Leasing an office: how do commercial leases work?

Thinking about leasing an office? Broadly speaking, there are three main options open to businesses looking for office space: renting premises such as serviced offices is a flexible, shorter-term solution; buying an office is the more long-term route, and a commercial lease sits in the middle of these two.

This guide explains everything you need to know about leasing as a business tenant. Join us as we explore the key areas that customers ask us about, including how commercial leases work, the different types, what a commercial landlord is responsible for, the costs, the renewal process, and break clauses and terminations.

What is a commercial lease?

A commercial lease is a legal agreement that enables a business tenant to make use of a landlord’s property for commercial purposes in exchange for a monthly fee. The lessor (or landlord) and lessee (or tenant) will agree on the amount of rent to be paid, the terms, and a set period for the lease – usually around three to seven years.

Different types of commercial lease

There are seven different types of commercial lease for business tenants in the UK:

• Percentage lease – this type of lease applies only to retail properties and is most often used for stores in shopping centres. The tenant pays a base level of rent to the landlord (often based on square footage), then pays a percentage of profits on top of this. Usually, the percentage is decided by factors like location and footfall.
• Full service lease – with a full service lease, the commercial landlord will take care of all of the property management costs up to a certain amount (known as the ‘expense stop’) above which the tenant pays the excess. Sometimes referred to as a gross lease, the rent for this type of lease is usually more expensive than others due to the potential for additional costs on the part of the landlord.
• Modified gross lease – modified gross leases require the business tenant to pay a certain percentage of the property management costs in addition to rent. Normally, the landlord will take care of these costs for the first year of the lease.
• Single net lease – the main expenses involved in property management are maintenance, taxes, and insurance. With a single net lease, the tenant agrees to pay for one of these three costs as well as the rent.
• Double net lease – in addition to rent, a double net lease requires the tenant to pay for two of the three property management costs (normally property tax and insurance). The landlord then takes care of the maintenance costs such as ensuring the building is in a good condition.
• Triple net lease – as suggested by the name, a triple net lease requires the tenant to pay rent and cover the costs of all three operating costs (property tax, insurance, and maintenance). The rent will typically be lower than other forms of lease to reflect this.
• Absolute lease – with an absolute lease, the business tenant is responsible for paying all of the costs associated with the premises. As well as tax, insurance, and maintenance, the tenant will have to pay for things like emergency repairs and structural work, so the rent for absolute leases is usually the lowest of all the types.

Flexible term solutions with BizSpace

Traditional leases tie the customer down to a fixed long-term contract. The pandemic has shown that this can be problematic, with many businesses forced to continue paying for office space that they couldn’t use during the various UK lockdowns. Whilst a conventional commercial office lease won’t allow you to get out of your contract due to a situation like this, there are alternatives.

BizSpace offers flexible term solutions, allowing for the ultimate flexibility and ensuring that your business doesn’t get trapped into paying for office space it can’t use. Similar to a lease in every way except for the length of the term, our flexible term agreements work on three, six, or nine-month rolling contracts. If circumstances change, you can add to your office space, give some back, or get out of the contract altogether when it comes up for renewal.

Sound like this could work for your business? Get in touch today using the enquire button at the top of this page or find your new premises online using our office search tool.

How do commercial office leases work?

Now that you understand the different types of lease available, it’s time to take a closer look at how commercial leases work and the process involved with leasing an office.

Commercial lease agreements

Before the start of a business lease, you will sign a commercial lease agreement. This is a legally binding contract that includes:

• The rent, maintenance costs, and service charges to be paid.
• An outline of the responsibilities for paying utilities, tax, and insurance.
• The start and expiry dates of the lease.
• Any bank guarantees and security deposits that will be required.
• The covenants (or agreements) that apply to the commercial tenant and landlord.
• Legal rights reserved and granted.
• Any restrictions on development and planning.
• The signatures of the lessor and lessee, agreeing to the provisions of the lease (this part is known as the attestation clause).

What is a commercial landlord responsible for?

A commercial landlord is responsible for ensuring that the premises are safe to use and in good working order at the beginning of the lease. They must ensure that all of the fixtures and fittings owned by them are installed safely and maintained properly (anything that is installed by the business tenant is their responsibility). The landlord also oversees the upkeep of communal areas. 

Beyond this, the responsibilities of a commercial landlord vary depending on the terms of the agreement and the type of lease. These range from a full service lease (or gross lease) – where the landlord will take care of every aspect of the property management – to an absolute lease, which requires the business tenant to pay for all of the costs associated with the property.

When leasing an office, the terms of the lease will state clearly whether the landlord or tenant is responsible for:

• Health and safety arrangements (including fire safety).
• Utility bills, taxes, and insurance.
• Maintenance of the property.

Before signing a commercial lease agreement, you should make sure that you’re completely clear about the type of lease you’re agreeing to and the responsibilities that this entails for you and the landlord.

