The five-year lease we outgrew in eighteen months

Nobody signs a five-year lease expecting to regret it. You take the unit because it is the right size for the business you have, the rent is affordable against current turnover, and the alternative — staying somewhere too small — is obviously worse.

Then the business grows faster than the building. Eighteen months in you are working round the space rather than in it, and you discover that a commercial lease is not a rolling arrangement you can hand back. It is a fixed financial commitment: five years at £24,000 a year is £120,000 you have promised to pay, and if there is a personal guarantee attached, you have promised it personally.

The clauses that decide how much that costs to escape are all agreed before you move in, when nobody is thinking about leaving.

Security of tenure, and the notice you signed without reading

Business tenancies in England and Wales come with statutory protection under the Landlord and Tenant Act 1954: at the end of the term the tenant has a right to renew, and the landlord can only refuse on specified statutory grounds.

Most commercial leases granted to small businesses are contracted out of that protection. It is a formal process — the landlord serves a warning notice before you commit, and you sign a declaration acknowledging you are giving up the right to renew. If there are at least fourteen days before you commit, a simple declaration suffices; inside fourteen days it has to be a statutory declaration sworn in front of an independent solicitor.

This is why owners sometimes remember signing something in front of a solicitor without recalling what it was. It was the right to stay in your own premises.

It is not automatically wrong to contract out — many landlords will not let otherwise. But you should know which you have, because it determines whether you have a right to renew or merely a hope of one.

Break clauses that do not break

A break clause is the obvious answer to a long lease, and it is the clause most often drafted so that it fails when you try to use it.

Three conditions do the damage. First, notice: usually six months, in a specified form, to a specified address, and if the date is wrong the break is invalid — there is no near-enough. Second, rent paid up to date, which sounds trivial until you realise a break date mid-quarter can require you to pay a full quarter's rent to exercise it. Third, and worst, vacant possession: the property handed back empty, with no goods, no fixtures you installed, and nobody in occupation. Tenants have lost breaks over leftover partitioning and a skip that had not been collected.

A break clause is not a right to leave. It is a right to leave provided you do six specific things perfectly, on a date chosen a year in advance — and the burden of proving you did is entirely yours.

Diarise the notice date the week you sign, with a reminder three months before it, and read the conditions again at that point rather than the week before.

Assignment and subletting: the realistic exit

If the break has gone, the practical route out is usually passing the lease on. Most leases permit assignment or subletting with the landlord's consent, and where the lease says consent is not to be unreasonably withheld, the landlord must act reasonably and within a reasonable time.

In practice the landlord will assess the incoming tenant's covenant strength and may require conditions: a rent deposit, guarantors, or an authorised guarantee agreement under which you guarantee your successor's performance. That last one matters more than it sounds — under an AGA you are still on the hook if the business you assigned to stops paying, so you can be out of the building and back in the liability.

Subletting leaves you as tenant with the head landlord and makes you a landlord to the subtenant. It works, but you now have two relationships to manage and you are liable for the rent whether or not your subtenant pays.

The bill at the end

Dilapidations are the part almost nobody budgets for. A full repairing and insuring lease obliges you to keep the premises in repair and hand them back in the condition the lease specifies, and at the end the landlord serves a schedule of dilapidations listing everything that falls short.

For a small unit that has been fitted out, stripped back and worked hard for five years, the claim can run well into five figures — and it arrives exactly when you are paying deposit and fit-out costs on somewhere new.

Two things reduce it substantially, and both happen at the start. A schedule of condition — a dated photographic record annexed to the lease — caps your obligation at handing the property back in the state recorded, rather than the state a surveyor imagines it was in. And a licence for alterations should say explicitly whether you must reinstate at the end; without that, you may be required to remove work you paid to install.

The other end-of-lease cost worth knowing about is energy performance. A landlord generally cannot let or continue to let commercial premises below an EPC rating of E, and from 2031 buildings over 1,000 square metres face a minimum of B. If the building you are in is marginal, that is a cost pressure that ends up in the rent or the lease terms sooner or later.

What to negotiate before you sign

Ask for a break clause at year two or three, with the only precondition being notice and rent paid up to date. Push back hard on vacant possession as a break condition; 'give up occupation' is a far safer formulation.

Get a schedule of condition annexed. Ask for the repairing obligation to be limited by reference to it. Check whether the lease is contracted out of the 1954 Act and whether you mind. Check whether a personal guarantee is being asked for, how long it survives after assignment, and whether it can be capped.

And model the whole commitment, not the monthly rent — the term, the rates, the service charge, the insurance, the dilapidations provision and the deposit. That is the real number, and it is the one to compare against the rent review that catches shops out and against what business rates will add on top.

Spending £800 with a commercial property solicitor before you sign a £120,000 commitment is not caution. It is the same maths as everything else that only looks expensive until you need it.

Common questions

What does contracting out of the Landlord and Tenant Act 1954 mean?

Business tenancies in England and Wales are normally protected under the 1954 Act, giving the tenant a right to renew at the end of the term which the landlord can only refuse on specified statutory grounds. Contracting out removes that right. It requires a formal process: the landlord serves a warning notice before you commit, and you sign a declaration acknowledging what you are giving up. Where there are at least fourteen days before you commit a simple declaration suffices; inside fourteen days it must be a statutory declaration sworn before an independent solicitor. Many landlords insist on it, but you should know which position your lease takes.

How do break clauses in a commercial lease work?

A break clause lets you end the lease early on a specified date, but only if you satisfy every condition attached to it — and conditions are where breaks fail. Notice is usually six months, in a prescribed form and to a specified address, with no allowance for getting the date slightly wrong. Rent must normally be paid up to date, which can mean paying a full quarter for a mid-quarter break date. Vacant possession is the most dangerous condition, requiring the premises handed back empty with fixtures removed; tenants have lost breaks over leftover partitioning. Diarise the notice date the week you sign.

Can I get out of a commercial lease by assigning or subletting it?

Usually yes, with the landlord's consent, and where the lease says consent is not to be unreasonably withheld the landlord must act reasonably and within a reasonable time. Expect them to assess the incoming tenant's financial strength and to impose conditions such as a rent deposit, guarantors, or an authorised guarantee agreement. An AGA matters: under it you guarantee the performance of the tenant you assign to, so you can be out of the building and still liable if they stop paying. Subletting keeps you as tenant to the head landlord and liable for the rent whether or not your subtenant pays.

What are dilapidations and how much do they cost?

Dilapidations are the landlord's claim at the end of a lease for breaches of your repairing, decorating and reinstatement obligations, served as a schedule listing everything falling short of the required condition. On a small unit fitted out and worked hard for five years, the claim can comfortably reach five figures, arriving at the same time as the deposit and fit-out costs on new premises. Two things reduce it dramatically and both happen at the start: a dated photographic schedule of condition annexed to the lease, capping your obligation at the recorded state, and a licence for alterations that states clearly whether reinstatement is required.