The heads of terms came through on one side of A4 and looked reasonable: ten years, break at five, £22,000 a year, three months rent free. The lease itself is forty-one pages and the solicitor's report is nine. Somewhere in there is the sentence that makes you responsible for a flat roof installed in 1974.
Commercial leases in England and Wales are not consumer contracts and there is very little statutory protection for you as a tenant. What you negotiate is what you get, and the time to negotiate is before the heads of terms are agreed, because after that everything is a renegotiation and you have already told the agent you want it.
Full repairing and insuring means everything
Most commercial leases in Britain are FRI: full repairing and insuring. The tenant is liable for all repairs and pays the cost of the landlord's insurance premium. There is no residual landlord obligation waiting in the background.
On a whole building this is absolute. Roof, structure, windows, drains, boundary walls. If the roof fails in year three you replace it, and the fact that it was thirty years old when you took it is your problem, not the landlord's.
On part of a building, such as a unit in a parade, you will usually have an internal repairing lease with a service charge through which the landlord recovers a share of the cost of the structure and common parts. That is better, but the service charge is uncapped unless you cap it. Ask for the last three years of service charge accounts and ask whether any major works are planned, because a re-roofing project spread across six tenants arrives as a demand, not a discussion.
The protection against inheriting somebody else's dilapidation is a schedule of condition: a photographic and written record of the state of the premises at the start, annexed to the lease, with the repairing covenant qualified so that you need not put the property into any better condition than that record shows. It costs a building surveyor's fee. It is the single best money you will spend on the transaction.
A break clause with conditions may not be a break clause
Break clauses are where tenants lose the most money, because a conditional break is very easy to fail.
Typical conditions include giving notice in a precise form by a precise date, usually six months in advance and strictly enforced; paying all rent due up to the break date; giving vacant possession; and, in badly drafted leases, having complied with all covenants in the lease, which is a condition almost nobody can satisfy because there is always some minor breach.
Courts have consistently held tenants to the strict wording. Serve a day late and the lease runs for another five years. Leave a few pieces of furniture behind and you may not have given vacant possession.
What to negotiate: notice of six months rather than nine or twelve; conditions limited to payment of the basic rent and giving up occupation, nothing about full compliance with covenants; and an express provision that rent paid in advance for the period after the break date is refunded, because absent that wording the case law does not give it to you.
Rent review is usually upward only
The standard British rent review is open market, every five years, and upward only. It cannot go down. Even if the market has fallen, the rent stays where it is or rises to the new open market level.
Upward only review has been criticised for decades and remains market practice. What you can sometimes get instead, particularly in a weak letting market or on a smaller unit, is a fixed uplift stated in the lease, which at least lets you budget, or index linkage to the Consumer Prices Index with a cap and collar, or a shorter term with no review at all.
Read the assumptions clause in the review provisions carefully. It typically tells the valuer to assume a hypothetical letting on the terms of your lease, for a stated term, with vacant possession, and to disregard any improvements you have paid for. If your improvements are not disregarded, you pay rent on your own fit-out for the rest of the term.
Dilapidations is the bill at the end
When the lease ends, the landlord serves a schedule of dilapidations setting out the breaches of your repairing, decorating and reinstatement covenants, with a costing. It frequently runs to tens of thousands and it frequently arrives at the worst possible moment, as you are paying to fit out somewhere else.
The claim is governed by the Dilapidations Protocol, and the landlord's damages are capped by section 18(1) of the Landlord and Tenant Act 1927 at the amount by which the value of the landlord's interest is diminished. If the building is about to be redeveloped, that diminution may be nil regardless of the schedule.
Two practical defences: the schedule of condition already mentioned, and a sinking fund of your own. Put something aside each year against the end-of-lease cost rather than meeting it from working capital in the month you move.
Also note reinstatement. If you carried out alterations under a licence for alterations, the licence almost certainly requires you to remove them at the end. That mezzanine, that air conditioning, those partitions all come out at your cost unless the landlord elects otherwise.
Security of tenure is a right you can be asked to give up
Part II of the Landlord and Tenant Act 1954 gives business tenants security of tenure: a right to remain after the contractual term ends and to be granted a new tenancy, unless the landlord can establish one of the statutory grounds of opposition.
This is valuable. A business with goodwill attached to its location does not want to be turned out at the end of five years and told to move.
Landlords routinely require tenants to contract out of sections 24 to 28. That is lawful, but only if the correct procedure under section 38A is followed: the landlord serves a prescribed warning notice, and you make a declaration. If you receive the notice at least fourteen days before you commit, a simple declaration suffices. If less than fourteen days, you must make a statutory declaration before an independent solicitor. Get the procedure wrong and the contracting out is ineffective, which is occasionally a pleasant surprise for a tenant and a disaster for a landlord.
Decide consciously. Contracting out is often the price of the deal and is acceptable for a business that could move. It is a serious concession for a shop whose customers are its street.
Finally, look at the Code for Leasing Business Premises, the RICS professional statement that sets out what is considered fair in lease negotiations. It is not law, but a landlord's agent who is an RICS member is expected to have regard to it, and citing it is a civilised way of asking for a term you are entitled to ask for.
Where this shows up in the game
Business Baron treats a lease as a commitment rather than a monthly cost. You choose the term, you live with the break clause you agreed, and the dilapidations bill turns up when you hand the keys back. Signing a ten-year full repairing lease on a building with an old roof is a decision the game lets you make and then remembers. The free game has no time limit, so you can find out how a lease behaves in year six without owning one.