There are two main types of arrangement allowing a person, company or other organization to occupy real estate for a limited period of time without buying it outright.
The first is a lease, which grants the right of exclusive possession of the property for an agreed period of time. A lease confers on the tenant contractual rights and a proprietary interest in the property, which can be transferred to a third party subject to specific restrictions set out in the lease.
The second is a licence which grants permission to occupy the property. Unlike a lease, the occupier of a property under a licence does not have exclusive possession and cannot transfer the licence to a third party. In addition, under a licence the period of occupation does not have to be fixed.
In granting a licence, property owners need to ensure that they are not inadvertently granting a lease. The courts will not consider whether the document is called a lease or a licence but will instead look at the substance of the agreement to determine whether it constitutes a lease or a licence.
Although there is no distinction in law, some very long leases are commonly granted (for example 999 years) at a very low rent. We are not intending to cover these here as they represent a capital interest in a property and do not generate significant or regular income.
The Economic Crime (Transparency and Enforcement) Act 2022 applies to all UK property. In broad, and simplified, terms, the Act prevents:
unless the relevant overseas entity has first become a registered overseas entity and complied with the updating requirements. Selling or granting a charge over a leasehold interest is also prohibited. To become a registered overseas entity, the overseas entity must file information about itself, its managing officers and its beneficial owners (among other things) on the Register of Overseas Entities at Companies House. Failure to comply with the Act will be a criminal offence punishable by significant fines or, in some cases, imprisonment.
Last modified 13 Mar 2025
There is no minimum or maximum term for a commercial lease. Very long leases (for example 999 years) are relatively common, normally granted for a one-off payment rather than at a market rent. For market rent leases, terms are usually much shorter, with anything from 5, 10 or 15 years being common. The current market trend is towards shorter leases.
If the tenant has “security of tenure”, this means that the lease will not end following the expiry of its contractual term. The tenant will be entitled to a new tenancy unless the landlord has reasonable grounds for opposing it, in which case compensation may be payable.
Leases of more than seven years must be registered at HM Land Registry.
Last modified 13 Mar 2025
Residential tenants have many statutory rights and specific advice should be sought. Many different procedures apply to residential lettings. Please see the residential leases section of this site for more information.
Commercial leases covering industrial property, offices, retail property and hotels are generally governed by case law, with some supplementary statutory provisions particularly in relation to business leases (Landlord and Tenant Act 1954 and Landlord and Tenant (Covenants) Act 1995), land registration (Land Registration Act 2002) and taxation.
Parties are generally free to contract as they wish, although there are some restrictions on contracting out of statutory provisions. In particular, the Landlord and Tenant Act 1954 provides security of tenure for business tenants which can only be avoided by means of a special procedure.
The RICS (Royal Institution of Chartered Surveyors) Professional Standard: Code for Leasing Business Premises, England and Wales (1st edition) is a code of practice intended to influence the conduct of landlords and tenants during lease negotiations and after the lease is in place. It contains mandatory requirements for negotiations and heads of terms that must be complied with by landlords and agents who are RICS members and statements of good practice which may be departed from in exceptional circumstances. There is also a professional standard on service charges in commercial property (1st edition) which sets out best practice in the management and administration of service charges and provides some mandatory obligations with which surveyors who are RICS members and firms regulated by the RICS must comply.
Under the MEES Regulations, subject to certain exceptions, it is unlawful for landlords to let commercial or residential properties unless a minimum energy efficiency standard (MEES) is met.
Agricultural tenants have many statutory rights and specific advice should be sought.
Additionally, the National Security and Investment Act 2021 applies to transactions entered into from 12 November 2020, introducing a mandatory and a voluntary notification regime for transactions which could affect national security and where a sensitive sector is involved (for example, defence). The legislation could cover the transfer of a leasehold interest or the grant of a new lease for a property which is, or is proximate to, a sensitive site, such as a government building or site of national critical infrastructure. However, little guidance has been given on the definitions of ‘proximate’ or ‘sensitive’. The regime will also cover foreign-to-foreign transactions with a UK element (such as an acquisition by one foreign investor of a data storage company in another country, if that company performs services which may impact on national security in the UK). Government approval would be required prior to completion of affected transactions and without it, the transaction would be void.
