Commercial Leases Explained: Key Terms Every Business Tenant Should Check
A commercial lease fixes your rent, repair bills, exit options and whether you can stay at the end of the term. Check the break clause, rent review, repairing obligation, service charge, assignment rights and 1954 Act position before signing.
Key points
- Heads of terms are not binding, but they set the shape of the lease; the RICS Code for Leasing Business Premises says what they should cover.
- Break clauses are strictly construed: miss the date, leave rent unpaid or fail to give vacant possession and the break fails.
- A full repairing and insuring lease makes you pay for repairs whatever the state of the premises; a schedule of condition limits that.
- Part 2 of the Landlord and Tenant Act 1954 gives most business tenants the right to renew unless the lease is contracted out using the warning notice procedure.
- Leases of more than seven years must be registered at HM Land Registry, and SDLT is due on the rent where its net present value exceeds £150,000.
- The ban on upward-only rent reviews became law in April 2026 but is not yet in force; the current legal minimum energy rating for a let is EPC E.
A commercial lease governs your business premises for years, and the terms that matter most are the term and any break clause, rent review, repairs, the service charge, assignment and subletting, permitted use, and whether you can renew at the end under Part 2 of the Landlord and Tenant Act 1954. Business tenants in England and Wales get very little statutory protection on price or terms, so what is agreed at the heads of terms stage is largely what you get. This guide explains each key term, the pitfalls, the tax, registration and energy rules that come with a lease, what is changing in the law, and what a solicitor does for you.
Heads of terms, term and break clauses
Negotiations start with heads of terms, usually from the landlord's agent. They are not binding, but the lease will follow them, and reopening a point later is harder and costs more. The RICS Code for Leasing Business Premises, a professional statement in force since 1 September 2020, requires surveyors acting for landlords to record heads of terms in writing covering the premises, the term and any breaks, the rent and its review, rent-free periods, repairs, rights to assign and sublet, permitted use and whether the lease will be inside or outside the 1954 Act. The Code binds RICS members rather than landlords, but it is a useful checklist.
Term and break clauses
Terms of three to ten years are common for small business premises; a shorter term gives flexibility, a longer one security and sometimes a better deal on rent. A break clause lets one or both parties end the lease early, typically on a fixed date or on rolling notice after a set period.
Courts construe break clauses strictly and every condition must be met exactly: notice served on the right person, at the right address, in the right form and by the deadline (time is of the essence, so a day late is fatal); all rent and other sums paid; covenants complied with; vacant possession given. Vacant possession can fail if partitioning is left behind or a sub-tenant remains, "all sums paid" catches interest on an old late payment, and rent paid in advance for the period after the break is not refundable unless the lease says so, a point the Supreme Court settled in Marks and Spencer v BNP Paribas in 2015. Negotiate for a break conditional only on notice, payment of the principal rent and giving up occupation, with a refund of rent for the period after the break.
Rent, rent review and the ban on upward-only reviews
Rent is usually an annual figure payable quarterly in advance, exclusive of VAT (if the landlord has opted to tax), business rates, utilities, insurance and service charge. Check whether rent is suspended if the premises are damaged by an insured risk.
Leases of more than about five years normally include a review every fifth year. Open-market reviews reset the rent to what the premises would let for, traditionally upward-only so the rent can never fall; index-linked reviews track CPI or RPI, often within a cap and collar; stepped rents fix increases in advance; turnover rents link part of the rent to sales. Ask how disputes are resolved and who pays.
The English Devolution and Community Empowerment Act 2026, which received Royal Assent on 29 April 2026, bans upward-only rent review clauses in new commercial leases in England and Wales. As at 30 October 2026 the ban is not in force: regulations are awaited and commentators expect commencement in 2027 or later. It will not rewrite existing leases, so a lease signed today with an upward-only review keeps it.
Repairs, insurance and dilapidations
Most commercial leases are full repairing and insuring (FRI) leases. The tenant must keep the premises in repair, which includes putting them into repair if they are in poor condition at the start, decorate at set intervals and pay the landlord's insurance premium; in a multi-let building the landlord repairs the structure and common parts and recovers the cost through the service charge. A photographic schedule of condition attached to the lease, limiting your obligation to the state shown, is the standard protection for second-hand premises.
