey and schedule of condition.
• Upward-only rent review with a short review period: Upward-only reviews every 3 years in a rising market can substantially increase occupancy costs. Negotiate longer review intervals or an RPI-linked cap.
• Reinstatement obligation: Many leases require the tenant to reinstate any alterations at the end of the term. If fit-out costs are high, agree with the landlord at the outset (in a licence for alterations) whether reinstatement will be required — and get the answer in writing.
• Break clause conditions: Tenant break conditions should be limited to notice and vacant possession only — avoid break conditions requiring full compliance with all covenants (any minor breach could defeat the break).

Key obligations at a glance