Last modified 13 Mar 2025
There is only a right to renew the contractual period of the lease if the lease explicitly provides for this or if the tenant has "security of tenure". If a tenant is actually occupying a property for business purposes, then in most cases statute grants them security of tenure. If the tenant does have security of tenure, the lease will not end following the expiry of its contractual term and the tenant will be entitled to a new tenancy unless the landlord has reasonable grounds to oppose it. In this case compensation may be payable. It is very common in the current market for landlords to disapply these statutory rights of security of tenure, although a strict procedure must be followed before the lease starts. This procedure involves serving notice on the tenant and the tenant making a declaration that they agree to exclude these rights. If a tenant stays in occupation after expiry of a protected lease, the tenant continues paying rent at the passing rate. Either party can apply to court to set an ‘interim rent’. The parties are free to agree the terms of the new lease (including the rent and the term) but if they are unable to agree, the court will set the terms for them. The court may grant a renewal lease term of up to 15 years and must follow a statutory valuation formula to determine the new rent payable.
Last modified 13 Mar 2025
This depends on whether or not the tenant has security of tenure. If a tenant is actually occupying a property for business purposes then in most cases statute grants them security of tenure. If the tenant does have security of tenure, the lease will not end following the expiry of its contractual term and the tenant will be entitled to a new tenancy unless the landlord has reasonable grounds to oppose it. In this case compensation may be payable. The landlord may also serve a notice requiring repossession of the property in certain specified circumstances. It is very common in the current market for landlords to disapply these statutory rights of security of tenure, although a strict procedure must be followed before the lease starts which involves serving notice on the tenant and the tenant making a declaration that they agree to exclude these rights.
If the tenant does not have security of tenure (for example, because the procedure was followed to enable the parties to contract out of the statutory provisions conferring security of tenure) then the tenant must leave on or before the end of the contractual term specified in the lease. No additional action is required from the landlord unless the tenant refuses to leave, in breach of the terms of its lease.
Last modified 13 Mar 2025
Leases invariably contain a provision allowing the landlord to terminate the lease on non-payment of rent or if the terms of the lease are breached. In the case of market rent leases, the tenant's insolvency is also usually grounds for termination. The landlord must first serve a notice on the tenant stating what the breach is and requesting that the tenant remedies it. If the tenant fails to remedy the breach in the time allowed the landlord can re-enter the premises subject to certain conditions. The tenant may still apply to the court for “relief from forfeiture”. During the Covid-19 pandemic, a landlord’s ability to recover possession from a tenant was reduced in some situations. Most of these restrictions have now been lifted.
Courts have a tendency to allow tenants to rectify breaches of the lease and stay in occupation of the premises. For example, if the tenant pays any rent arrears due then the court will normally allow them to stay in the premises unless they have a long history of rent arrears.
Last modified 13 Mar 2025
Local authorities have certain rights to acquire property on a compulsory basis, including leased property. Rights of compulsory purchase can only be exercised in certain circumstances, such as to enable a new development, and the tenant will receive the market value of their interest in the property. In addition, they may also be entitled to further compensation.
Last modified 13 Mar 2025
Parties are free to contract as they wish. The landlord may ask for a guarantee from the tenant's parent company or a bank, or require a deposit to be paid (usually only one of these), although the guarantor of one tenant cannot validly act as guarantor for the subsequent tenant if the tenant's interest in the lease is transferred. Deposits for breakages and damage are not normally provided in the case of commercial lettings.
Last modified 13 Mar 2025
Leases normally specify the permitted uses of premises. Certain activities which may cause a nuisance are prohibited and tenants are also subject to any usage restrictions laid down by the planning regulations.
