Commercial leases: what to check before you sign

What heads of terms should cover

A commercial letting usually starts with heads of terms: a short document, marked "subject to contract", recording the deal the landlord and tenant have agreed in principle. Heads of terms are not normally legally binding, but the landlord's solicitor drafts the lease from them, and a point you did not raise at this stage is much harder to win once the lease is in draft. They should cover the premises (with a plan), the length of the term, the rent and any rent-free period, rent reviews, service charge and insurance, who repairs what, whether you can assign or sublet, any break clause, whether the lease will be protected by the Landlord and Tenant Act 1954, any rent deposit or guarantee, and any works either side will carry out before you move in. Have them checked before you agree them.

Once terms are agreed, your solicitor checks that the landlord owns the property and can grant the lease, which may need the consent of its lender or a superior landlord, raises enquiries and negotiates the draft lease. If the landlord is carrying out works first, or you need planning permission before you can trade, the parties usually sign an agreement for lease setting out those conditions, and the lease itself is completed once they are met.

Rent and how rent reviews work

The lease sets the rent, when it is paid and whether VAT is added. A landlord that has opted to tax the building charges VAT on the rent, which is a real cost if your business cannot recover all of its VAT. If a rent-free period is agreed, for example to cover fitting out, the lease should state the date rent starts and whether any of the rent-free period must be repaid if you use a break clause.

On a longer lease, the rent review clause can matter more than the starting rent. The main types are:

• Open market review: the rent is reset to what the premises would let for on the review date, on assumptions set out in the lease.
• Index-linked review: the rent moves with an index such as the Consumer Prices Index, often within an agreed minimum and maximum.
• Fixed increases: the rent rises by set amounts on set dates.
• Turnover rent: some or all of the rent depends on your takings.

In an open market review, the assumptions decide the result. A clause telling the valuer to ignore the rent-free period a new tenant would receive pushes the figure above what the premises would really let for. The valuer should disregard your improvements and goodwill, and the lease should say whether a disagreement goes to an arbitrator or an independent expert.

Many leases contain upwards-only reviews, under which the rent stays the same if the market rent on the review date is lower. For example, say your rent is £30,000 a year and the market rent at the fifth-year review is £27,000: under an upwards-only clause you carry on paying £30,000.

Legislation that received Royal Assent on 29 April 2026 adds a ban on upwards-only rent reviews to the Landlord and Tenant Act 1954, as section 54A and Schedules 7A and 7B, covering new and renewal business leases in England and Wales. Where the ban applies, a review cannot leave the rent above the market, index or turnover figure it is based on, so in the example above the rent would fall to £27,000. The ban takes effect on a date set by regulations, and none had been set by 17 September 2026. Leases granted before it takes effect, or under arrangements made before then, are generally outside it, but an arrangement to renew an existing business lease made on or after 17 March 2026 can be caught. Until the ban takes effect, an upwards-only clause in a new lease is valid, so it remains a point to negotiate.

Service charge and insurance

In a building with several tenants, the landlord usually repairs the structure and common parts, provides services such as cleaning, lighting and security, and recovers the cost through a service charge. The main risk for a tenant is paying for improvements, or for replacing major items such as the roof or the heating and cooling plant, during a short lease. Ask for the service charge budget and the actual accounts for the last three years, and check whether there is a cap, whether the cost of putting right defects in the original construction is excluded, whether improvements can be charged, and how the share of any empty units is dealt with.

The landlord normally insures the building and recovers the premium from tenants. The lease should suspend the rent and service charge if the premises are damaged by an insured risk and cannot be used, and let you end the lease if they are not reinstated within a set period. Ask what happens if damage is caused by a risk that is not insured. As the occupier you will also normally pay business rates and utilities.

Repairs, schedules of condition and dilapidations

A full repairing and insuring lease of a whole building makes you responsible for the roof, structure and exterior as well as the inside. The courts have long treated a covenant to keep premises in repair as requiring the tenant to put them into repair first if they are in poor condition when the lease starts. On a lease of part of a building, the tenant usually repairs only the inside, and the landlord repairs the structure and recovers the cost through the service charge.

If the premises are not in good condition, ask for a schedule of condition: a written record of their state at the start of the lease, with dated photographs, attached to the lease, together with a clause saying you never have to put the premises into better condition than the schedule shows. Have a surveyor prepare it before you sign. If the lease makes you responsible for maintaining or repairing the premises, you may also have a legal duty under the Control of Asbestos Regulations 2012 to manage any asbestos in them, so ask the landlord for its asbestos records.

