What is a Commercial Lease?

The Commercial Lease

A lease in which the Lessee (or Tenant) has entered into the lease transaction with the Lessor (or Landlord) for business or commercial purposes. This is called a business or commercial lease.

A lease is a legally binding agreement between the Lessee(s) and the Lessor(s). It usually contains all the terms that the lease will be subject to. It usually dictates the specified period (the ‘term’) of the lease, the rent payable, and it lists the rights and obligations of the Lessee and the Lessor.

Drafting a good and sound Lease is very important to prevent possible future disputes.

Lease are recognised by law and are the only way an agreement can be enforced without referring to the Court (though there are certain specific procedures that still require application to the Court).

It is always advisable that you have the Lease explained to you by an independent solicitor before signing the Lease. There are often other documents related to the Lease, which also need careful consideration before signing.

The Commercial Sub Lease (or ‘Under Lease’)

Most leases of commercial buildings give the tenant the right to sell the lease (see page on The Assignment of a Commercial Lease) and some will permit subletting.

Subletting means that the tenant grants a new lease out of the tenants lease. If this is done then the tenants lease (from the freeholder) is generally referred to as the ‘Head Lease’ and the lease granted out of that is called the ‘Sub Lease’ or ‘Under Lease’.

A Sub Lease cannot be granted for a term that exceeds the term of the Head Lease. Subject to this point, whether or not a sub lease can be granted depends on the Head Lease terms – if the Head Lease is silent on the point then there is no restriction on the grant of a Sub Lease. More often though the Head Lease will permit a Sub Lease to be granted subject to it complying with certain conditions laid out – and subject to the landlords consent.

Usually the easiest way of granting a Sub Lease will be to grant a lease by reference to the Head Lease – i.e. a lease in which you set out the rent and term but otherwise import into it all the same terms as are in the Head Lease. This should pass on to the sub tenant all the responsibilities of the tenant – though of course it does not relieve the tenant of those liabilities to the landlord – a direct contract remains between the Head Landlord and the Head Tenant.

In the grant of a Sub Lease there are generally two documents required:

  1. the Sub Lease itself and
  2. the Licence to Sublet – this is granted by the landlord

The same conditions regarding registration requirements and SDLT apply to a Sub Lease as they do to a Lease – see http://www.hmrc.gov.uk/so/sdlt/index.htm#1

As in the situation of a Lease, if further security is required against performance of the sub tenants obligations then the tenant may wish to consider taking a rent deposit.

Beware – leases are substantial and often complex documents. You must be aware that some Head Leases will set out various requirements that have to be observed in the way in which the Sub Lease is to be drafted. I recommended that you consult one of our specialist Solicitors, who can give you clear and thorough advice on the best way to deal with the assignment and registration of the Sub Lease with the Land Registry for you.

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