Signing a commercial lease: guide to renting small business premises

Leasing a premises is a significant milestone when following your business plan.

Whether moving into your own office space for rent, setting up shop in a retail unit or securing a warehouse for storage, this is a hugely exciting time for your business.

But while it might be tempting to sign on the dotted line and get things going immediately, it’s important to go over the details and carefully consider the contract (AKA the commercial lease agreement) before agreeing to anything.

In this article, we’ll share the key considerations and tips to help you navigate your commercial lease agreement with confidence.

Key clauses to look out for

When signing a commercial lease, it’s important to understand the key clauses that could affect your business, such as how long the lease lasts, how and when you’ll pay rent, and whether you can sublease the property.

Here are some of the most important clauses to look out for, so you can make sure your lease works for your business both now and in the future.

Use clause

This specifies what the premises can be used for, such as running a retail store, opening an office space or another purpose. It’s important to ensure that the lease allows for your intended use of the property. If your business has specific needs or plans to evolve over time, make sure the lease reflects that flexibility.

If you need to change the permitted use, this can be a complicated and costly process. 

For example, if you were to convert an office space into a retail store, you may need the landlord’s approval or even consent from your local authority. Therefore, it’s essential to understand the use clause and make sure it’s right from the start to avoid restrictions down the line.

Lease length

When signing a lease, you’ll need to be aware of how long it’ll last. No two leases are the same, though they typically range between three to five years, or even up to 25 for longer terms.

This can be quite a heavy commitment for small businesses or startups, so you’ll need to negotiate a few concessions with your landlord to take the pressure off. This can include:

A break clause

A clause in the lease contract which allows you – or your landlord – to end the lease early. It might be that the break clause only comes into effect after a certain amount of time (for example, three years) or on particular dates, or it may be that it can be exercised at any point during the lease.

Subleasing

Allows tenants to rent out the space to another business, often to help cover costs if they no longer need the entire space. This can be a valuable option for businesses that may not need the full lease or want to reduce their financial obligations. However, subleasing typically requires the landlord’s consent, and the terms of the sublease should align with the main lease agreement.

Payment conditions

It’s crucial to have a thorough understanding of all the conditions of payment that apply to your lease. You’ll need to understand:

• Frequency of the rent: this is usually paid quarterly and in advance, though some landlords prefer monthly payments.
• Penalties: these come into effect if you pay your rent late and can range from stiff charges to eviction and retention of your assets, such as office equipment.
• How to pay: rent payments are usually made via bank transfer, standing order or cheque, depending on what the lease says.
• Additional charges: these can include administrative fees, service charges or maintenance costs, which may not be included in the rent but are still your responsibility.

Rent guarantees

Most businesses – particularly new ones – will be asked to provide a rent guarantee to prove they can consistently meet the cost of renting before a landlord will agree to lease to them. Rent guarantees help assure the landlord that the tenant is financially stable and capable of fulfilling the terms of the lease, especially in the early stages of a business’s operations.

In most cases, a bank guarantee or recent financial accounts – such as income statements, balance sheets and cash flow statements in a business plan – will suffice. However, some landlords may require additional security, such as a cash deposit upfront, which can range from a few months’ rent to a full year’s rent, depending on the perceived risk.

Personal guarantee

Some commercial leases will hold you, as the business owner, personally liable for the lease if your business fails. This means that if your business cannot meet its obligations or defaults on the lease, you could be held responsible for paying the rent and any other associated costs out of your personal finances.

Security deposit

This clause may require tenants to pay a security deposit at the start of the lease, which is usually refundable at the end of the lease term. However, the size of the deposit can impact initial cash flow, though it doesn’t directly affect the ongoing rent costs.

Exit strategy

This is an important consideration when signing a commercial lease, especially if your business situation changes unexpectedly. It’s essential to understand how you can exit the lease if needed, whether due to financial difficulties, a change in your business model, or needing to relocate.

The lease should clearly outline the conditions under which you can terminate the agreement, such as through a break clause or by giving notice within a certain timeframe.

Have you launched your business yet? Check out our guide to starting your own business.

How much does it cost to rent a premises?

The cost of renting a premises will depend on different factors, including:

• The property’s location
• The condition of the premises
• The size of the premises
• Any lease restrictions
• The state of the property market in general

Other factors affecting the cost of your rent

You’ll also need to consider what can impact the cost of your rent beyond the base price. Here, we’ll break down what to watch out for, so you know exactly what you’re getting into when it comes to the full cost of renting.

Rent-free periods

A rent-free period is, as the name suggests, an agreed period in which you don’t need to pay rent at all.

It might sound too good to be true, but there are plenty of reasons a landlord might offer this. For example:

• Enticing tenants into signing a lease: offering a rent-free period can make a property more attractive, especially in competitive markets or for new businesses.
• Allowing businesses time to set up: if you need to renovate or customise the space before operating, the landlord might offer a rent-free period to give you time to get everything ready.
• Compensating for property issues: if the property needs some work or isn’t in the best condition, a rent-free period can act as compensation for any inconvenience or delays caused by those issues.
• Filling a vacant property: if the property has been vacant for some time, landlords might offer a rent-free period to get tenants in quickly and avoid prolonged downtime.
• Encouraging long-term leases: some landlords offer a rent-free period as an incentive for businesses to commit to a longer lease, ensuring stability for both parties.

