Commercial Leases: What Every SME Should Know

Finding the perfect commercial premises for your small or medium-sized enterprise (SME) is exciting. You've spotted that ideal shop, office, or warehouse that could take your business to the next level. But before you get swept away by visions of success, there's a crucial reality check needed: commercial leases are nothing like the residential tenancy agreements you might be familiar with.

Unlike consumer protection laws that grant ordinary customers second chances and cancellation rights, commercial tenants get no such safety net. The law assumes you're a savvy business person who knows exactly what you're doing - even if this is your first rodeo.

The hard truth about commercial leases

A commercial lease is a complex legal document detailing rent reviews, repairs, surveying requirements, and customary practices; however, it too often starts with the landlord being in the driving seat.

This doesn't mean landlords are necessarily out to get you, nor that they're unreasonable. Many landlords want long-term, successful tenants who'll take care of their property. But the relationship between property owner and tenant is fundamentally commercial: two business parties treated as equals under the law.

Why commercial leases are different

Most commercial properties are let on what's called a "full insuring and repairing" basis. This phrase, beloved by solicitors and surveyors, essentially means that once you've got the keys, everything becomes your responsibility from day one. Maintenance, decoration, insurance, repairs, rates - the lot falls squarely on your shoulders.

Plus, unlike residential tenants who may have some flexibility, commercial leases typically offer no unilateral right to cancel. If you sign a 5, 10, or 15-year lease, you're committed for the duration unless you've specifically negotiated break clauses. You are obligated to pay rent and maintain the building throughout the entire term, regardless of how your business performs. There is no easy exit strategy.

You also have limited rights to make changes, so if you want to give your shop a makeover or reconfigure your office layout, you'll need the landlord’s permission first. This might involve producing detailed plans, technical drawings, samples, and reports. But - here's the kicker - permission can be refused entirely.

Key considerations before you sign

Firstly, get a professional survey. This is vital, as you need to know exactly what condition the property is in before you commit. Why? Because of something called "good tenantable order." This means that regardless of the state you found the premises in, you must hand them back in tip-top condition when your lease ends. Take on a tired, decrepit building, and you're still obligated to return it in pristine condition.

A pre-lease survey can identify issues that you might negotiate rent reductions for, or secure agreements limiting your repair responsibilities to specific defects only. Skip this step, and you'll have no bargaining power later.

Longer leases typically include rent review clauses allowing landlords to increase rent according to specific formulas. This might be linked to the retail price index, consumer price index, or open market values of similar properties. Factor these potential increases into your long-term financial planning.

Beyond rent, additional costs you'll likely face include:

Land and Buildings Transaction Tax (LBTT) in Scotland - payable within 30 days, or you'll incur penalties
Insurance premiums
Maintenance and repair costs
Business rates
Legal and surveying fees

Furthermore, understand the restrictions; you can't even put up a simple trade sign without landlord approval. The lease rules cover everything about your occupancy, so read them carefully and make sure you understand them.

The negotiation game

Here's where many SMEs go wrong. By the time you're instructing a solicitor, you're usually set on the premises. Perhaps you want to get in ahead of the competition, or you're desperate not to miss out on what seems like the perfect opportunity. However, this emotional investment can lead to accepting unfavourable terms just to secure the keys.

Don't fall into this trap. According to the Royal Institution of Chartered Surveyors, demand for commercial property is up, which means landlords have options. But that doesn't mean you should accept their first offer.

What you can negotiate:

Rent-free periods to offset initial setup costs
Break clauses allowing early termination
Caps on repair responsibilities
Contribution towards initial improvements
Rent review mechanisms
Assignment and subletting rights

Due diligence essentials

Before signing anything, have a commercial property solicitor review every clause. You should also ensure you can afford rent and associated costs for the full term, as well as have the property surveyed so you understand exactly what you're taking on. Finally, do some market research to check if the rent is competitive for similar properties, and consider how the space will work if your business grows or changes.

Getting professional help

While it might be tempting to handle negotiations yourself to save money, this is rarely wise. Commercial property law is complex, and landlords typically have experienced legal teams. You need someone in your corner who understands the intricacies of lease agreements and can spot potential pitfalls.

A good commercial property solicitor will:

Explain all terms in plain English
Identify problematic clauses
Negotiate better terms where possible
Ensure you understand your long-term commitments
Help you avoid costly mistakes

The bottom line

Commercial leases are serious long-term commitments that can make or break your business. The old legal principle "caveat emptor" - let the buyer beware - applies in full. You won't get statutory protections, second chances, or the benefit of the doubt if things go wrong.

But with proper preparation, professional advice, and thorough due diligence, you can secure a lease that supports your business growth rather than constraining it. Take time, ask questions, negotiate hard, and never sign in haste.

Remember, a commercial lease creates a long-term relationship between you and your landlord. Starting from a position of mutual understanding and fair terms benefits everyone involved. Any time and money spent on proper legal advice upfront is a wise investment, especially when compared to the potential costs of getting it wrong.

About the author

John Roberts is a Partner and Director at Austin Lafferty Solicitors. John has been with the firm for over 20 years, with experience in all areas of business law.