At the end of the term the landlord serves a schedule of dilapidations claiming the cost of putting the premises back into the state the lease requires. Damages are capped by section 18 of the Landlord and Tenant Act 1927 at the reduction in value of the landlord's interest caused by the disrepair, and the Dilapidations Protocol governs how claims are made. Budget for it from day one.
Service charges, alienation and permitted use
Service charges
In a multi-let building you pay a share of running costs. The RICS professional statement on commercial service charges sets standards for budgeting, apportionment and accounts. Ask for three years' accounts and the budget, and try to negotiate a cap or exclusions for improvements and inherent defects.
Assignment and subletting
Alienation clauses control whether you can transfer (assign) the lease or sublet. A typical lease prohibits dealing with part and permits assignment or subletting of the whole with the landlord's consent, which under section 19 of the 1927 Act and the Landlord and Tenant Act 1988 cannot be unreasonably withheld or delayed. The most important pre-agreed condition is an authorised guarantee agreement: under the Landlord and Tenant (Covenants) Act 1995 an outgoing tenant of a lease granted since 1996 is released on assignment, but can be required to guarantee the incoming tenant until the next assignment.
Permitted use and planning
The lease limits use to a stated purpose or a planning use class. Since 1 September 2020 most shops, offices, cafes, gyms and clinics in England fall within Class E, but a lease can be narrower than planning law, and Wales has kept the older use classes. Make sure the permitted use covers what you plan to do and that consent to a change cannot be unreasonably withheld.
Security of tenure under the 1954 Act
Part 2 of the Landlord and Tenant Act 1954 gives a business tenant in occupation the right to stay at the end of the contractual term and to a new lease on broadly similar terms at a market rent, unless the landlord proves one of the grounds in section 30, such as persistent arrears, an intention to redevelop or an intention to occupy the premises itself. On a no-fault ground the tenant receives compensation of one or two times the rateable value, depending on its length of occupation. Either side starts renewal with a notice giving six to twelve months' warning. The Act does not extend to Scotland, where business tenants have no equivalent statutory right to renew.
Landlords frequently insist on contracting out. Under the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003 the landlord serves a warning notice and the tenant signs a simple declaration at least 14 days before it is bound, or a statutory declaration before an independent solicitor if there is less time. A contracted-out tenant must leave at the end of the term unless the landlord agrees a new lease, and gets no compensation. Many landlords will grant a lease inside the Act, or concede a longer term or a break as the price of exclusion, so negotiate.
The Law Commission is reviewing Part 2. Its first consultation paper appeared on 19 November 2024, and its interim statement in June 2025 concluded that the current model, protection by default with the ability to contract out, should stay. A second consultation paper published on 16 June 2026, which closed on 16 September 2026, proposes technical reforms such as excluding most periodic tenancies and simplifying contracting out. A final report will follow, and any change needs an Act of Parliament.
Rent deposits, guarantees and forfeiture
A landlord letting to a new or small company usually asks for a rent deposit, commonly three to six months' rent plus VAT held under a rent deposit deed, or a personal guarantee from a director, or both. Negotiate for the deposit to be returned after a period of good payment or on assignment, and for a cap on the guarantor's liability, since a guarantor is personally liable for rent and dilapidations. If you default, the landlord can forfeit the lease (by re-entry for arrears, or after a notice under section 146 of the Law of Property Act 1925 for other breaches), seize goods for unpaid rent under Commercial Rent Arrears Recovery, or sue the tenant and guarantor. Relief from forfeiture is available from the court if arrears are cleared, but it is costly.
SDLT, registration, energy standards and legal costs
Stamp Duty Land Tax is payable on a new lease in England and Northern Ireland where the net present value of the rent over the term exceeds £150,000 (1% on the excess up to £5 million and 2% above) and on any premium at the non-residential rates (0% to £150,000, 2% to £250,000 and 5% above); a ten-year lease at £25,000 a year crosses the threshold. The return is due within 14 days of completion, and stamp duty land tax explained covers the mechanics. A lease granted for more than seven years must be registered at HM Land Registry; shorter leases take effect without registration.
