Five pitfalls to avoid when leasing a commercial property

Summary

• Many small businesses sign commercial leases without understanding key terms such as security of tenure, repairing duties, or rent review.
• Contracting out of security of tenure can leave a tenant with no right to stay or renew, even when the business is flourishing.
• Full repairing and insuring obligations can expose tenants to major building costs, including structural repairs.
• Rent review clauses, break clauses and service charges can create sudden cost spikes when they are one-sided or unclear.
• Early legal advice and proper checks on the building help small businesses avoid expensive surprises and negotiate better terms.

Two business partners in Yorkshire once told me they had found the perfect unit. It had the right light, the right feel and a landlord eager to hand over the keys. They were ready to sign. They had never heard of security of tenure, FRI obligations or upward-only rent review until I mentioned it and told them to reconsider forthwith.

My client’s enthusiasm is common. Commercial leases are technical documents. Landlords often use standard forms that protect their interests. A tenant who signs without advice can end up with a lease that limits growth, drains profit or prevents flexibility when the business needs to change. Here are five pitfalls that catch out first-time tenants and how to avoid them.

Pitfall 1: overlooking security of tenure

Security of tenure comes from the Landlord and Tenant Act 1954. It gives a business tenant the right to stay at the end of the lease and request a new one unless the landlord has specific grounds to refuse. Renewal terms are usually negotiated, and the tenant enjoys a degree of stability.

Many modern leases contract out of security and tenuree. This means the landlord and tenant agree that the protection of the Act will not apply. When the term ends, the tenant must leave if the landlord says so.

Picture a young coffee shop. The owners invest heavily in fit-out and build a strong customer base. The lease ends after five years. Because the lease was contracted out, the landlord can refuse renewal or ask for a rent that no longer reflects what the business can afford.

To avoid this, ask early whether the lease includes security of tenure. Understand what that means for your long-term plans. If contracted out, consider safeguards such as a longer fixed term, an option to renew or agreed compensation if the landlord ends the lease at a critical point for your business.

Pitfall 2: underestimating full repairing and insuring obligations

A full repairing and insuring lease runs on a simple principle. The tenant takes responsibility for repairs, insurance, and, in some cases, the structure or common areas through a service charge. On paper, this looks straightforward. In practice, it can be expensive.

Without a schedule of conditions, a tenant may take on the responsibility of putting an old property in a far better state than when they arrived. That includes brickwork, roofing, drainage, and external decoration.

Take a small retailer who rents a shop in an ageing building. A year later, they receive a service charge demand for a share of roof replacement and structural brick repairs. The cost wipes out the year’s profit.

A surveyor can identify issues before you sign. Negotiate a schedule of conditions to limit repairs to the property’s condition at the start. Look carefully at the definitions of structure and common parts. Clarify who pays for major works such as roofs, lifts or heating systems. A few early tweaks can prevent large and unexpected bills.

Pitfall 3: rent, rent review and break clauses that do not work for you

Commercial leases set out initial rent, any rent-free period, and the method for reviewing rent during the term. Reviews take place every three to five years in many leases and are often upward-only. Some reviews link to market rent, others to an index.

A one-sided clause can push rent up even when the market falls. Vague drafting can make the review process unpredictable.

Break clauses give tenants a chance to exit early. They protect cash flow and create flexibility. Yet many break clauses contain strict conditions, such as full compliance with all covenants or the absence of rent arrears. A minor dispute about the service charge or an error in serving notice can make the break useless.

Imagine a tenant planning to break the lease at year five. They serve notice. The landlord argues that a small, historic service charge shortfall means the break is invalid. The tenant remains locked in.

It is crucial to have an experienced Commercial Law Solicitor review a break clause in a commercial lease agreement. Try to limit conditions to compliance in all material respects. Diarise notice dates and understand how to serve the notice correctly. Review rent mechanisms and model how they will affect the business across the term. Clear rent review drafting saves time, stress and money later.

Pitfall 4: ignoring service charges, insurance and hidden costs

Rent is not the whole story. Service charges, insurance contributions, management fees, business rates, and utilities can push total occupancy costs much higher than expected. Some leases require tenants to pay the landlord’s legal or surveyor’s fees for applications, fit-out approvals, or consents.

Uncapped service charges create uncertainty. Major repairs to shared areas can lead to large bills, especially in converted mills, business parks or multi-let offices.

Consider a small creative studio in an old mill. Rent is modest. The service charge jumps sharply as the landlord replaces lifts, repairs masonry and upgrades security. The tenant pays a share, with little room to challenge.

Ask for at least three years of service charge accounts. Look for caps or limits on unusual expenditure. Clarify what the building insurance covers and whether you are liable for any excess. Negotiate limits on the landlord’s ability to recover all professional costs from you. Transparency early on helps avoid shocks later.

Pitfall 5: failing to plan for exit, assignment and change

Business plans evolve. You may need more space, less space or different space far sooner than you expect. Leases often include detailed provisions on assignment, underletting, and sharing occupation. These rules control how you can pass the lease to another business or bring in partners.

User clauses decide what activities are permitted. Fit-out clauses decide when and how you can make changes. Reinstatement clauses can require costly works at the end of the lease.

Imagine a growing business that needs to sell. A buyer is ready, but the lease bans assignment or the landlord insists on an authorised guarantee agreement that keeps the original tenant liable for future breach. The sale stalls, and value is lost.

Negotiate balanced assignment rights. Understand whether the landlord’s consent is required for fit-out changes or new product lines. Keep dilapidations and reinstatement in mind when budgeting. Exit planning at the start saves time and cost later.

Wrapping up

A commercial lease is one of the most significant commitments a small business makes. It can support growth or restrict it. Security of tenure, repairing duties, rent review, break clauses and service charges matter as much as headline rent.

Take your time. Visit the building. Ask questions. Instruct a commercial property solicitor and a surveyor. Understand the landlord’s approach and the building’s history.

Check the key issues before signing. Understand security of tenure. Limit repairing and insurance risks. Stress-test the rent review and break clause. Review service charges and hidden costs. Take advice that matches your business plan.

FAQs

What does it mean if a commercial lease is contracted out of the Landlord and Tenant Act 1954?
It means you have no automatic right to stay or request a new lease at the end of the term. You must leave if the landlord requires it.

How can I limit my repairing obligations in an FRI lease?
Request a schedule of condition, instruct a surveyor, and negotiate exclusions for structural or historic defects.

Why are break clauses so important for tenants?
They allow early exit and flexibility. A well-drafted break clause can save a business during periods of financial pressure or during expansion.

What should I check before agreeing to a rent review clause?
Review how rent will be calculated, whether it is upward-only, and whether the mechanism aligns with market conditions.

How can I avoid unexpected service charges and hidden costs?
Ask for past service charge accounts, seek caps or limits and clarify insurance cover and landlord’s professional fee provisions.

If you have any questions regarding this article, please call our office today on 02476 231000 or email enquiries@askewslegal.co