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Commercial Real Estate – key risks for tenants and landlords
Reducing possible disputes in business leases
There are significant legal risks associated with commercial leases. These include a failure by the parties to fully consider the terms of the lease before committing to it. Misunderstandings also arise around legal obligations governing the landlord and tenant relationship that can’t be overridden by private agreement. Added to this, a raft of environmental and other safety regulations introduced in recent years must be complied with to avoid civil or, in some cases, criminal liability.
In practice, the risk when entering a lease for any business premises can never be eliminated entirely. Unforeseen events, such as changing business priorities during the lifetime of the lease and market volatility, may intervene in a way that fundamentally alters the landlord-tenant relationship. This often forces a rethink of the terms agreed, which increases the chance of dispute. With expert legal advice from a commercial property solicitor, these risks can be factored into the structure of the lease so that both sides are comfortable with their legal obligations, facilitating a smooth and mutually beneficial commercial relationship over the long term. In this guide, our property experts identify the most common pitfalls in commercial leases – for both landlords and tenants. We also give some tips on how to reduce and mitigate the potential impact of these risks.
Risks for tenants
When the lease ends, tenants are usually required to return the property in its original condition or to an agreed standard of repair. Failure to do so can expose the tenant to legal action by the landlord. Bear in mind that:
- Leases typically contain repair and decorating provisions, obligating the tenant to keep the leased premises in repair and decorated both during and at the end of the lease
- While the requirement to maintain leasehold property applies throughout the term of the contract, dilapidation disputes usually come to a head when the lease ends
- As part of its works at the end of the term, the lease may require the tenant to remove alterations that the tenant (or sometimes its predecessors) has made
- If a tenant fails to comply with its obligations at the end of the lease, a landlord can sue for breach
- It is generally cheaper for a tenant to carry out remedial works than to agree a settlement payment with their landlord
Top Tip
Agreeing lease terms is a matter of negotiation between prospective landlords and tenants. Our commercial property solicitors can help you in your lease negotiations to try and limit your liabilities and push back against unduly onerous repair and yield up terms. Limiting your repair liability by reference to a detailed photographic Schedule of Condition of the premises (prepared before you enter the lease) will generally greatly limit your dilapidations liability at the end of the term.
In your eagerness to take possession of new commercial premises you might be tempted to skimp on due diligence. Signing up to a commercial lease ties you into a series of legal and financial commitments. These won’t be easy to get out of down the line; you may encounter defects in the property that you could have discovered through reasonable enquiry. Here are some things to be aware of when it comes to due diligence:
- Effective due diligence may require input from a range of professionals. In addition to an expert commercial property solicitor, you may need advice from surveyors, planners, tax advisors and valuers
- You may think that you know the area or the property, and you may be reluctant to incur upfront costs. It is crucial to think about the future and conduct searches to future proof your investment – once you have entered into the lease you are committed to pay the rent, whether or not there may be fundamental issues that prevent you from using the property or make it much more expensive to do so, for example a lack of planning permission, major planned works by the landlord, or enforcement notices against the property
- By not carrying out due diligence, you may be unaware of issues that a more diligent future tenant or lender identifies – this could make it much more difficult to dispose of your lease
- We can help you investigate the title to the property, raise necessary searches, review the documents and ask the right questions of the landlord to extract key information. This ensures you make an informed decision that will protect the value of your investment
Top Tip
Look at the due diligence exercise as an investment. It’s the most effective way of reducing the risks involved in leasing commercial property. Information disclosed in the process may even enable you to negotiate more favourable lease terms and having a commercial property solicitor on hand to support can help make the process easier and more efficient.
Commercial leases end in a number of ways. Your options will depend on the terms of your lease, and, in many cases, the flexibility of the landlord. Some things to be aware of when you wish to get out of your lease include:
- It’s not unusual for a tenant to want to terminate their lease early. The business may be moving, growing or shrinking, and you may no longer need or want your current premises
- If you need to get out of your lease, there are a limited number of routes you can take. These include surrendering your lease, exercising a break clause, assigning the lease, or underletting the premises
- The options available to you depend on how your lease was drafted, commercial property market conditions, and the time at which you decide to move on
Top Tip
Sometimes the best way to negotiate a smooth exit is to be upfront with your landlord about your plans. This is particularly the case should you wish to surrender the lease early and don’t have the benefit of a break clause. Our commercial property solicitors help review your lease, advise on the options open to you, and execute an effective exit strategy.
