Residential property investors are increasingly adding commercial properties to their portfolios. But commercial leases are a very different beast to the assured shorthold tenancies (AST) most residential property investors will be familiar with.
Residential property investors will be familiar with ASTs with the term limits and the responsibilities and obligations they put on both the landlord and the tenant. Commercial leases typically contain a greater number of obligations on the part of the tenant but at the same time allow the tenant more freedom.
Unlike a residential AST, a commercial lease term is not limited to a maximum term. Whilst the good old days of securing a tenant for 25 years are now rare, a typical commercial lease term is five to ten years. Rents are often paid quarterly in advance although tenants, particularly retail tenants, often seek to pay the rent monthly.
Full repairing and insuring (FRI) leases
Ideally, a tenant of a commercial property will accept a full repairing and insuring lease, often referred to as an FRI lease, which means they are fully responsible for decoration, repair and reimbursement of the insurance premium to the landlord. Where the tenant accepts a lease of part of a building rather than the whole, a tenant will pay a proportion of the costs of repair of the building and common parts via a service charge. It must be noted that it is not uncommon for a tenant to seek to limit their repairing liability when negotiating the heads of terms with the agents before legal documentation is prepared.
Commercial leases, unlike an AST, generally provide for the property to be returned to the landlord in full repair at the end of the term. If the tenant breaches this obligation, a landlord (if the lease permits) may issue a dilapidation claim in respect of the cost of disrepair left by the exiting tenant.