Rent reviews

These allow the landlord to adjust the rent at regular intervals, usually every three to five years. This is typically based on the current market rate for similar properties in the area, and the new rent is usually set to reflect these market conditions. 

During the review, the rent may be adjusted up or down based on market conditions. The new rent figure can be agreed upon by both parties or if there’s a dispute, it may be determined by a third party surveyor.

The types of rent reviews include:

• Open market rent reviews: this is adjusted to match the current market rate for similar properties.
• Fixed increase: the lease specifies a set rent increase at each review date (for example, a 5% increase every three years).
• RPI (Retail Price Index) or CPI (Consumer Price Index): rent increases are tied to inflation rates, like RPI or CPI, to keep rent in line with overall price changes.

Additional charges

Other charges to consider as well as the rent include:

Operating costs and service charges

Many commercial leases require tenants to pay additional charges on top of the base rent. These can include costs for:

• Building maintenance
• Security
• Heating
• Cleaning
• Other services

Building insurance

Building insurance is usually the landlord’s responsibility to organise, but as the tenant, you’ll typically be required to cover the cost. This insurance protects the building against risks like fire, flood or structural damage. This cost is often passed on to you through service charges, or included in the rent itself.

While you’ll be responsible for paying for the building insurance, you might also be allowed to have some input in choosing the insurer, letting you find the best policy that covers your business’s needs.

Business rates

Business rates are a type of tax charged on most commercial properties. They are set by local councils and are used to fund services in the area, such as rubbish collection, street maintenance and local amenities.

Business rates are generally based on the “rateable value” of a property, which is an estimate of its rental value and is often influenced by factors such as its location, size and condition of the property.

Your landlord may include business rates in your rent and pay them directly to the local council on your behalf. However, in some instances, you might be required to pay them directly yourself.

Taking out a commercial lease: do’s and don’ts

Remember – taking out a commercial lease is a big commitment, so it’s important to know what you’re getting into. To help you through the process, here are the key steps you should take, plus a few pitfalls to avoid.

DO: Read the lease carefully

Before signing anything, read the lease thoroughly, including the finer details. Commercial leases can be packed with legal jargon, so you should seek legal advice if there’s anything you’re unsure about.

DON’T: Skip legal advice

Even if you feel confident about the lease terms, it’s always a good idea to get advice from a solicitor or surveyor. They can spot potential issues and help you negotiate fairer terms, potentially saving you from unexpected surprises.

DO: Negotiate the terms

Don’t assume the initial terms are set in stone. A lot of aspects – including rent payments, break clauses and even who’s responsible for repairs – can often be negotiated. You should take the time to discuss these points with your landlord before agreeing to anything.

DON’T: Rush into signing

It might be tempting to get things started right away, but leases are legally binding, so you should take time to review everything properly. Also, don’t let pressure from the landlord or an attractive offer rush you into making a decision you’re not entirely sure about.

DO: Check for hidden costs

Remember that your rent may not be the only cost you’re responsible for. Additional charges like service fees, insurance and maintenance costs can quickly add up. That’s why you should ensure that you know exactly what’s included and what isn’t.

DON’T: Overlook the property’s condition

A cheap property may seem like a great deal, but sometimes this can be because they’re not in the best condition. Therefore, you should inspect the property carefully by checking for signs of damage or disrepair, and document any issues. This can prevent you from being held responsible for problems that were there before you moved in.

DO: Plan your exit strategy

Business needs can change quickly, so it’s important to understand how you can end the lease if necessary. In this case, you should ask about break clauses or notice periods so you have a clear idea of your options if your circumstances change.

DON’T: Ignore future growth plans

The location you’re considering might be good now, but if your business expands, will the premises still meet your needs? If you’re unsure, consider negotiating flexible terms or asking for options to expand into additional space.

DO: Understand your responsibilities

Some commercial leases place a surprising amount of maintenance responsibility on a tenant. Be clear on what repairs, cleaning or general upkeep you’re expected to handle to avoid unexpected costs later.

DON’T: Forget about permissions

If you plan to make changes to the property – like redecorating, installing new fixtures or changing its use – don’t jump into it. Your landlord, and potentially your local council may need to approve these changes before you can go ahead.

Conclusion

Sorting out a fair commercial lease can feel like a daunting task, but it’s time well spent to avoid headaches and unexpected costs down the line.

Also, don’t be afraid to negotiate – many terms, from rent payments to maintenance responsibilities, can often be adjusted to better suit your needs.

Most importantly, take your time, seek professional advice and make sure you’re fully aware of your rights and responsibilities before signing. With the right preparation, you’ll be able to secure a lease that supports your business both now and in the future.