Under the minimum energy efficiency standard regulations it has been unlawful since 1 April 2023 to continue letting commercial premises rated below EPC E unless an exemption is registered. In June 2026 the government confirmed that the proposed 2027 EPC C milestone is dropped; from 2031 buildings over 1,000 square metres will need EPC B where cost-effective, smaller buildings stay at E, and the regulations have not yet been made. Check the EPC before committing, as a lease may pass improvement costs to you.
Fees depend on the lease. Fixed fees for reviewing and reporting on a landlord's draft are commonly around £600 to £1,000 plus VAT, and for negotiating and completing a straightforward lease around £1,250 to £3,000 plus VAT, with heavily negotiated leases charged by the hour. Landlords usually ask the tenant to undertake to pay their legal costs; resist or cap it. Add SDLT, the Land Registry fee, any searches and the surveyor's fee for the schedule of condition. What commercial property law covers sets this work in context.
What the solicitor negotiates and what to do next
A commercial property solicitor reads the draft lease against the heads of terms, reports on it in plain language, negotiates amendments, checks the landlord's title and any superior lease, advises on the 1954 Act declaration, SDLT and registration, and handles completion. The points pushed hardest for tenants are the break conditions, the repairing obligation and schedule of condition, service charge caps, the alienation clause and the release of any guarantor on assignment. A lease is a long-term liability, so acting alone is rarely sensible for anything beyond a short licence.
If you are setting up or growing a business, sole trader vs limited company explains which entity should sign the lease and why a company tenant is usually asked for a guarantee, and shareholders' agreements explained covers what co-owners should agree before committing the company to premises. To find a firm, see business law solicitors in Liverpool, the solicitors in Sheffield landing page or the business law sector guide; what business law covers gives an overview of related services.
Frequently asked questions
What does full repairing and insuring mean?
An FRI lease puts the cost of repairing the premises on the tenant, including items that were already in poor condition when the lease began, and requires the tenant to reimburse the landlord for insuring the building. In a multi-let building the landlord does the structural work and recovers it through the service charge. A schedule of condition recording the state of the premises at the start is the usual way to limit the obligation to keeping them no worse than they were.
Can my landlord refuse to let me assign the lease?
Where the lease allows assignment with consent, the landlord cannot unreasonably withhold or delay it and must give written reasons for a refusal within a reasonable time under the Landlord and Tenant Act 1988. Refusal is usually reasonable if the incoming tenant is financially weak or the lease conditions are not met, and the landlord can insist on an authorised guarantee agreement. If the lease prohibits assignment outright, the landlord can simply say no.
What happens at the end of a contracted-out commercial lease?
You have no right to stay. The lease ends on the contractual expiry date, you must vacate and settle any dilapidations, and you receive no statutory compensation. If you want to remain you need the landlord to agree a new lease on whatever terms it offers. Start those discussions well before expiry, and if staying matters to the business, try to negotiate a lease inside the Act or an option to renew at the outset.
Do I have to pay the landlord's legal costs?
Only if you agree to. Many landlords ask the tenant for an undertaking to pay their legal and surveyor's costs whether or not the lease completes, and some lease-related consents, such as a licence to assign or alter, do make the tenant liable for the landlord's reasonable costs. For the lease itself the usual position is that each side pays its own solicitor, so refuse or cap the undertaking, and check the point in the heads of terms.
Can I get out of a commercial lease early?
Only through a break clause, an assignment or sublease the landlord consents to, or a negotiated surrender for which the landlord will normally want a payment. Simply handing back the keys does not end your liability for rent. If the lease has a break, diarise the notice date and serve exactly as the lease requires, because a defective break notice cannot be corrected once the deadline has passed.
Is a licence to occupy better than a lease?
A licence is quicker and more flexible, with no 1954 Act protection on either side and usually a short notice period, which suits serviced offices and short projects. It gives you no exclusive possession and no security, and the landlord can end it easily. The courts look at the substance of the arrangement rather than its label, so a document called a licence that gives exclusive possession for a term at a rent may in law be a lease.
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This guide describes the law in England and Wales as at 30 October 2026. It is general information, not legal advice about your situation; the law and the figures it quotes change, so check the position with a solicitor before acting. LawFirms.co.uk is a directory and does not provide legal services.