What happens when a commercial lease expires?

Technically, a commercial lease doesn’t end on the expiry date – you should have the option to renew the lease or terminate it. Business tenants are afforded this freedom to choose by something known as security of tenure, which gives you the right to carry on leasing an office once your term ends by extending the lease.

Security of tenure was introduced as part of The Landlord and Tenant Act 1954. Most commercial leases give the business tenant this right unless they initially agreed with the lessor to contract “out of the Act” (meaning they forfeit their right to security of tenure).

The commercial lease renewal process

6-12 months before your commercial lease’s expiry date, the lessor should provide you with a Section 25 Notice (S25) stating if they would like to renew the lease or not. Try to respond in good time so that you can iron out the details of the new lease ahead of the start date.

Should you wish to renew the lease, you then send the landlord a renewal notice (known as a Section 26 Notice or S26). Be sure to include the following key details:

• Agreement of the fees to be paid.
• The desired duration of the new lease.
• Any changes to the terms of the lease that you would like to make.

Terminating a commercial lease

Alternatively, if you want to terminate a commercial lease, you should send the lessor a Section 27 Notice (S27) at least three months before the expiry date. This simply states that you no longer want to continue the tenancy after your lease term is ended.

Can a commercial landlord refuse to renew?

If the tenant has security of tenure, a commercial landlord can only refuse to renew a lease in the following situations:

• The tenant has broken the terms of the existing lease (this could include things like paying rent late on a regular basis or allowing the premises to fall into disrepair).
• The lessor wants to demolish, rebuild, or occupy the premises themselves.
• Part of the building is occupied by another tenant and the landlord would like to rent it as a whole.
• The landlord makes an offer to provide other premises that meet the tenant’s needs.

What is a break clause in a commercial lease?

A break clause in a commercial lease allows a business tenant or landlord to end the lease before its expiry date. The terms of a break clause will establish when the lease can be ended (often only after a specified period of time or on certain dates). Equally, it will outline certain pre-conditions that must be met, which could include:

• The tenant must have paid all of the rent and other payments due as part of the lease up to that point.
• All of the agreed requirements of the lease (the covenants) must have been met.
• The tenant must remove any fixtures and fittings they have added and return the premises to the landlord in a good condition.

What is an alienation clause?

An alienation clause in a commercial lease states whether the tenant is allowed to assign, sublet, or share the premises with another business. Let’s take a closer look at each of these possibilities in turn.

To ‘assign’ a commercial lease is to sell the remainder of the term to another business, who will take over the lease from the existing tenant and move in to the property. In situations where the alienation clause in your lease terms allows for assignment, you must still seek the consent of the landlord. If they agree, they will grant you a Licence to Assign.

Subletting allows a business tenant to sublease all or part of the property to another tenant. As with the assignment process, the landlord must agree to the sublease and can set certain conditions – for example, they may require the sub-tenant to provide their own guarantor. Additionally, a sublease must be for a shorter term than the main lease (usually by a few days), leaving the original tenant as the only business in the property at the end of the term.

Finally, an alienation clause may allow you to share the premises with another company in the same group of companies (i.e. a subsidiary or parent company). This situation is very rare and will require there to be no new landlord and tenant relationship created by the premises being shared.

Belvedere House, BizSpace Basingstoke

How much does a commercial office lease cost?

All commercial leases require the business tenant to pay Stamp Duty Land Tax and rent. Depending on the type of lease and the terms that have been agreed, the lessee’s other outgoings could include:

• Service charges (including common area maintenance or CAM charges).
• Maintenance costs.
• Utilities costs.
• Insurance.
• Property tax.

With an absolute lease, the tenant will cover all of these costs. By contrast, you will only have to pay for the rent and Stamp Duty if you opt for a full service lease.

Rent on commercial office leases

The average rent on commercial office leases varies significantly from city to city. Statista’s report on the rental cost of prime office space in the UK provides the following figures for the fourth quarter of 2020:

• London West End – £102.40 per square foot per month
• London City – £65 per square foot per month
• East London – £40 per square foot per month
• Bristol – £38 per square foot per month
• Manchester – £37.50 per square foot per month
• Birmingham – £37 per square foot per month
• Edinburgh – £36 per square foot per month
• Glasgow – £34.50 per square foot per month
• Leeds – £34 per square foot per month
• Newcastle – £26 per square foot per month
• Cardiff – £25 per square foot per month

BizSpace offers competitive prices on commercial office leases throughout the UK – try our office search tool to find your new premises today.

This guide has explained all of the key information about the different types of commercial leases in the UK, how they work, and the costs involved. If you need any further information, don’t hesitate to contact us.

BizSpace is a leading supplier of flexible office space and commercial office leases. If your company is looking for new premises, get in touch via the enquire button at the top of this page. You can also call us on 0800 975 0875 or use our office search tool to find your new space.