When the lease ends, the landlord can claim for dilapidations: repairs, redecoration and removal of alterations that the lease required and you did not carry out. Under section 18(1) of the Landlord and Tenant Act 1927, damages for breach of a repairing covenant cannot exceed the amount by which the breach reduces the value of the landlord's interest, and nothing is recoverable for failing to leave the premises in repair if they are to be demolished, or altered so much that the repairs would be wasted. Our guide to renewing or ending a business tenancy covers how dilapidations claims are made at the end of a lease.

Can you assign or sublet the lease?

The clauses about dealing with the lease, which lawyers call alienation provisions, decide whether you can pass the lease to a buyer of your business, sublet space you do not need, or share the premises with another company in your group. A lease can ban a transaction outright or allow it with the landlord's consent.

Where consent is needed, section 19(1)(a) of the Landlord and Tenant Act 1927 adds a term that the landlord cannot unreasonably withhold it. Under the Landlord and Tenant Act 1988, once you apply in writing, the landlord must give its decision in writing within a reasonable time, stating any conditions or its reasons for refusing, and it is for the landlord to show that it acted reasonably. For most leases granted on or after 1 January 1996, the lease can set out in advance when consent to an assignment may be refused, or the conditions that may be imposed, such as a financial test for the incoming tenant.

For those leases, the Landlord and Tenant (Covenants) Act 1995 releases you from the tenant's obligations when you assign the whole lease with any consent the lease requires. A landlord may make its consent conditional on an authorised guarantee agreement, under which you guarantee that your immediate assignee will perform the lease until that assignee is itself released. If you may need to sublet, check whether you can sublet part of the premises, what rent a sublease has to reserve, and whether every sublease must be contracted out of the renewal rights in the 1954 Act.

How break clauses work

A break clause allows the tenant, the landlord or both to end the lease early by giving notice. The courts apply break clauses strictly: if the notice is late, served on the wrong party or in the wrong way, or a condition is not met on the break date, the break fails and the lease continues.

Look closely at the conditions. A requirement to have paid all sums due under the lease can include disputed service charges and interest as well as the rent. A requirement to give vacant possession can fail if people, furniture or stock are left behind. A requirement to have complied with all your obligations can let a landlord challenge the break over a minor breach. Ask for the conditions to be limited to paying the rent due up to the break date and giving up occupation.

Unless the lease says otherwise, you are unlikely to recover rent paid in advance for the period after the break date. For example, say your break date is 1 April and rent is paid quarterly in advance on the usual quarter days: you must pay the full quarter's rent due on 25 March, and without a refund clause the landlord keeps the rent for the rest of that quarter. At least a year before the break, check who the landlord is, ask it to confirm in writing what you owe, and plan any repairs and the removal of your fittings.

Will you have the right to renew?

Part II of the Landlord and Tenant Act 1954 protects most tenants who occupy their premises for the purposes of a business. A protected lease does not end on its expiry date: it continues on the same terms until it is ended in a way the Act allows, and the tenant can apply to court for a new lease at a market rent. The landlord can only refuse a new lease on the grounds in section 30 of the Act, such as redevelopment or occupying the premises for its own business, and in some of those cases must pay the tenant compensation.

Landlords often ask for this protection to be excluded, which is known as contracting out. It is valid only if, before you sign the lease or become bound to take it, the landlord serves a warning notice in the statutory form and you, or someone you authorise, sign a declaration that you have read it and accept the consequences. If the notice is served less than 14 days before you commit, the declaration must be a statutory declaration, made in front of a solicitor or other person authorised to administer oaths. The lease must refer to the notice, the declaration and the agreement. A fixed-term lease of six months or less is not protected anyway, unless it can be renewed or extended beyond six months or you and any predecessor in your business have already been in occupation for more than 12 months.

If you are spending heavily on fitting out, or your customers rely on finding you at that address, the right to stay has real value. If the landlord insists on contracting out, consider asking for a longer term or an option to renew. Our guide to renewing or ending a business tenancy explains the notices, deadlines and compensation.

Stamp Duty Land Tax, VAT and registration

When you take a new lease of commercial premises in England, Stamp Duty Land Tax (SDLT) can be due on any premium, at the non-residential purchase rates, and on the rent. The rent is taxed on its net present value: the rent payable over the whole term, with each future year's rent discounted at 3.5% a year. HMRC's online calculator works this out. In Wales, Land Transaction Tax applies instead. Each rate applies only to the part of the value within its band.

Net present value of the rent	England: SDLT	Wales: Land Transaction Tax
Up to £150,000	0%	0%
£150,001 to £225,000	1%	0%
£225,001 to £2 million	1%	1%
£2,000,001 to £5 million	1%	2%
Above £5 million	2%	2%

For example, if the net present value of the rent under a new lease in England is £400,000, the SDLT is 1% of the £250,000 above £150,000, which is £2,500. A return must be sent to HMRC, and any tax paid, within 14 days of the effective date. A lease of seven years or more needs a return unless the premium is under £40,000 and the annual rent is under £1,000; a shorter lease needs one only if tax is due. The effective date can be earlier than completion of the lease: if you take possession under an agreement for lease, including going in to fit out, or you pay rent before the lease is granted, the tax falls due from then.

