TRW & Co · Real estate
Commercial Lease Key Terms: What Tenants Should Negotiate
A commercial lease decides your rent, repair liability, exit options and ability to sell or sublet the business. Tenants in England and Wales can negotiate almost every term, and the best time is at heads of terms. This guide covers rent review, repair, break clauses, alienation, service charges, security of tenure and the coming ban on upward-only reviews.
Key pointBreak clauses fail more often on their conditions than on their dates: negotiate a break conditional only on paying principal rent and giving vacant possession, and treat exercising it as a project.
At a glance
Security of tenure
Business tenants in occupation can renew under Part 2 of the 1954 Act unless the lease is validly contracted out before they commit.
Contracting out timing
A warning notice served at least 14 days before commitment needs a simple declaration; a later notice requires a statutory declaration.
Upward-only ban
The English Devolution and Community Empowerment Act 2026 will ban upward-only reviews in many new business leases, but is not yet in force.
Repair damages cap
Section 18 of the 1927 Act limits disrepair damages to the fall in the value of the landlord's reversion caused by the breach.
Consent to assign
Where consent is required, the 1927 Act implies it cannot be unreasonably withheld, and the 1988 Act requires a timely decision.
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Commercial lease terms: the short answer
A commercial lease is a long-term contract that fixes your rent, your repair liability, your ability to leave and your ability to sell or sublet the business. In England and Wales almost every term is negotiable, and the heads of terms stage is where tenants have the most leverage. The six terms that most often decide whether a lease is a good deal are rent review, repair, break clauses, alienation, service charges and security of tenure.
The market is also changing. As of October 2026, a statutory ban on upward-only rent reviews in new business leases has become law but is not yet in force, and the Law Commission is consulting on reform of security of tenure under the Landlord and Tenant Act 1954. Tenants negotiating now should understand both today's rules and what is coming.
The legal framework
Commercial lease law in England and Wales is mostly contract, overlaid by a handful of statutes that tenants should know:
- Part 2 of the Landlord and Tenant Act 1954 gives business tenants in occupation a right to renew at the end of the term, unless the lease is validly contracted out.
- Section 19 of the Landlord and Tenant Act 1927 implies that a landlord's consent to assignment or underletting is not to be unreasonably withheld, where the lease requires consent. The Landlord and Tenant Act 1988 adds a duty to deal with applications within a reasonable time.
- Section 18 of the Landlord and Tenant Act 1927 caps damages for disrepair at the diminution in the value of the landlord's reversion.
- The Landlord and Tenant (Covenants) Act 1995 releases tenants from liability on a lawful assignment of leases granted since 1996, subject to any authorised guarantee agreement.
- The English Devolution and Community Empowerment Act 2026, which received Royal Assent in April 2026, contains the ban on upward-only rent reviews. It needs secondary legislation before it takes effect.
The RICS professional statement, the Code for leasing business premises, also sets mandatory requirements for RICS members acting on lease negotiations, including clear heads of terms. Unrepresented tenants should ask whether the landlord's agent is following it.
The commercial lease terms that matter most
Term, break clauses and security of tenure
Length of term drives cost and flexibility. A break clause lets one or both parties end the lease early, but tenant breaks are often conditional on paying all rent, giving vacant possession or complying with covenants. Strict conditions are the most common reason break notices fail. Negotiate for conditions limited to paying the principal rent and giving up occupation, and make sure the notice period and dates are clear.
If the commercial lease is not contracted out of the 1954 Act, a tenant in occupation for business purposes can usually stay on at the end of the term and ask the court for a new lease, which the landlord can oppose only on statutory grounds. Contracting out requires the landlord to serve a warning notice and the tenant to make a declaration before committing to the lease, as set out in section 38A and Schedule 2 to the 2003 Order. If the notice is served at least 14 days in advance, a simple declaration is enough; otherwise a statutory declaration is required.
