Business Lease Agreement

What is a business lease agreement?

A business lease agreement creates a tenancy agreement. The tenancy gives permission for a tenant to use property for business purposes. It grants permission for the tenant to exclusively occupy the premises. This business lease agreement may be used in England and Wales.

 

What are the different types of business lease agreements?

Business leases are commonly referred to in the context of the following common categories:

• Gross leases - under a gross lease the landlord will pay for and shall be liable for all maintenance costs, taxes and insurance costs. The landlord will pay for those costs directly. The tenant will pay rent to occupy the space (the landlord will usually factor in the cost of running the property into the rent fee).
• Net leases - under a net lease, the tenant will pay rent and will pay for some or all costs and taxes associated with the property as a separate fee.

What is the most common type of business lease agreement?

Commonly, a business tenant will enter into a net lease. The tenant will pay rent and the agreement will also detail which of the following the tenant will pay a contribution towards:

• utilities
• services/maintenance
• insurance
• taxes

What is the difference between a business lease and a business licence to occupy?

A tenancy agreement is different from a licence agreement. A licence is an agreement that permits a person or legal entity to do something. A licence to occupy therefore permits a business to occupy a space or part of a property but does not grant a legal interest in the property. A business tenant will enjoy exclusive occupation of the relevant property, whereas a business licensee will only have the right to use a space or room as may be specified from time-to-time, and the landlord will retain the right to occupy that space at all times.

It is common to use a commercial licence to occupy in the following situations:

• in office spaces - to allow 'hot-desking' in a shared workspace
• in shopping centres where there are different stalls or kiosks where sellers may sell goods for a short period only
• in other commercial retail buildings for temporary periods

A business tenant will have particular rights and obligations under a tenancy agreement (including, in some circumstances, a right to remain in the property at the conclusion of the agreement).

What is the difference between a residential assured shorthold tenancy agreement and a business lease?

A residential lease (an assured shorthold tenancy) will be used where the tenant will live in the property and the property will be used as their home.

A business lease agreement will be used where the property will be used for business purposes only. Commercial tenants have distinct and different rights and responsibilities to residential tenants.

Is it mandatory to have a written lease agreement?

Whilst a business lease with a term of not exceeding 3 years may be reached via a verbal agreement, it is always desirable to have a written agreement so that each party has a clear understanding of the terms of the agreement.

What does security of tenure mean?

Security of tenure refers to the tenant's right to remain in the property and to renew the lease, at the conclusion of the contractual term. Business leases generally have security of tenure, unless the parties explicitly contract out of this. Short business leases with a fixed term of 6 months or less will not generally benefit from a security of tenure.

What is a guarantor?

A guarantor will agree to pay the rent and other charges incurred by the tenant, in the event that the tenant cannot or does not pay this. This business lease agreement may include a guarantor as a party if so desired.

What should a business lease agreement not contain?

A tenancy agreement should not include any clauses which unreasonably:

• restricts the legal rights and responsibilities of the tenant; or
• attempts to waive or diminish the legal obligations of the landlord.

What are the prerequisites of a business lease agreement?

Before a landlord enters into a tenancy agreement, they should:

• Check the permitted use classes of the property against any permitted use which is to be granted to the tenant under the lease
• Ensure that they understand their obligations as a commercial landlord
• Obtain an Energy Performance Certificate (ECP) to provide to the tenant
• Obtain appropriate relevant insurance
• Ensure that they have the legal authority to grant the lease (i.e. they own or have the appropriate legal interest/permission to let the property)
• If the parties wish to exclude the security of tenure provisions, they must follow a particular process prior to the commencement of the lease.

Who can enter into a business lease agreement?

The landlord should ensure that they have the authority to grant a lease over the property. The tenant will be a business tenant which could include a company, LLP, partnership or sole trader - the tenant will occupy the property for the purposes of a trade or profession.

What can the duration of a business lease agreement be?

This business lease is designed to be used a shorter term business lease agreement. If a lease is created for a term of more than 3 years, the parties must execute the agreement by deed and the agreement therefore takes this format. The formalities for a business lease with a term of more than seven years involves very specific requirements, including:

• the requirement to register the lease with Land Registry; and
• other particular requirements regarding the terms and format of the lease

Therefore, if the parties seek to create a lease for a term of more than seven years, this business lease agreement should not be used.