If the landlord opted to tax the building before the lease took effect, the VAT on the rent is included in the SDLT calculation. A lease granted for more than seven years must be registered at HM Land Registry, and until it is registered you do not hold a legal lease.

What to check before you sign

Before you sign, you should be able to confirm that:

• the landlord owns the property and has any consent it needs from its lender or superior landlord;
• the use allowed by the lease and by planning covers your business;
• the energy performance certificate rating is E or better, or the landlord has registered an exemption;
• a schedule of condition is attached if the premises are not in good repair;
• the service charge, break conditions and alienation terms work for your plans;
• your fitting-out works are approved, and you know whether you must remove them at the end;
• any rent deposit or guarantee has a clear trigger for its release;
• you know whether the lease is protected by the 1954 Act or validly contracted out;
• your budget includes SDLT, VAT on the rent, business rates and fitting out.

In England, shops, cafés, professional services, gyms, medical services, nurseries, offices and light industrial uses have been in a single planning use class, Class E, since 1 September 2020, so moving between them does not usually need planning permission. Wales still has separate use classes for these uses.

Send us the heads of terms, the agent's particulars and any plans as early as you can, so these points can be settled before the lease is drafted. We agree the scope and cost of our work with you in writing before we start.

Frequently asked questions

What does a full repairing and insuring lease mean?

It means the tenant pays for all repairs to the premises and pays the landlord's cost of insuring them. On a lease of a whole building that includes the roof, structure and exterior. A covenant to keep the premises in repair can require you to put them into repair first if they are in poor condition at the start, so a tenant taking premises in poor condition should ask for a schedule of condition attached to the lease, limiting the obligation to the condition recorded at the start.

Can a landlord refuse consent to assign a commercial lease?

A landlord can refuse if the lease bans assignment outright, or if it has reasonable grounds where the lease allows assignment with consent. Once you apply in writing, the Landlord and Tenant Act 1988 requires the landlord to give its decision in writing within a reasonable time, with its reasons if it refuses, and the landlord has to show it acted reasonably. For most leases granted since 1 January 1996, the lease can set out in advance conditions the landlord may impose, such as an authorised guarantee agreement.

What happens if I miss the deadline in a break clause?

The break fails and the lease continues, usually until the next break date or the end of the term. Courts apply break clauses strictly, so a notice served late, on the wrong party or in the wrong way does not end the lease, and neither does a notice where a condition such as vacant possession is not met. The landlord may agree to a surrender instead, but it does not have to and will usually want a payment.

Do I have to pay Stamp Duty Land Tax on a commercial lease?

In England, SDLT is due on the rent if its net present value over the term is more than £150,000, at 1% of the value between £150,001 and £5 million and 2% above that. A premium is taxed at the non-residential purchase rates. A return is needed within 14 days of the effective date for a lease of seven years or more unless the premium is under £40,000 and the annual rent under £1,000. In Wales, Land Transaction Tax applies instead.

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

It means the landlord and tenant agree, before the lease is granted, that the tenant will have no statutory right to a new lease when it ends. The landlord must serve a warning notice in the statutory form, and the tenant must sign a declaration, or a statutory declaration if the notice was served less than 14 days before the tenant committed. The lease must refer to both. If the procedure was not followed, the lease is protected.

Are upwards-only rent reviews banned?

The ban has been legislated but is not yet in force. Legislation that received Royal Assent on 29 April 2026 adds it to the Landlord and Tenant Act 1954 for new and renewal business leases in England and Wales, from a date to be set by regulations, and no date had been set by 17 September 2026. Existing leases are generally unaffected. Where the ban applies, a review can reduce the rent to the market, index or turnover figure it is based on.

Sources & further reading

• legislation.gov.uk — Landlord and Tenant Act 1954, Part II
• legislation.gov.uk — English Devolution and Community Empowerment Act 2026, Schedule 37
• GOV.UK — Stamp Duty Land Tax on leasehold sales
• GOV.UK — SDLT rates for non-residential and mixed land and property
• GOV.WALES — Land Transaction Tax rates and bands
• Justice UK — Pre-Action Protocol for dilapidations claims
• GOV.UK — Non-domestic private rented property: minimum energy efficiency standard

This article is general information, not legal advice. The law changes and depends on your circumstances — always take advice on your specific situation before acting. Last reviewed 17 September 2026. AD Solicitors is a trading name of AD Solicitors Limited, a recognised body regulated by the SRA (no. 8011228).