Most tenants are likely to contribute towards the cost of services the landlord provides, on top of rent payable. Disputes about service charges are not uncommon. The extent of the services and what you pay will depend on the property and the terms you are able to negotiate. Note that:
- Services typically include maintenance of areas not included in the lease. If you take a unit in a larger development, the services may be more extensive and cover things like public spaces, shared access roads and car parking
- You should ensure a record is made in the lease of costs that should not be caught by the service charge. For example, landlord upgrades to the property that go beyond what is required to repair it
- Service charges can represent a significant cost for tenants. It is important that the service charge provisions in the lease are carefully drafted and negotiated to ensure that the tenants’ liabilities are appropriate for the property being leased
- We can negotiate a full list of the services for which the landlord can charge and exclude or limit the landlord’s ability to add extra chargeable services during the lease term
- When negotiating a new lease, it may be possible to limit your service charge exposure by negotiating a service charge cap. We can further ensure that the lease contains the right to challenge service charge items
Top Tip
One of the best ways to protect yourself is to ensure that the service charge is administered in accordance with the RICS Service Charge Code – this gives tenants comfort that the service charge is being managed and administered in accordance with best practice.
When negotiating your lease, it is crucial to ensure that you can adapt the premises to suit your business needs. You should make a careful assessment of any restrictions on works before you finalise your agreement with your landlord. Note the following:
- Commercial leases normally control the alterations that a tenant can carry out depending on whether proposed modifications are structural, non-structural or minor/decorative. The tenant of part of a building will not usually be able to undertake structural or external alterations (other than perhaps to a shop front)
- However, it is common for the tenant to be permitted to carry out non-structural, internal alterations with the landlord’s prior consent
- Our commercial property experts can review and negotiate the full extent of alterations permitted and whether such terms are effective for your business use
- Before doing any work you should always check whether the lease requires the landlord’s consent. If so, it is critical that such consent is recorded formally to avoid dispute or uncertainty further down the line.
Top Tip
When carrying out alterations that add value to the premises, always bear in mind future rent reviews. Ensure the lease specifies that alteration and improvement works carried out at your cost cannot be used by the landlord to justify a rent increase.
Having an experienced commercial property solicitor on your side when negotiating lease terms is paramount. Some risks that prospective tenants face include:
- Some leases can be incredibly landlord friendly. Unfortunately for tenants, all leases are not drafted equally
- The fact that you know and like your landlord when you enter into the lease does not mean that you will have that relationship during or at the end of the lease
- Ownership of the property may change during your term as a tenant. Make an objective assessment as to whether your lease terms will still operate effectively if the landlord changes, and you have no relationship with the new landlord
- Signing a lease without legal advice and a negotiation of its terms carries risk and increases the potential future disputes and legal costs
Top Tip
Always get bespoke legal advice on your commercial lease. Our commercial property experts can help you negotiate an agreement that is workable and fair to both parties on the one hand and protects your interests on the other.
Risks for landlords
There are many reasons why commercial landlords and tenants may wish to provide for a period of temporary occupation that is not governed by a formal lease. The tenant may wish to enter the property before completing the lease, or an existing lease may have ended but the parties are not ready to enter a new lease straight away. Permitting a commercial tenant to occupy premises temporarily does expose landlords to a degree of risk. For example:
- Where the parties have not ‘contracted out’ of the Landlord and Tenant Act 1954 a tenant may acquire ‘security of tenure’ (the right of a tenant to occupy the property after the lease expires), making it difficult for the landlord to get vacant possession of the property
- If a tenant refuses to vacate, the landlord’s hands are largely tied in terms of being able to redevelop or re let the property, achieve a higher rent, or change the use of the premises
- We regularly see a tenant’s motivation to agree a lease fall away if they are allowed into the premises early
- Bear in mind that the costs of securing possession from an unwanted tenant can be substantial
To guard against these risks, and avoid inadvertently creating unwanted security of tenure, we can document any temporary arrangements you have with a tenant. For example:
Creating a Tenancy at Will
If the tenant wishes to enter the property prior to completing the lease, the parties may wish to enter into tenancy at will. The essence of a tenancy at will is that it can be brought to an end instantaneously by either party without notice at any time.
