Top 10 things for Landlords to consider before letting a commercial property

1. MEES and EPC

Where a commercial property is let, landlords must ensure the property meets current MEES (minimum energy efficiency standards) and EPC (energy performance certificate) requirements. Currently, a commercial property must have a valid EPC certificate (valid for 10 years) with a minimum rating of E (unless the property meets the exemption requirements). There are current proposals to increase the required ratings to C in 2027 and B in 2030.

2. Length of the Lease

Lease lengths can vary depending on the type of property being let and individual tenant requirements. Shorter terms can create more flexibility for tenants; however, longer terms provide landlords with more financial security and stability. Whatever term length is agreed by the parties, it is important to consider the points below regarding rent reviews, security of tenure and break clauses.

3. Rent

Depending on the type of property being let, there are different types of rent options to consider:

• Fixed Rent: the most common type of rent included within leases, especially for offices or warehouses.  Depending on the length of the lease, fixed rents can be reviewed during the course of the term (see point 5 below).
• Turnover Rent: This is becoming popular for retail and hospitality leases.  The annual rent is generally lower than market value, with an additional top-up payment based on a percentage of the tenant’s gross turnover.

4. Rent Deposit

A rent deposit can provide a landlord with added financial protection for their property. The deposit is agreed by a deed which is valid for the term of the lease, and the deposit required from the tenant is typically six months’ rent (but can be between 3-12 months). During the term of the lease, landlords can request that the deposit be ‘topped up’ (e.g. to incorporate the new rent following a rent review) by the tenant.

5. Rent Review

Depending on the length of the lease, there are a couple of different options to consider for any rent review:

• Open Market: the most common type of review, where a surveyor assesses the amount the property could be let for on the open market.
• Inflation Linked: these reviews are commonly increased by RPI, and the lease includes a calculation for any increase.
• Stepped/Fixed Increases: more common in leases with shorter terms and very easy to implement.  The rent increases/amounts are agreed before completion and included within the lease.

6. Repairs and Schedule of Condition

It is important that a lease clearly sets out both the landlord’s and the tenant’s repairing obligations. It is more common for leases to be full repairing and insuring (or FRI) where the tenant has responsibility for all maintenance, repairs and insurance costs. Where a tenant has an FRI lease, it will likely include a schedule of condition to capture the condition of the property at the time of letting and limit any repairs to those shown on the schedule of condition. Where a lease is for an office in a larger building or a retail unit, landlords might prefer being responsible for structural repairs, where costs can be reclaimed through the service charges.

7. Service Charge

If there are communal areas, a wider estate the tenant accesses, or services provided to a tenant (e.g. concierge/security), then landlords will want to include service charges in the lease. Consideration should be taken on how these will be charged:

• In advance: meaning their proportion of the charges is estimated at the beginning of the financial year, then reconciled at the end with any shortfall charged and any surplus returned; or
• In arrears: meaning tenants are billed their proportion for all charges incurred in a 12-month period.

8. Security of Tenure

Ever heard a solicitor ask, ‘Is the lease contracted in or out? This is because under the Landlord and Tenant 1954 Act, tenants will have security of tenure unless it is ‘contracted out’. Where a lease is contracted out, a tenant has no statutory right to renewal, and they will need to negotiate a new lease with the landlord at the end of the term. When a tenant has security of tenure under the 1954 Act, they will have the right to renew unless the landlord wishes to oppose on statutory grounds.

9. Break Clauses

Including a landlord/tenant or mutual break right provides flexibility for the parties to terminate the lease ahead of the end of the contractual term. There are many options for break rights, including:

• Landlord/tenant or mutual breaks: meaning a break right can solely be for the tenant, the landlord or mutual (both parties can terminate the lease).
• A rolling break: meaning the lease can be terminated at any time on a set notice period (e.g. 6 months)
• Have set break date(s) where the break can be exercised on specific dates that are specified in the lease.

It is important to remember that for a break right to be validly exercised, notices must be served correctly, and all break conditions must be met, so seek legal advice well before any break date.

10. Get Legal Advice

The final and most important step is to get legal advice when negotiating a lease. See my colleague Harry Rudolf’s article about the pitfalls of do-it-yourself leases here! If you need any advice on your commercial letting, get in touch with the Greenwoods Real Estate team to help.