Commercial Leases Glossary

Commercial leases can sometimes be a minefield of legal jargon. You may come across some of the following phrases when negotiating and entering into a lease:

ASSIGNMENT - The transfer of all the tenants obligations and rights to another party ("Assignee") for the remainder of the time left to run on the lease with residual on-going obligations under the lease for the Tenant (see notes on Authorised Guarantee Agreement below).

AUTHORISED GUARANTEE AGREEMENT (“AGA”) - A type of personal guarantee which a Landlord usually requires from a tenant assigning their lease to a new tenant; the guarantee will bind the Tenant to the lease obligations if the new tenant defaults. It will be effective as long as the new tenant remains the tenant under the lease.

BREAK CLAUSE - This allows either or both parties to bring the lease to an end earlier than the lease expiry date. Usually a period of notice must be given to exercise the break (typically 6 months) and sometimes a tenant exercising a break option will have to pay a penalty for doing so.

CONTRACTED OUT LEASE - A commercial lease where the parties have agreed that security of tenure will not apply.

COVENANTS - A promise to do something e.g. pay rent, or repair the property.

FRI LEASE - A full repairing and insuring obligations lease; the tenant is responsible for all repairs to the whole of the property including the main structure, although the Landlord will usually insure the property and the tenant will reimburse the insurance premium to the Landlord (often known as “insurance rent”).

HEADLEASE - Also referred to as a superior lease. This is entered into by the freehold owner of the property with a Tenant.

HEADS OF TERMS - As referred to above this is a non-binding summary of the proposed lease terms as agreed between Landlord and Tenant at the conclusion of negotiations.

OPEN MARKET RENT REVIEW - A rent review by reference to the annual rent obtainable in the current market place as at the review date and is usually on an “upwards only” basis i.e. will not be reduced if the market rent is less than the current rent.

RENT DEPOSIT - An initial sum paid to the Landlord at the beginning of the lease to be held in the Landlord’s bank (usually in a separate designated account) as security for compliance with the lease obligations. If for example you fail to pay the rent or keep the property in repair the Landlord will be entitled to offset these costs against the deposit. 

RPI REVIEW – A rent review by reference to the Retail Price Index.

SDLT (STAMP DUTY LAND TAX) – Can be payable on a new lease even though you are not buying the property. It is calculated by reference to the length of the lease and the rent (plus any VAT payable on the rent) and a formula applied. If the lease is for 7 years or more you will need to file an SDLT return with the Inland Revenue even if no actual SDLT is payable.

SECURITY OF TENURE - An automatic statutory right for a commercial lease to (where the Tenant is in occupation and carrying on a business) to be renewed at the end of the term, subject to certain exceptions, such as the Landlord demonstration an intention to redevelop.

SERVICE CHARGE - There are certain costs that may be payable on top of the rent, particularly if you are leasing part of a building occupied with other tenants. A service charge is a contribution towards the Landlord’s costs incurred in keeping shared spaces such as toilets or car parking areas in good order.

SUBLEASE - Also referred to as an underlease; entered into by a Tenant who already has a Headlease with another party ("subtenant" or "undertenant"). Both the Headlease and the sublease will run together.

TERM - An expression referring to the period for which the lease will run.

If you have any queries about Commercial Leases that aren't fully explained above, we can provide you with the help you need. Call us on 01423 869977 and we'll be happy to help.