Commercial Leases in English Law

Introduction

Commercial leases govern the occupation of business premises and are a significant area of property law practice in England and Wales. The legal framework for commercial leases is shaped primarily by the Landlord and Tenant Act 1954, Part II, which provides business tenants with security of tenure and rights to lease renewal. Commercial leases differ substantially from residential tenancies in their form, content, and legal regulation, reflecting the different nature of business occupation.

The Landlord and Tenant Act 1954, Part II

Part II of the Landlord and Tenant Act 1954 (LTA 1954) provides security of tenure for business tenants. Section 23 defines business premises as premises occupied by the tenant for the purposes of a business carried on by the tenant or for those and other purposes.

Section 24 provides that a tenancy to which Part II applies does not come to an end unless terminated in accordance with the Act. The tenant has a statutory right to apply to the court for a new tenancy on the termination of the existing tenancy, providing substantial security of tenure.

The Landlord and Tenant Act 1954 applies to leases of business premises, agricultural holdings, and premises occupied for professional or trade purposes. It does not apply to residential tenancies or to leases of premises used for mining.

Termination and Renewal

A business tenancy may be terminated by the service of a section 25 notice by the landlord or a section 26 request by the tenant. The notice or request must be in the prescribed form and must specify the date of termination and whether the landlord opposes the grant of a new tenancy.

A landlord may oppose the grant of a new tenancy only on one of the seven grounds set out in section 30 of the LTA 1954: disrepair (Ground (a)); persistent delay in paying rent (Ground (b)); other substantial breaches (Ground (c)); suitable alternative accommodation (Ground (d)); subletting of part at too high a rent (Ground (e)); the landlord’s intention to demolish or reconstruct the premises (Ground (f)); and the landlord’s intention to occupy the premises for their own business (Ground (g)).

Where the landlord establishes Ground (f) or (g), the court must make an order for possession, but the tenant may be entitled to compensation under section 37 of the LTA 1954. The compensation is calculated by reference to the rateable value of the premises and is intended to reflect the tenant’s loss of goodwill.

Contracting Out

Section 38 of the LTA 1954 permits landlords and tenants to contract out of the security of tenure provisions, provided the prescribed procedure is followed. The tenant must make a declaration confirming that they have received independent legal advice and understand the consequences of contracting out. The landlord must serve a notice on the tenant in the prescribed form.

Contracting out is common in the commercial lease market, particularly for short-term lettings and lettings of secondary premises. A contracted-out tenancy does not give the tenant a right to renew, and the landlord may recover possession on the contractual term date without establishing a ground for possession.

Rent Review

Commercial leases typically contain rent review clauses enabling the landlord to increase the rent at specified intervals (commonly every five years). Rent review may be upwards only, upwards or downwards, or index-linked.

Upwards-only rent review clauses — which permit the rent to increase but not decrease — have been the subject of criticism and are required to be specifically drawn to the tenant’s attention. The Code for Leasing Business Premises in England and Wales 2007 recommends against upwards-only rent reviews.

Service Charges

Commercial leases typically require the tenant to pay a service charge covering the landlord’s costs of providing services to the building, including cleaning, lighting, security, and maintenance of common parts. The service charge must be calculated in accordance with the lease and must be reasonable.

The Service Charge (Commercial Property) Regulations 2024 introduced new requirements for transparency and consultation in commercial service charges, requiring landlords to provide annual service charge accounts and to consult tenants on major works.

Alienation and Assignment

Commercial leases typically restrict the tenant’s right to alienate (assign, sublet, or charge) the lease without the landlord’s consent. Section 19 of the Landlord and Tenant Act 1927 implies a covenant that the landlord may not unreasonably withhold consent to an assignment. The landlord may refuse consent only on grounds that are objectively reasonable.

The Landlord and Tenant (Covenants) Act 1995 governs the liability of tenants and guarantors following assignment. An outgoing tenant may be released from liability on assignment, but may be required to provide an authorised guarantee agreement — guaranteeing the performance of the lease by the assignee.

Conclusion

Commercial leases in England and Wales operate within a legal framework that balances the tenant’s security of tenure under Part II of the Landlord and Tenant Act 1954 against the landlord’s interest in managing the property. The widespread practice of contracting out, the use of rent review clauses, and the regulation of service charges and assignment reflect the commercial nature of the relationship.