Commercial tenants beware – what to look out for in commercial lease agreements post pandemic

With workers returning to the office post pandemic, it has triggered a bounce back of office space demand.

However, the move to new premises could bring future issues and expense for business owners unless their tenancy agreements are future-proofed, warns Cathy Thomas, director and solicitor of Sheffield-based commercial property law specialist Mason Thomas Law.

She explained: “Commercial tenancy agreements are very different to residential agreements, and they are usually drafted very much in the landlord’s favour. It’s important that a tenant goes into any commercial tenancy agreement with their eyes open, or they could find themselves facing large, unexpected bills for repairs, maintenance or rent increases that they haven’t budgeted for.”

Cathy is urging small business owners to look out for five key areas in a commercial lease agreement BEFORE they sign, as it could leave them liable to owing thousands of pounds or paying over market rent in the future.

1. Rent Reviews – A tenancy agreement often includes rent reviews; these can typically be at three or five yearly intervals. In a commercial lease agreement, look out for upwards only rent reviews. In essence this means that if market rent rises, your rent will do too, which is reasonable. However, if market rates drop, then your rent will remain the same. Commercial tenants should make sure that they benefit from a drop in market rates where possible.
2. Rent cessation clause–Commercial tenancy agreements usually include a ‘rent cessation clause’ which ensures a tenant will not pay rent during the period for which a property is unusable following damage by an insured risk, for example, fire or flood. The pandemic has highlighted the need for rent cessation provisions to be incorporated into commercial leases, to provide for rent cessation if future lockdowns render commercial tenants unable to use their property. Commercial tenants are advised to request that such provisions are included in their leases.
3. Break Clause – Ensure you have the option to break your lease at defined intervals during the term, and that the option to break is not subject to unreasonable conditions, such as full compliance with all lease terms, which could see something as minor as a broken door handle arguably preventing the break option from being properly exercised… A break clause will provide you with the flexibility to end your commercial lease early if the premises no longer fit your requirements.
4. Service Charges – if you’re in a shared building you will be expected to pay charges for the upkeep of the shared areas and external repairs. This could leave you financially liable to contribute towards some very costly building repairs, like a new roof or a replacement ventilation system. Commercial tenants are advised to negotiate a cap on service charge contributions, in order that they have the certainty of knowing the maximum contributions that they will have to make in any given year of the term.
5. Repairs – Most standard leases require a tenant to keep the property in ‘good and substantial repair and condition’. The legal effect of this wording is that a tenant could actually be liable to put the property into a better state than when it was in, when initially leased. Failure to comply could result in a dilapidations bill at the end of the tenancy from the landlord, which could run into thousands. Commercial tenants are encouraged to ensure that they limit their repairing obligation at the outset, by limiting the repairing obligation to having to put the property into no better state than it was in at the start of the term, and annexing photos to the lease to evidence that state of repair.

The pandemic has caused businesses to reassess their office space needs. Research shows that businesses are now looking to make the move to either flexible office space with lots of services, or smaller offices designed to accommodate hybrid working.

The Q1 2022 RICS UK Commercial Property Survey results showed that the office market gained a ‘notable increase’ over the quarter, with the uplift particularly prevalent in prime office spaces.

Cathy added: “As employees return to the workplace, business owners may be feeling pressure to move quickly and secure new premises. Do not do this at the expense of getting your tenancy agreement thoroughly reviewed by a legal professional. This will ensure you are adequately protected from onerous conditions and inflexible terms which could cost you significantly further down the line.”

For expert legal support and guidance on commercial lease agreements, contact a member of the Mason Thomas Law team on 0114 294 5360.