Rent and rent review
Rent reviews are typically to open market rent, to an index such as CPI or RPI, or to fixed uplifts. Upward-only open market reviews have long been standard in London. Tenants should scrutinise the review assumptions and disregards, which can inflate the hypothetical rent, and resist collars or minimum uplifts on index-linked reviews where the market allows.
Repair and dilapidations
A full repairing obligation can require a tenant to put the premises into better condition than they were in at the start. Tenants taking older buildings should limit the obligation by reference to a photographic schedule of condition. At the end of the term, the landlord's claim is limited by section 18, but disputes are common; see our guide to dilapidations claims.
Alienation: assigning and subletting
Alienation clauses control whether you can assign the lease, sublet, share occupation with group companies or charge the lease. Aim for the right to share with group companies without consent, a clear test for assignment, and limited preconditions. Landlords commonly require an authorised guarantee agreement from the outgoing tenant on assignment.
Service charges and insurance
In multi-let buildings the service charge can be a large part of occupation cost. Negotiate exclusions for initial construction defects, capital improvements and the costs of letting other units, and ask for a cap or budget mechanism and annual reconciliations. Review the insurance rent and whether the tenant benefits from rent suspension after damage by an insured risk.
Alterations, use and energy efficiency
Check the permitted use, alteration rights and reinstatement obligations. Minimum energy efficiency standards can restrict letting and may lead landlords to seek access for works; see our note on MEES and EPCs for commercial property.
| Term | Landlord's typical starting position | Tenant's negotiating target |
|---|---|---|
| Break clause | Conditional on full compliance with all covenants | Only on payment of principal rent and giving vacant possession |
| Rent review | Upward-only to open market rent | Upward and downward, or index-linked without a minimum uplift |
| Repair | Full repairing, regardless of start condition | Limited by a schedule of condition |
| Alienation | Consent required for any dealing; wide conditions | Group sharing without consent; limited preconditions |
| Service charge | Uncapped, wide recovery | Exclusions for capital works and defects; budget cap |
| Security of tenure | Contracted out of the 1954 Act | Inside the Act, or a longer term with a break |
| Rent-free incentive | Short, clawed back on a break | Longer, not repayable on a break |
The ban on upward-only rent reviews
The English Devolution and Community Empowerment Act 2026 contains provisions that will make upward-only rent review mechanisms unenforceable in many new business leases in England and Wales, including renewal leases. Existing commercial leases are generally not caught, and genuinely upward and downward reviews, agreed fixed steps and some fixed formulas remain possible. The detail on caps and collars is expected to follow in regulations.
As of October 2026, the ban is not yet in force and commentators expect commencement no earlier than 2027. Some arrangements agreed before commencement, including certain renewal arrangements made during 2026, may still be caught when the provisions come into force. Tenants agreeing heads of terms now should ask how the rent review will operate if the ban applies during the term, and landlords should model the effect on valuation. Our guide to the upward-only rent review ban covers the detail.
How to negotiate a commercial lease: the process
- Define your requirements. Set the space, term, budget, fit-out needs, expansion or contraction plans and exit points before viewing. These drive which terms matter most.
- Agree detailed heads of terms. Record rent, review, term, breaks, incentives, repair, alienation, service charge cap and 1954 Act status. Gaps at this stage are hard to fill later.
- Carry out due diligence. Check title, planning use, the EPC, the service charge history, any superior lease and the building's condition. Commission a survey for older premises.
- Negotiate the draft lease. Compare the draft with the heads of terms clause by clause. Focus on break conditions, repair, alienation and service charge exclusions.
- Deal with contracting out. If the lease is to be contracted out, receive the warning notice and make the declaration before exchange or completion, and check the lease refers to them.
- Agree the ancillary documents. Rent deposit deed, guarantee, licence for alterations, agreement for lease and any side letter recording personal concessions.
- Complete and diarise. Diarise rent review dates, break dates and notice windows, the expiry date and any conditions. Register the lease at HM Land Registry where required.
