Business premises: Lease length, break clauses and rent reviews
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Posted: Tue 7th Nov 2023
When you're looking for business premises, you might want to simply sign on the dotted line and get a contract in place. But contracts often take longer to sort out than expected and it's important to think ahead before you agree a lease.
In any business, things change. For example, you might find that you need to look for alternative or bigger premises sooner than you thought. In these cases, make sure you and your advisers look closely at the lease length, break clauses and rent review in your lease.
Lease length
In any lease you sign, you should clearly understand the following:
The length of the lease (also called the "lease term"). Leases can be of any length up to 999 years, but three years is the most common.
Some leases don't have a fixed term but are periodic. The period is usually six months but might be monthly, quarterly or yearly. Periodic leases continue until either the landlord or tenant takes action to end them.
Whether there are any rights to break the lease.
Whether you're entitled to an extension of the lease (usually called a "lease renewal" or "new lease") when it ends.
Some leases are protected by a law called the Landlord and Tenant Act 1954, Part II. Leases protected by that law are called leases "inside the Act", "protected leases", "renewable leases" or leases with "security of tenure".
You should find out whether your lease is one of these. If it is, you're probably entitled to a lease renewal.
If you have a protected lease, you may be entitled to compensation if you have to give it up. This area of law is complicated, so seeking specialist legal advice is recommended.
Top tips on lease length
Understand the difference between a renewable lease and a non-renewable lease.
Make sure that the length of the lease is appropriate for your business needs.
If you're signing a new lease, ask the landlord to offer you a break clause that only you (as the tenant) can exercise. That gives you the opportunity to cancel the lease at a time that suits your business.
Break clauses
A break clause is a section in the lease that allows you or your landlord (or both) the right to end the lease early – for example, on the third anniversary of the date it started.
If the lease has a break clause, you have to give notice in writing to use it (called "exercising the break"). Exercising the break clause ends (or "breaks") the lease. Landlords and tenants sometimes disagree about whether a break clause notice is legally binding.
Some break clauses have conditions that must be met – for example, you can't break the lease if you've missed a rent payment (or payments). Any liabilities due after the lease ends (such as dilapidations, or items of disrepair) are still due if the lease is ended early.
Top tips on break clauses
Any break clause you negotiate should allow you to walk away from the lease at a given time after informing the landlord in writing. As a tenant, ideally the break clause should have as few conditions for you as possible – preferably none.
Many landlords try to insist that you can use your break clause to end the lease only on certain conditions. For example, the lease might say that you can't break it unless you've:
paid the rent you owe
kept to all obligations for repairs
vacated the property and left behind no continuing subleases
Try to keep these break clause conditions to a minimum.
Make sure you know what the break conditions are and carry them out. Conditions could include removing all your belongings and handing over keys and security codes for alarm systems. If you don't, you may still be liable for the rent.
When agreeing your lease, see whether the lease says that the landlord must pay you back any "overpaid" rent.
For example, you might break your lease so that it ends on 1 April, but you have to pay three months' rent on 25 March up to 24 June. If the lease doesn't say the landlord must pay you back the rent for 2 April to 24 June, then legally the landlord can keep it.
Rent reviews
Rent review is another area of law that can be complicated. Most leases have a rent review clause where the rent is adjusted or reviewed after a set period of time. The lease sets out when and how this is done. The idea is that the landlord continues to be paid the "market rent" for the property.
The lease says how the new rent is decided and the legal process involved. Leases are different, but a typical rent review clause says the following:
Your landlord must serve you written notice (by letter) after a certain date saying what the new rent should be.
You must respond by a deadline – usually 28 days – by letter (not by email). If you respond in time, you and the landlord must try to agree a new rent. If you don't, you have to pay the landlord's new rent without negotiation.
If you and your landlord can't agree, a third party (called an arbitrator) is appointed to decide the new rent. The lease says who this is and how the arbitrator is chosen (see Who is the arbitrator? below).
Both you and the landlord have the opportunity to put your case to the third party or arbitrator.
The lease also sets out what factors should be assumed and what should be ignored in the rent review. Usually, the rent review assumes that the property is in good repair (even if it isn't). This favours the landlord.
But other considerations may favour you as tenant – for example, many rent review clauses will disregard improvements you've made to the property.
Who is the arbitrator?
An arbitrator is normally a surveyor from the Royal Institution of Chartered Surveyors (RICS) who's qualified to act as an arbitrator, or it might be the RICS's Small Business Scheme for Rent Reviews.
How does the arbitrator decide?
In most leases, the rent review contains phrases like "upwards only" – which means rent is calculated based on "open market rent". If the market rent has gone down, the rent you pay stays the same. Of course, you and the landlord may have different ideas about what the market rent – the going rate – is.
The arbitrator will hear both sides' arguments and decide what the new rent should be. To do so, they look at "comparable evidence", such as rents for similar properties. It's up to you or your advisers to get this evidence. Don't expect the landlord or the arbitrator to do it for you.
It can be challenging to find out what the going rate is. Ask local estate agents who know what the market is like. Rent review surveyors can get access to specialist databases and evidence. You can also speak to nearby tenants who have an interest in your business not paying over the odds. If you do pay a higher rate, that could be used against them at their next rent review.
A review of the rent also takes place when a lease is renewed under the Landlord and Tenant Act 1954. Those statutory rent reviews, unlike contractual rent reviews, can increase or reduce the amount of rent you pay. These reviews are more tenant-friendly, and if that option is open to you, it's worth considering.
Top tips: What to look out for in rent review clauses
When reading through your lease, make sure the rent review clause sets out the following:
When rent reviews take place: It's important to know when the rent reviews happen because they usually mean a rent increase, and you need to plan for that. It's just as important to look out for the landlord's rent review notice when it comes.
The method of review: You should receive a rent review as written notice (a letter) from your landlord or their agent, surveyor or solicitor. Keep your address up to date so you don't miss the landlord's rent review notice.
Assumptions and disregards made when valuing the premises for the rent review: Be aware of what the assumptions and disregards are and don't let the landlord charge you for anything that should be disregarded. If you've carried out improvements, make sure you can prove you were allowed to do them.
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Disclaimer: This information is meant as a starting point only. While we've made all reasonable efforts, we make no warranties that the information is accurate and up-to-date and we won't be responsible for any errors or omissions in the information or any consequences of any errors or omissions. You should seek professional advice where appropriate.