Although a tenancy at will is not intended to create security of tenure, there is a risk that such arrangements can be construed as periodic tenancies. We can advise you and assist with drafting tenancies at will. Used cautiously and appropriately, a tenancy at will can be an effective way to minimise the risk of security of tenure being conferred.
Holding Over on Expiry of a Contracted Out Lease
If a former unprotected tenant (i.e. a tenant that does not benefit from security of tenure) continues to occupy and pay rent, the likely position is that they will become a protected tenant. In other words, they acquire security of tenure under a new periodic tenancy. Periodic tenancies like this can be created in the absence of express agreement, and can only be ended by following a set legal procedure. For landlords, the best way to prevent security of tenure arising inadvertently under a periodic tenancy is for the landlord to put a ‘rent stop’ in place immediately on expiry of a contracted out lease. This should prevent the creation of a periodic tenancy. Such tenancies are precarious for tenants (as landlords can seek to regain possession at any time), but the irregular situation may motivate the parties to regularise the position as soon as possible. Rent lost when the rent stop is in place may be recoverable by the landlord in damages at a future date.
Top Tip
Given the risks of inadvertent security of tenure arising, landlords should plan ahead and seek legal advice well in advance of the expiry of the existing lease. Our real estate solicitors can advise on how to mitigate potential risks and assist by negotiating a renewal lease.
Rent review clauses are crucial for the landlord. They provide the right, at regular intervals, to reassess the level of rent payable and decide whether it should increase in light of market conditions and other factors. Note that:
- The rent review method will usually have to be documented in the lease, with specific clauses setting out a clear method for review
- Historically, the most common methods for rent reviews were open market rent review (based on market value of properties) or index linked rent review (broadly based on inflation). However landlords should be aware that many tenants, especially those in retail and hospitality, are now more likely to ask for at least part of their rent to be calculated with reference to their turnover after profit. This is known as ‘turnover rent’
- Rent reviews are typically upwards only, but note that as at the time of writing (Autumn 2025) legislation has been proposed that will prohibit many new upwards only rent reviews
Top Tip
Rent review clauses are integral to any commercial lease arrangement. They are complex legal provisions. Subject to any agreement you have made with your tenant, an experienced commercial property lawyer will ensure your lease contains rent review mechanisms that are clear, enforceable and less likely to lead to a dispute.
Energy efficiency is a key element of future-proofing an investment property. At present, landlords must achieve minimum energy efficiency standards (MEES) before the property can be lawfully let. Commercial landlords should be aware that:
- The minimum level of energy efficiency is currently EPC E. It is envisaged that the minimum level will rise in the near future
- Through the terms of the lease, landlords should retain the right to control tenant’s alterations. The risk is that a tenant may modify the property is such a way as to adversely affect energy performance. The cost of putting things right may not be recoverable from the tenant
- Environmental laws are regularly updated. Consequently the responsibilities of commercial landlords change. Ensure that your lease is drafted in a way that enables you to enter the property to make energy efficiency improvements, and if necessary, comply with new legislation during the term of the lease
- Where a landlord is in breach of environmental standards, a tenant may have arguable grounds for breaking the lease
- Non-compliance with applicable regulations can lead to Environment Agency Enforcement Notices, fines and prosecution
Top Tip
Energy performance is a key compliance issue for landlords. Ignoring the rules is not an option. Our commercial property solicitors can assist by negotiating a lease that ensures sufficient energy performance provisions are included.
Our role is to support individuals and businesses throughout the full cycle of property ownership, whether a straightforward lease acquisition or a complex matter involving planning, development or construction input.
Tom Watkins, Partner, Real Estate
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