A beneficial minimum term for your business depends largely on how established your business is, but there’s also a host of other factors that feed into your decision to go for a short (say one year) or longer (five years or more) contract. 

Aspects like break clauses, maintenance costs and scheduled rent increases all feed into the final calculation, and there are legal factors that can protect you in certain situations.

In this comprehensive article, we break down the most important factors to help you land a commercial property deal with a minimum term that suits your current and future situations.

The aspects of lease terms to be aware of in the UK

There’s no legal minimum or maximum term length for commercial property leases in the UK. It’s all determined by a number of aspects, which are broadly driven by competition and precedent in the industry. 

When you’re deciding on your minimum term, we’d say that the main aspects to be aware of are as follows:

1. Average lease length

The word “commercial” covers a number of uses, such as industrial, retail, office, distribution, artisanal, hospitality and others. You’ll find that each sector has its own norms and expectations when it comes to lease lengths.

At the shorter end of the spectrum are small retail, workshop and office properties. Start-ups and small businesses need to minimise cash flow risk as a matter of survival, so don’t want to tie themselves down to decade-long contracts when they know their business could well fold – or even expand – in twelve months. 

It’s therefore possible to find very short pop-up leases of around one year for properties aimed at businesses of this nature. However, the average is probably about 3–5 years in practice.

Larger industrial and retail properties tend to require longer minimum leases, which can be 10 or even 15 years in length. It makes sense for both parties. Large businesses are by their nature established and more stable, so they are more able to commit to longer timeframes, often for a better deal. 

From the landlord’s perspective, larger properties might be harder to lease, so some assurance is required. 

There’s also usually a lot of work, such as installing machinery or specialised equipment, that means the property will be commercially inoperable for weeks or months while it’s being installed and removed. That alone rules out very short contracts.

2. Break clauses

Break clauses are written into leasehold contracts, and allow tenants to vacate the property before the end of the full duration without penalty. They tend to be included in contracts of five years or longer, but they’re common and expected in most industries. 

Typically, the break points would come at, say, three years of a five-year contract, or five years of a decade-long agreement.

Tenants like break clauses because they allow them to expand if their business’s success exceeds their expectations, or indeed to downsize if things don’t go as well as planned. It’s not necessarily a bad thing for landlords, however. Those who offer favourable terms might well end up owning the property the tenants move to, so there are commercial reasons to be reasonable and helpful.

3. Rent increases

Inflation is part of life, so it obviously needs to be incorporated into rents too. However, if an area becomes developed, a once-cheap property might become rather desirable, and able to command higher rental prices.

For this reason, a good commercial lease contract will include a policy for changing rent in a predictable way. The policy will determine how often changes happen, and will determine maximum percentages, or perhaps a rationale for how much the price will increase. 

For example, it could say a simple 3% increase per year, but it might also say that the price increases in line with the RPI or CPI, just as a tracker mortgage changes with the Bank of England Base Rate. Increases might also be justified by changes in the average rental prices in the locality, which should be openly available information.

4. Liability for repairs

Any building needs repairs and maintenance, but in commercial contracts, it’s not always the obvious party (i.e. the owner) who is responsible. In fact, it’s common practice for tenants to be responsible for the upkeep and insurance of the property for as long as they occupy it. The idea is that by the end of their contract, the next tenant can move straight in.

Although it might seem a little unfair at first for the tenant to pay for repairs, it’s worth considering that if the tenant wasn’t paying for them directly, the costs would simply be absorbed into the rent. Paying for repairs and maintenance might actually incentivise tenants to look after the building and fix issues more quickly, saving them money in the long term compared to a higher fixed cost or emergency charges.

When a building is shared with other tenants, the agreement will usually be for their own space (within specifically determined boundaries) to be maintained by the tenant, with structural and shared parts being the responsibility of the landlord, or covered by a service charge.

In some cases, the tenant will have no responsibilities at all for cleaning, decorating, maintenance or structural repairs. Where a particular tenant sits on the sliding scale is a critical part of the contract or negotiations, so it’s important that you assess the condition of the building and your responsibilities before signing the contract.

5. Legal implications

Commercial property lawyers exist for a reason. With long-term contacts in particular, the legal minutiae can need some pretty specialist knowledge. For example, under the Land Registration Act 2002, any lease granted for a term exceeding seven years must usually be registered with HM Land Registry, and that has costs of its own attached. It’s also possible that Stamp Duty Land Tax will be payable in some circumstances.

Tenants can do a lot worse than familiarising themselves with the Landlord and Tenant Act 1954, which covers the legal responsibilities of landlords. 

An important rule is the part about business tenants having the statutory right to renew their contract when it ends, unless the contract is for six months or less, or unless something different is stipulated in the lease contract. 

6. Insurance

We touched on insurance above, but it’s an important aspect that needs to be fully covered and understood in the contract. Businesses will no doubt have their own public liability insurance, and their equipment and other critical elements will be insured. But what about the building they occupy?

As with repairs, insurance for the building can be covered wholly by the landlord or completely by the tenant, or somewhere in between. 

As with all aspects in this article, it’s something that you’ll need to pay special attention to in the contract, but it’s also something that might be up for negotiation. It’s possible that insurance could be reviewed annually, and you could pay less as trust is built, in a similar way to how no-claims bonuses work with motor insurance. 

Understanding the best lease term for your requirements 

The most important thing to know is that “best” doesn’t necessarily mean “cheapest” with lease terms. It all comes down to matching the lease term with your own requirements and business projections. Here are some questions you should ask yourself to help you to arrive at a term that is optimal to your future plans.

How established is my business?

Any start-up is by its nature a risky project, however solid your business plan is. Cash flow can be tight or negative as you get established and win new customers, and costs of setting up, like buying equipment and marketing yourself, represent a serious headwind. However, once you reach a certain point, those startup costs and risks should ease. 

In this phase, getting bedded in, with stability and predictability, becomes more important. All this should be reflected in your lease term. A short term suits start-ups, especially if there’s a good break clause. But once you’re properly established, you can probably negotiate a longer term with lower costs.

What is my business’s growth trajectory in the medium term?

Growth can happen quickly, and you might need to get out of your start-up property for all the right reasons. Does your contract allow you to move on or expand if this happens? 

What are my realistic budgets?

Balancing your costs is a critical element of cash flow, and never more so than at the birth of a company. 

Your ongoing monthly budgets will determine the kind of property you can afford, so there’s a balance to be struck between cheaper monthly costs for a longer contract and more expensive costs for a tenancy with a shorter commitment.

Am I tied to a location?

Retail and hospitality in particular benefit from being in the same place for a long time. As well as footfall, there’s also public transport or parking to consider, and simply the fact that customers know where to find you. If a location is critical to your perceived success, it might justify taking on a longer lease agreement. 

The same applies to other sectors, too, such as proximity to motorways for a logistics firm. A short-term contract isn’t always the best option.

Conclusion 

As we’ve covered above, there’s no right or wrong term length, but there are a lot of factors that feed into your final decision. 

It’s important that you don’t let the excitement of launching a business make you take on too much risk, but it’s also worth reviewing your lease term when you’re fully established, as you might be able to negotiate a better deal, even without having to relocate. 

If you’re in the South East and you’re looking for a commercial property, talk to our team at Sorbon Estates. 

We’ll be able to come up with a great deal, whatever stage your business is at.