The agreement created by the parties will not be reviewed by a lawyer to ensure that the legal content applies to the personal situation of each of the parties. In order to review the particulars of the final agreement, it will be necessary to instruct a lawyer. For assistance finalising, reviewing and executing a deed, advice should be sought from a lawyer who is regulated by an approved regulator in the legal services sector. It is possible to search for a lawyer using the Law Society – find a solicitor webpage.

What must be done after signing?

The parties should each retain a copy of the signed agreement once it has been properly finalised. The tenant will occupy the property under the terms of the agreement, and must pay rent and any other charges in accordance with the agreement. The landlord must comply with its obligations under the agreement.

Where the property is in England, the landlord will need to check the amount of any Stamp Duty Land Tax (SDLT) payable. The landlord should complete the relevant action SDLT within 14 days of the effective date of the transaction. Where the property is in Wales, the landlord check the amount of any Land Transaction Tax (LTT) - the landlord should complete the relevant LTT action 30 days of the effective date. Usually, the effective date refers to the completion of the lease.

Which documents should be attached to the business lease agreement?

The landlord should attach a property plan to the agreement if one is available. This can assist the parties in understanding the property boundaries.

Is it necessary to register the business lease agreement?

It is only necessary to register a business lease where the term of the lease is for more than 7 years. This agreement should not be used for a business lease with a term of more than 7 years and registration should therefore not be required.

Is it necessary to have witnesses to the business lease agreement?

The business lease agreement will take the form of a deed. A business lease with a term of more than 3 years must be executed as a deed.

The format of the deed will depend upon the nature of the party (i.e. whether it is a company, LLP, partnership or sole trader). In very broad terms, execution as a deed will mean that the signature of each party should be witnessed. A witness should be over the age of 18 and should not be a party to the agreement.

The agreement created by the parties will not reviewed by a lawyer to ensure that the legal content applies to the personal situation of each of the parties. In order to review the particulars of the final agreement, it will be necessary to instruct a lawyer. For assistance finalising, reviewing and executing a deed, advice should be sought from a lawyer who is regulated by an approved regulator in the legal services sector. It is possible to search for a lawyer using the Law Society – find a solicitor webpage.

 

How do the parties contract out of the security of tenure provisions?

Security of tenure refers to the tenant's right to remain in the property and to renew the lease at the conclusion of the contractual term. Business leases generally have security of tenure, unless the parties explicitly contract out of this. Short business leases with a term of 6 months or less, will not generally benefit from a security of tenure.

The parties must use a specific agreement and process to exclude the security of tenure, if this would ordinary apply to the lease. Where:

• the notice is sent by the landlord less than 14 days prior to the lease completing or before an agreement for lease is completed (usually completion will take place where the landlord and tenant. have signed the lease and all sums payable have been made), the declaration must be made through a statutory declaration on behalf of the tenant. A statutory declaration is a written statement of fact that is signed by a person who holds the power to make a statutory declaration (usually a solicitor or a Commissioner for Oaths);
• the notice is sent by the landlord more than 14 days prior to the lease completion or before an agreement for lease completion, the tenant can simply sign the agreement.

What must a business lease agreement contain?

A business lease agreement should contain:

• the parties to the lease - the full details of the tenant, landlord and any guarantor.
• the property details - information about the the property that is to be let. This will include reference to any title numbers and boundaries.
• the term of the lease - when the lease will begin and when it will end
• a statement confirming the lease agreement - this will confirm that the property will be let for the term
• the permitted use - this will confirm how the tenant may use the property (e.g as a shop, office or restaurant).
• details of the rent and payments - this will include the amount and frequency of rent to be paid and any other payments for services and facilities.
• the rights and obligations of the parties - this information will set out any specific permissions and rights granted to the tenant and any rights reserved to the landlord. It will also define any particular obligations of each party.
• a break clause - the parties may choose to include a break clause which will enable the parties to terminate the agreement before the expiration of the term. The break clause will explain a specific procedure for termination.

Which laws apply to a business lease agreement?

• The Land Registration Act 2002
• The Landlord and Tenant Act 1954
• The Law of Property Act 1925
• Law of Property (Miscellaneous Provisions) Act 1989
• The Companies Act 2006
• The Partnership Act 1890
• The Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009
• The Regulatory Reform (Business Tenancies) (England and Wales) Order 2003
• The Statutory Declarations Act 1835

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