Diarise break notice dates the day the lease completes, and treat break conditions as a project: pay all sums due under the lease and give back the premises in the state required. Many disputes turn on a small unpaid sum or a missed condition.
At the end of the term: renewal under the 1954 Act
If a commercial lease is protected by the 1954 Act, it does not end automatically on the expiry date. It continues until it is brought to an end by one of the statutory procedures. The landlord can serve a notice proposing new terms or opposing renewal on a statutory ground, such as redevelopment or own occupation, and the tenant can serve a request for a new tenancy. Strict time limits then apply to any court application.
Where the parties cannot agree, the court can fix the terms of a new lease, including the rent, generally by reference to the existing lease and the open market. A landlord who successfully opposes renewal on certain grounds may have to pay the tenant statutory compensation. Tenants should start planning at least a year before expiry, because the notices interact with break dates, dilapidations and relocation decisions. The Law Commission is reviewing this regime, and our guide to 1954 Act reform tracks the proposals.
An illustrative scenario
This scenario is illustrative only and does not describe a real client or matter.
A growing technology company is offered a ten-year commercial lease of a London office floor. The landlord proposes an upward-only open market review at year five, a tenant break at year five conditional on full compliance with all covenants, a full repairing obligation and contracting out of the 1954 Act.
The company negotiates the break so it depends only on paying the principal rent and giving vacant possession, obtains a schedule of condition limiting repair, secures group sharing rights and agrees a service charge cap linked to inflation. It accepts contracting out in exchange for a longer rent-free period. It also asks the landlord to confirm how the review clause will work if the statutory ban on upward-only reviews applies. None of these points is unusual; each is a matter of preparation and leverage.
Risks and common mistakes
Signing heads of terms that are too thin
Heads of terms are usually not binding, but they set the frame for the lease. If they are silent on break conditions, repair standard, service charge caps or 1954 Act status, the landlord's solicitor will fill the gaps in the draft lease in the landlord's favour. Tenants should resolve the commercially important points at heads of terms, when the landlord is most motivated to secure the letting.
Break conditions that cannot realistically be met
A break conditional on full compliance with every covenant is very hard to satisfy, because any minor breach of repair or decoration may defeat the break. Courts apply break conditions strictly. Negotiate conditions limited to principal rent and vacant possession, and on exercise, pay every sum demanded, even if disputed, and recover it later if appropriate.
Accepting a full repairing covenant on an old building
Without a schedule of condition, a full repairing obligation can require a tenant to remedy defects that existed before the lease began. That can produce a large dilapidations claim at the end of the term. A photographic schedule annexed to the lease, with the obligation limited by reference to it, is the usual protection.
Getting the 1954 Act formalities wrong
If the warning notice is served too late, the wrong declaration is made, or the declaration is made after the tenant is contractually bound, the contracting out can be void and the tenant will have security of tenure. Landlords should treat the procedure as a timetable item; tenants should understand what they are giving up before signing the declaration.
Overlooking service charge exposure
In multi-let buildings, uncapped service charges can rise sharply, especially where major works or refurbishments are planned. Ask for several years of service charge history, a schedule of planned works and exclusions for capital improvements and inherent defects. A cap gives budget certainty, even if the landlord insists on an index-linked increase.
International tenants and guarantees
Overseas businesses opening a London office, including groups from Bangladesh, the Gulf and Asia, often face requests for a parent company guarantee or a large rent deposit, because the UK entity has no trading history. Negotiate the size and release mechanism of the deposit, and limit any guarantee in amount and duration. Consider whether the guarantor's home jurisdiction affects enforceability and whether foreign law advice is needed on corporate authority.
Our commercial property solicitors act for UK and international occupiers, and our landlord and tenant team advises on renewals and disputes. If you are buying rather than leasing, see our guide to buying commercial property.
Commercial lease checklist for tenants
- Agree detailed heads of terms covering every term in the table above.
