Commercial lease agreements – Legal essentials before signing

Commercial lease agreements are legally binding contracts between a landlord and a business tenant, governing the occupation and use of commercial premises. Before signing any commercial lease agreements, it is essential that business owners fully understand their rights, obligations and potential liabilities. Getting professional advice from Commercial Property Solicitors can prevent costly disputes and ensure you negotiate favourable terms.

In this guide, we outline the legal essentials to consider before entering into commercial lease agreements in England and Wales.

Types of commercial lease agreements

Before committing to commercial lease agreements, it is important to understand the different structures available:

• Full Repairing and Insuring (FRI) Lease – the tenant is responsible for all repairs and insurance costs, although this can be capped by a Schedule of Condition, as noted below.
• Internal Repairing Lease – the tenant maintains only the interior of the property, while the landlord retains responsibility for the exterior and structure.
• Short-Term Leases – typically under 5 years, with limited repairing obligations in some cases and often on simpler terms.

The structure of commercial lease agreements can significantly affect your ongoing liabilities and should be tailored to your business needs.

Term and break clauses

The length of the lease, and your ability to terminate it early, are crucial elements of commercial lease agreements:

• Fixed-term leases – offer security, but limit flexibility if business circumstances change, as you would either need to vacate as the lease comes to an end or have a new arrangement in place to follow on.
• Break clauses – allow either party to end the lease early under agreed conditions (e.g. six months’ notice).
• Renewal rights – covered under the Landlord and Tenant Act 1954, giving tenants a legal right to renew in many cases unless excluded.

Ensure that the lease clearly states the term, renewal rights and break options – and that you understand the notice and procedural requirements.

Rent and financial terms

Rent is only one part of the financial package in a commercial lease agreement:

• Base rent – payable monthly, quarterly or annually, as agreed.
• Insurance rent – a contribution towards the landlord’s cost of insuring the property.
• Rent reviews – often included in longer leases, allowing the landlord to increase rent based on market rates, inflation (RPI), or fixed percentages.
• Service charges – contributions to maintenance and shared facilities, often passed on to tenants in multi-occupancy buildings.
• VAT – commercial lease agreements may be subject to VAT depending on the landlord’s tax election status.

Have your solicitor or accountant review the financial implications before committing, especially where variable costs such as service charges are concerned.

Repair, maintenance and dilapidations

Repair obligations are a common source of dispute in commercial lease agreements:

• Schedule of Condition – a photographic or written record of the property’s state at lease commencement. This can limit your end-of-lease repair obligations and can be prepared by a surveyor, or in some cases can be produced and agreed between the parties direct.
• Dilapidations – refers to claims for disrepair made by the landlord at the end of the lease.
• Ongoing maintenance – ensure the lease states clearly who is responsible for what areas (roof, plumbing, common areas, etc.).

Agreeing a fair and clearly drafted clause, supported by a Schedule of Condition if possible, can protect your business from unforeseen costs.

Real-world case study

A retail tenant signed a 10-year FRI lease without a schedule of condition. Upon leaving the property early under a break clause, the landlord served a £30,000 dilapidations claim. Had the tenant negotiated and documented the original property condition, their liability could have been substantially reduced. The business later engaged solicitors to review future commercial lease agreements in advance, avoiding similar exposure.

Alterations and fit-out

Most tenants entering commercial lease agreements will wish to modify the space. Before signing:

1. Check whether the lease permits alterations and what approvals are needed.
2. Identify whether reinstatement is required at the end of the lease.
3. Ensure your plans comply with building regulations and planning permission requirements.

Even internal changes may require landlord consent, so confirm this in writing before proceeding. Consent could be included in the lease, through a separate licence or simply in correspondence depending on the extent of the works.

Assigning or Subletting

Your commercial lease agreement may need to accommodate business changes, such as selling or relocating:

• Assignment – transferring your lease to another tenant. Most leases require landlord consent and may impose conditions.
• Subletting – allowing another party to occupy part or all of the space. Terms must be clearly authorised in the lease.

Landlords often require an Authorised Guarantee Agreement (AGA), under which you remain responsible if the new tenant defaults. Always check your future exit options carefully.

Insurance and liability

Understand how insurance is structured within commercial lease agreements and what is covered:

• Landlord’s Insurance – usually covers the structure and is recharged to tenants via the lease.
• Tenant Insurance – you must insure your business contents and may be required to maintain public liability and employer’s liability cover.

Check that all policies meet the requirements in the lease and that the liabilities are appropriately balanced. If the property is damaged or destroyed during a course of the lease, often the rent will be suspended or the lease terminated depending on the circumstances.

Legal compliance and usage restrictions

Each commercial lease agreement must reflect how your business plans to use the property:

• Does the permitted use clause allow your specific business activity?
• What other uses are allowed, as this may impact any attempt to transfer the lease if the prospective buyer can’t operate their business.
• Are there trading hour restrictions or noise limits?
• Are you responsible for complying with laws such as fire safety, accessibility (Equality Act 2010), and health and safety regulations?

Your solicitor can review these clauses to ensure your operational needs are protected and that you’re not taking on excessive regulatory burdens. For more detail on property responsibilities, see RICS Commercial Property Standards.

Expert insights

Commercial property solicitors recommend:

• Never sign commercial lease agreements without legal review – hidden liabilities can be significant.
• Always negotiate and document a break clause if flexibility is important.
• Request a full draft lease and review it against Heads of Terms for accuracy.
• Agree a photographic schedule of condition.

Our Commercial Property Solicitors are vastly experienced in advising landlords and tenants on a wide range of commercial lease issues. We support clients associated with all types of premises, including shops, offices, warehouses, sports clubs and community centres.

Contact us for more information.

Benefits and Challenges

• Benefits:
  • Secure business premises with known costs.
  • Control over fit-out and branding (subject to permissions).
  • Potential negotiation leverage on long-term commercial lease agreements.
• Challenges:
  • Long-term liabilities including rent and repairs.
  • Limited flexibility without break or subletting rights.
  • Complex clauses that require professional interpretation.

FAQs

What are commercial lease agreements?

Commercial lease agreements are legal contracts that set out the terms under which a tenant occupies a commercial property from a landlord for business purposes.

What is a Full Repairing and Insuring (FRI) lease?

An FRI lease requires the tenant to maintain and insure the entire property, including structural elements, during the lease term.

Can I exit a commercial lease early?

Yes, if the lease contains a break clause allowing early termination under agreed conditions such as providing notice. Without it, you may be liable for rent until the term ends or the lease is assigned.

Do I need a solicitor to review a commercial lease?

Absolutely. A solicitor ensures the lease protects your interests, highlights liabilities, and helps negotiate more favourable terms before you sign. As the landlord will normally prepare the lease, it will tend to favour the landlord’s interests by default.

What should I look out for in a commercial lease agreement?

1. Term and break clauses.
2. Rent and review provisions.
3. Repair and maintenance obligations.
4. Usage and alterations permissions.
5. Exit and assignment options.

This article was produced on the 15th July 2025 for information purposes only and should not be construed or relied upon as specific legal advice.