How is commercial property defined in law?
What is defined as commercial property?
Differing from residential property, commercial property is defined as any property which is not used for domestic dwelling.
Commercial property includes:
- Coffee shops
- Hair salons
- Beauty salons
- Travel agencies
- Post offices
- Vehicle showrooms
You should always ensure that a property designated for commercial use has the correct planning permission for the nature of the business you intend to lease to. The Planning Portal specifies a list of use classes for commercial property in England and Wales.
If a tenant wishes to make any alterations to a commercial property – either structural or cosmetic – they will need your consent as the landlord to do so.
How does a commercial property lease work?
A commercial lease is a legally binding contract between the landlord and the commercial tenant which specifies a fixed term during which the tenant can occupy and trade from the commercial premises.
The length of a lease will vary and they can run for up to 25 years. Commercial leases are more flexible than they have been historically, with optional break clauses (which must be negotiated as part of the commercial lease) now giving the option for both the tenant and landlord to serve notice during the term of the tenancy without facing a penalty charge.
If applicable, a break clause will be defined in the lease. The clause will usually specify a period of six months’ notice of a date defined in the lease.
Once you have received an offer from a prospective commercial tenant, you can negotiate the terms of the commercial lease agreement. A document will be drafted which contains the key terms of the lease agreement, known as heads of terms.
- The type of the commercial rental agreement
- A brief description of the deal
- The rental value
- Payment agreements
- Proposed completion timescale
This document is not legally binding.
A prospective tenant is likely to want to see the findings from a building survey prior to signing a lease in order to be aware of the condition of the building, plus any likely repair and maintenance costs.
Local searches will identify if there are any plans that may impact the commercial property and the wider area, plus any flood risks.
A Schedule of Condition report detailing the exact condition of the property, alongside photographs, should be attached to the tenancy agreement.
What is included in a commercial lease?
When you negotiate a commercial lease, a number of factors need to be agreed as part of a standard approach to commercial property management. A commercial lease typically specifies:
- The type of commercial property being let
- The address of the property
- The term of the tenancy
- Whether the tenancy is a fixed term or periodically renews
- The length of the lease
- Any break clauses
- Lease renewal provisions (if applicable)
- The rental amount
- When the rent is due
- Any rent free periods
- When and how a rent review will be calculated
- The nature of business that may be conducted on the premises
- Service and maintenance charges and what they include
- Who is responsible for any maintenance or improvements
- The required deposit
- Whether the tenant can sublet the property
- Termination notice
- Insurance provisions
A commercial property lease also states the rights and responsibilities of both the tenant and landlord for the duration of the term.
Leases often include rent reviews every three, four or five years. Rent can go up as well as down, depending on the terms of the commercial lease. If the rental figure does not increase after a review, it will remain the same.
What is a Commercial Property Licence Agreement?
A commercial property licence is typical if the property is only set to be occupied for a short time – for example a pop up bar, restaurant or shop. Licences also apply to commercial property that has been split into units, such as warehouses and industrial buildings. Licences typically last for a maximum of 6 months.
The tenant has to pay a licence fee, which may be paid weekly or monthly in advance. A commercial licence has fewer terms and conditions than a traditional lease, but the tenant has no right to renew the licence once it has expired.
How do you calculate monthly rent on a commercial property?
The rent tenants pay on their commercial premises is likely to be one of the highest costs they will encounter.
Typically commercial rent is paid quarterly, on old English quarter days:
- 25th March
- 24th June
- 29th September
- 25th December
However, monthly commercial rental payments are now becoming more frequent and are an option if you wish. The option to make monthly payments is subject to negotiation and the terms of the commercial lease.
Alongside commercial rent, tenants are also liable to pay any specified service charges for maintenance, repairs and redecoration and – if you as the landlord are liable for it – the necessary insurance.
For further advice on all aspects of commercial property management get in touch and our expert team will be happy to help you.