Commercial leases explained for tenants and landlords

How a commercial lease comes together

A commercial lease lets a business occupy premises, such as a shop, office or industrial unit, for an agreed period in return for rent. Almost every term is negotiable, and what you agree will shape your costs for years.

Most deals start with heads of terms: a short summary of the main points, marked 'subject to contract', meaning nobody is legally bound until the formal documents are completed. In England and Wales, surveyors and agents regulated by RICS (the Royal Institution of Chartered Surveyors) must follow its Code for leasing business premises, which has applied since September 2020. It requires written heads of terms, and anyone without a professional adviser must be told about the Code and encouraged to get advice.

The landlord's solicitor drafts the lease. The tenant's solicitor checks the landlord's title (its proof of ownership), reviews the draft, negotiates changes and explains the risks. Your job is to check that the draft matches the deal, explain how you will use the premises and make the business decisions your solicitor raises.

Length of the lease and break clauses

The term is the length of the lease, for example five or ten years. A longer term gives security but commits you to paying rent for longer. A break clause lets one or both parties end the lease early on set dates, such as the third anniversary, by giving notice.

Break clauses are applied strictly. If you can only break if all rent is paid and the premises are returned with vacant possession (empty of people and belongings), a small unpaid sum or furniture left behind can make the break fail. Your solicitor will aim to limit the conditions, ideally to paying the main rent. Diarise notice dates and keep proof of service.

Rent and rent reviews

The heads of terms set the starting rent, how it is paid (commonly quarterly in advance) and any rent-free period, often a few months at the start while you fit out the premises. If the landlord has opted to tax the building (chosen to charge VAT on it), VAT at 20% is added to the rent, a real cost if your business cannot reclaim VAT.

Longer leases usually have rent reviews, commonly every five years. The main types are:

• Open market review: the rent is reset to what a tenant would pay for similar premises at the review date
• Indexed review: the rent follows an index such as the Consumer Prices Index (CPI), often within a cap (maximum) and a collar (minimum)
• Fixed or stepped increases: the rent rises by set amounts on set dates

Many existing leases say the rent can only go up at review. The English Devolution and Community Empowerment Act 2026 will stop these upward-only rent reviews in new business leases, but at the time of writing it has not been brought into force. Some arrangements made now, such as options to renew, may be caught, so ask your solicitor.

Repairs, service charges and insurance

Leases of whole buildings are often full repairing and insuring: the tenant carries out all repairs, including structural ones, and repays the landlord's cost of insuring. On a lease of part, such as one floor of an office block, the tenant usually repairs the inside of its unit and pays towards the rest through a service charge.

A repairing obligation can mean putting the premises into better condition than you found them. If the building is tired, get a survey and ask your solicitor about a schedule of condition, a written and photographic record attached to the lease so that you only have to keep the premises in no worse condition. When the lease ends, the landlord can claim for repairs left undone, known as dilapidations.

The service charge covers the landlord's costs of running shared parts, such as cleaning, lifts and roof repairs. Ask for recent budgets and accounts, check whether major replacements or improvements can be recovered from you and consider negotiating a cap.

Use, alterations, assignment and subletting

The user clause says what the premises can be used for, such as 'offices' or 'retail sale of clothing'. A narrow clause can make it hard to change your business or pass the lease on. Planning permission is a separate question your solicitor will check.

The alterations clause controls changes such as partitioning, shopfronts and signs, and structural work is often banned or needs the landlord's written consent in a formal licence to alter. You may have to remove alterations when the lease ends.

Alienation is the legal term for passing the lease on. Assignment transfers the whole lease to a new tenant, while subletting creates a lease of all or part to a subtenant. Most leases allow these only with the landlord's consent, which usually cannot be unreasonably withheld, and on assignment the landlord can often require you to guarantee the incoming tenant through an authorised guarantee agreement.

Rent deposits and guarantees

A landlord letting to a new or small business will often want security for the rent, such as a rent deposit held under a rent deposit deed (for example, six months' rent plus VAT) or a guarantee from a director or parent company.

A personal guarantee puts your own assets at risk, so read it carefully. Your solicitor will negotiate when the deposit is returned, for example after three years of paying on time, and when a guarantor is released.

Security of tenure and contracting out

In England and Wales, Part II of the Landlord and Tenant Act 1954 gives many business tenants security of tenure: the right to stay when the lease ends and ask the court for a new lease at a market rent. The landlord can only refuse on grounds set out in the Act, such as redevelopment or needing the premises for its own business, and sometimes has to pay compensation.

Landlords often ask for the lease to be contracted out, which removes these rights. The landlord serves a warning notice explaining what you are giving up, and you sign a declaration accepting it before the lease is completed. If the notice is served less than 14 days beforehand, you must make a statutory declaration instead, a formal statement made in front of a solicitor or other authorised person. If these steps are not followed properly, the lease may be protected after all.

A contracted-out lease can suit a short or flexible let, but you may have to leave when it ends. The Law Commission has been consulting on reform of this part of the Act, so ask whether anything has changed when your lease is agreed. Northern Ireland has different rules.

Stamp Duty Land Tax on a new lease

When a new lease is granted in England or Northern Ireland, the tenant may pay Stamp Duty Land Tax (SDLT) on two things: any premium (a lump sum paid for the lease), at the normal non-residential rates, and the net present value (NPV) of the rent. The NPV is the total rent over the term, including any VAT, discounted to reflect that future payments are worth less today.

For non-residential leases there is no SDLT on rent with an NPV up to £150,000. Above that, the rate is 1% on the part from £150,001 to £5 million and 2% above £5 million. For example, a ten-year lease at a fixed £30,000 a year with no VAT has total rent of £300,000 but an NPV of about £249,500, so the SDLT on the rent is roughly £995.

A return can be needed even when no tax is due, for example for a lease of seven years or more at a rent of £1,000 a year or more. Your solicitor will work out the figures and file the return; see the HM Revenue and Customs guidance on leases. Wales has its own tax and bands.

Checklist before you sign

Before the lease is completed, check that:

• The draft lease matches the heads of terms, including rent, rent-free period and break dates
• You know the full yearly cost: rent, VAT, service charge, insurance, business rates and utilities
• You understand any break conditions and have diarised the notice dates
• You know whether the lease is contracted out of the 1954 Act
• Any rent deposit or guarantee has clear release terms
• Your planned fit-out has the landlord's written consent and any planning permission it needs
• You have budgeted for legal fees, SDLT and any landlord's costs you agreed to pay

Next steps

If you are taking a lease, request a tailored quote for a new commercial lease for a tenant. Landlords can read about granting a new commercial lease. Tailored quotes are usually prepared within one working day, and the law firm you are introduced to confirms its fees in writing before you instruct it.