Commercial tenancy agreements and the law

A tenancy agreement is an essential document that aims to protect both parties’ interests. Before you even look for a tenant (if you’re a landlord), or a property to rent (if you’re a tenant), you should seek legal advice to ensure it does exactly that.

What is a commercial tenancy agreement?

A commercial tenancy agreement is a contract that aims to protect the interests of the landlord and tenant. It allows the tenant to run their business in a commercial property on the condition that they pay rent and follow the rules.

A tenancy agreement should set out the legal terms and conditions of the tenancy, and can be either a spoken or written agreement.

What should be included in a tenancy agreement?

Written tenancy agreements should include:

  • Name of the landlord
  • Name of tenant (or company name if appropriate)
  • Address of the rental property
  • Date the agreement begins
  • Term of the tenancy (how long it will last)
  • Responsibilities of the tenant
  • Terms of rental increase
  • Rent amount and due date (usually monthly or quarterly)
  • Services provided (such as maintenance and repairs)
  • Any service charges
  • Length of notice to quit (statutory rules may apply depending on the type of agreement)
  • Forfeiture clause (this is a rule under which the landlord can end the tenancy)

What are the laws governing tenancy agreements?

There are many statute laws regulating leases. The most important ones for commercial property are the Landlord and Tenant Act 1954 and Agricultural Tenancies Act 1995 (for agricultural businesses).

The effect of these laws is to reduce the power that a landlord has over the tenant by increasing the tenant's rights.

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What are the lengths of commercial tenancy agreements?

Most commercial leases have fixed terms that vary from as little as six months to as long as 125 years. The landlord and tenant will usually negotiate the length of the fixed term between them, before creating the tenancy agreement.

A lease with a fixed term of more than 30 years is known generally as a ‘ground lease’.

In the case of a business tenancy a short term agreement is usually of more benefit to the tenant than to the landlord. After all, the process of finding tenants costs money, both in the sense of the search itself and in the associated legal fees.

Landlords largely prefer longer term leases as they reduce the possibility of the property being left vacant and reducing cash flow.

Property investors give greater valuations to properties let on long term leases because they perceive the risk of the tenant leaving to be lower.

Tenants may prefer short term tenancy agreements because they give them the flexibility to move elsewhere if their circumstances change - for example if their business starts to outgrow the space.

Can the tenant sell their interest in the lease?

This depends. It is common for the landlord to include express terms in the tenancy agreement which restrict the ways in which their tenants can deal with the lease. Often a tenant will not be able to sell (also known as ‘assign’), sub-let, grant security over the lease, or share occupation without the landlord’s consent.

Can the landlord negotiate an existing lease?

If as a landlord, you acquire an existing lease, you should know that its terms are not usually negotiable. However, we would advise that you review the lease terms with care as they may have an adverse effect on the value of a property if found to be too restrictive.

I want legal advice about drawing up a tenancy agreement

You are right to seek legal advice as commercial tenancy agreements are complex. We can assign experts with a wealth of experience in dealing with situations just like yours. Contact us for a free review of your requirements.

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