- Decide whether you need 1954 Act protection, and price it into the deal.
- Limit repair with a schedule of condition on older premises.
- Negotiate a clean break clause and diarise the dates.
- Secure group sharing and reasonable assignment conditions.
- Obtain service charge history and agree exclusions and a cap.
- Ask how the rent review works if the upward-only ban applies during the term.
- Review the EPC and any energy efficiency obligations.
The Law Commission's business tenancies project may also change security of tenure in future; its second consultation closed in September 2026. For practical guidance on tenant responsibilities, see GOV.UK on renting business property. To discuss a commercial lease, contact our London office.
Frequently asked questions
01What should I negotiate in a commercial lease?
Focus on the terms that carry the most financial risk: rent and rent review, break clauses and their conditions, the repairing obligation, alienation rights, service charge exposure and whether the lease is inside or outside the 1954 Act. Incentives such as rent-free periods, fit-out contributions and caps on service charges are also negotiable. Resolve these points at heads of terms, when the landlord is most motivated, and make sure the draft lease reflects what was agreed.
02What does contracting out of the 1954 Act mean?
It means the tenant gives up the statutory right to renew the lease at the end of the term. To be valid, the landlord must serve a warning notice in the prescribed form and the tenant must make a declaration before committing to the lease, with a statutory declaration needed if the notice was served less than 14 days in advance. The lease must also refer to the notice and declaration. If the procedure is not followed, the contracting out can be void.
03Are upward-only rent reviews banned?
Not yet. The English Devolution and Community Empowerment Act 2026 received Royal Assent in April 2026 and contains a ban on upward-only rent review clauses in many new business leases in England and Wales. It needs secondary legislation before it takes effect, and as of October 2026 it is not in force. Existing leases are generally unaffected. Tenants agreeing leases now should ask how their review clause would operate if the ban applies during the term.
04Can I get out of a commercial lease early?
Only if the lease gives you a break right, the landlord agrees to a surrender, or you assign or sublet within the alienation provisions. A break clause must be exercised exactly as the lease requires, including any conditions on paying rent or giving vacant possession, which courts apply strictly. Without a break, a negotiated surrender usually requires a payment to the landlord. Assignment may leave you liable under an authorised guarantee agreement.
05Who pays for repairs in a commercial lease?
It depends on the lease. A full repairing and insuring lease makes the tenant responsible for repairs and the cost of insurance, while in multi-let buildings the landlord usually repairs the structure and common parts and recovers the cost through the service charge. Tenants of older premises should limit their obligation by reference to a schedule of condition. At the end of the lease, dilapidations damages are capped by section 18 of the 1927 Act.
06Do I need a solicitor for a commercial lease?
It is strongly advisable. A commercial lease is a long, complex contract with significant financial exposure, and statutory formalities such as contracting out of the 1954 Act must be followed precisely. A solicitor will check the draft against heads of terms, carry out title and planning due diligence, negotiate the key clauses and register the lease where required. Landlords' agents who are RICS members must also follow the RICS Code for leasing business premises.
Sources and official materials
- Landlord and Tenant Act 1954, Part 2 — Security of tenure for business tenants
- Landlord and Tenant Act 1954, section 38A — Agreements to exclude security of tenure
- Regulatory Reform (Business Tenancies) (England and Wales) Order 2003, Schedule 2 — Contracting-out notice and declaration requirements
- Landlord and Tenant Act 1927, section 18 — Cap on damages for disrepair
- Landlord and Tenant Act 1927, section 19 — Consent to assign not to be unreasonably withheld
- Law Commission: Business tenancies – the right to renew — Review of the 1954 Act
- GOV.UK: Renting business property — Government guidance for business tenants
General information only, current as at 21 October 2026. It is not legal advice and does not create a solicitor–client relationship. It reflects the law of England and Wales unless stated otherwise; Scotland and Northern Ireland have separate legal systems, and the law changes frequently. Check current official sources and take advice on the facts of your matter.