Reading the Exit Before the Entrance: A Director's Review of Commercial Lease Clauses

A commercial lease is usually the largest single financial commitment a small company makes, and it is frequently the least examined. The rent is understood. The term is understood. The break date is noted with the vague optimism of someone who intends to be bigger by then. Everything else — repairing liability, reinstatement, service charge mechanics, the conditions attached to the break — is left to be resolved at the point when the company has least leverage to resolve it.

That is the wrong way round. A lease is not really a property document; it is a ten-year cash-flow forecast with legal force. It should be read the way a lender would read it.

Begin with the repairing obligation, not the rent

Most modern UK leases are full repairing and insuring, which means the tenant pays for the building's condition as well as its occupation. Some are internal-only or demised-area only, and that distinction is worth real money. Whatever the extent, insist that a photographic schedule of condition is annexed to the lease at completion, recording the state of the premises on day one. Without it, the tenant inherits an undefined standard of repair and must return the property to a standard nobody can evidence. The cost of commissioning a schedule is trivial against the dilapidations claim it prevents.

Dilapidations: the bill that arrives at the end

Dilapidations are the landlord's remedy for breach of the repair and reinstatement covenants. They are assessed either during the term or, more commonly, at expiry or at a break date. Two things reduce the exposure. First, section 18(1) of the Landlord and Tenant Act 1927 caps the claim at the diminution in the value of the landlord's reversion, which is why a section 18 valuation is often the most commercially useful document in the file. Second, the RICS dilapidations protocol sets an expected process, and following it disciplines inflated claims.

Reinstatement is the twin of repair, and it is where alterations catch people out. Any works carried out during the term should have written landlord's consent, and that consent should record expressly whether the works must be removed at the end. A polite email exchange is not a substitute: it will not answer the question two years later.

Conditional and unconditional break clauses

An unconditional break lets the tenant end the lease on notice, subject to nothing. A conditional break attaches requirements, typically that there are no arrears of rent, that covenants have been materially complied with, that vacant possession is given, and that the landlord's costs are paid. Each of those conditions is a trap in the making.

Watch how "rent" is defined. If it includes service charge and insurance, a single disputed quarter can defeat the break. Watch the notice mechanics: a window that closes on a bank holiday, or a requirement to serve in a particular form, has defeated many otherwise valid breaks. Ask the solicitor to delete the conditions outright, or at minimum to limit arrears to principal rent only, to make time not of the essence for service, and to cap the landlord's costs at a stated figure.

Rent reviews and the ratchet

Upward-only reviews are less common than they were but still appear, and index-linked reviews achieve much the same effect by a different route. Where a review is linked to RPI or CPI, look for the collar and the cap, and model what happens at the top of the range rather than the middle. A rent-free period or stepped rent is often worth more to a growing business than a marginally lower headline figure that resets at review.

Service charges: caps, budgets and the right to audit

A service charge without a cap is an open-ended commitment. Fixed caps, index-linked caps and caps on specific categories are all negotiable. Beyond the cap, check the mechanics: an annual budget, a reconciled service charge account, a certificate of actual expenditure, and an express right for the tenant to audit or inspect the underlying accounts. The RICS professional statement on service charges in commercial property sets out expected standards of transparency, and referring to it in the lease strengthens the tenant's position. This is also the point to examine whether the landlord recovers its own management fees, insurance commission or the costs of resolving disputes.

Alienation, use and the question of exit

If there is any prospect of selling the business, the lease must permit assignment or underletting with consent not unreasonably withheld. A requirement for an authorised guarantee agreement, or a prohibition on sharing occupation with group companies, can quietly reduce the value of the company being sold. Check the permitted use against what the business might plausibly become, not merely what it does today.

When the business outgrows the space

Growth is the assumption behind most leases and the least provided for. A tenant-only break every three years, a right to underlet, and a term short enough to renegotiate are all worth more than a longer term at a lower rent. Conversely, if contraction is the risk, the same break options serve.

The provision almost nobody makes

Set aside an annual amount equal to the estimated dilapidations liability divided by the years remaining on the term. For a lease with a meaningful reinstatement obligation, add a separate figure for that. The money should sit somewhere identifiable, not in working capital, so that the exit is funded when it arrives.

There is a further reason to look at the balance sheet this year. The revised lease accounting requirements in FRS 102 take effect for accounting periods beginning on or after 1 January 2026, bringing most leases onto the balance sheet as a right-of-use asset and a corresponding liability. Directors should confirm the position with their accountant, because a liability that was previously invisible can affect bank covenants and borrowing capacity.

Questions to put to the solicitor before signature

Ask what the repairing obligation covers and whether a schedule of condition is annexed. Ask for the break conditions to be removed or narrowed. Ask for a service charge cap and an audit right. Ask whether there is any restriction that would prevent a future sale of the business. Then ask what the exit is likely to cost, and start funding it from the first quarter rather than the last.