Attempts by the landlord to restrict the use of the real estate by reference to the use carried out by other real estate occupiers or itself (for example in a shopping centre or multi-let estate) may fall foul of competition laws. The landlord cannot expressly prevent the tenant from competing with other businesses.
Last modified 13 Mar 2025
Most leases limit a tenant's right to alter or improve a property. Structural alterations are frequently prohibited, particularly where the tenant only leases part of the building. Non-structural alterations normally require the landlord's consent, although in the case of improvements statute requires the landlord to give consent unless it can be reasonably withheld. Under statute, tenants are entitled to receive compensation for any alterations made if they are considered improvements to the property, although in order to avoid this leases almost always require improvements to be removed on termination of the lease.
Last modified 13 Mar 2025
Under English law, a lease is considered to be a proprietary interest in land, so it is legally possible to transfer it to someone else. The lease will usually state that any transfer requires the landlord's consent, although statute requires that this should not be unreasonably withheld or delayed.
If the lease was entered into after 1 January 1996 the outgoing tenant will normally remain liable under the covenants in the lease during the period of occupation by the incoming tenant, but not subsequently, but whether or not the tenant will remain liable depends on the specific terms of the lease.
If the lease was entered into before 1 January 1996, the original tenant remains liable under the covenants in the lease throughout the term of the lease, no matter how many times the lease is transferred to new tenants.
If a party is in occupation other than pursuant to a lease (ie by a simple licence) any rights of occupation are personal and non-transferrable.
Under the Economic Crime (Transparency and Enforcement) Act 2022, generally, a transfer of a leasehold interest is prohibited if either the leasehold owner or the proposed transferee of the leasehold estate is an overseas entity which has either not registered on the Register of Overseas Entities or not complied with the related updating requirements.
Last modified 13 Mar 2025
Where a lease is granted for more than five years, it is standard practice to provide for a rent review every five years in line with the market rent that would be payable for a new lease of the property on similar terms. Such provisions normally provide only for upwards rent reviews, although statutory provisions have been proposed that, in the future, could restrict the imposition of upwards-only reviews.
Last modified 13 Mar 2025
Most leases with a term of more than five years contain provisions for rent reviews. The rent payable following a review will normally be the current market rent for the premises at the date of the review or the same rent as previously, whichever is higher.
Rent reviews are often complex with the valuer required to make certain assumptions about the premises and their rental value. A significant amount of case law has developed over the past 25 to 30 years which valuers must take into account.
Rents linked to turnover are also sometimes agreed. This is more common in premises such as restaurants or shops.
Where the lease is for less than five years, or where the parties don't wish to provide for an open market rent review, they will sometimes agree to link the rent to an index, such as the Retail Prices Index (although the basis on which this index is calculated is due to change in 2030) or may, less commonly, provide for fixed rent increases.
Note that where the lease benefits from security of tenure, the new rent may in some circumstances be set by the court.
Last modified 13 Mar 2025
VAT is not payable on rents unless the landlord makes an option to tax in relation to the property. If the landlord makes an option to tax, VAT will be chargeable in addition to the rents. The current rate of UK VAT (as at March 2025) is 20%.
Last modified 13 Mar 2025
There are several options available to the landlord depending upon the specific circumstances and what the landlord wants to achieve.
Forfeiture: Also known as re-entry, forfeiture is the landlord's right to determine the lease where the tenant is in breach of any of its obligations under the lease, or on the occurrence of certain events specified in the lease, such as non-payment of rent – it is subject to various statutory and common law limitations. The tenant may obtain relief from forfeiture if it pays all arrears, interest and costs. If the landlord forfeits, it should also have a plan to recover the debt if the tenant does not apply for relief from forfeiture. Some methods of recovery may not be available once the lease has come to an end.
Court proceedings to recover debt: A landlord can issue court proceedings against the tenant to recover rent or other sums due under the lease. The process can be expensive and protracted. A court hearing may not be set for several months and the tenant may not feel any impetus to pay the arrears in this period. Serving a statutory demand, which requires payment within 21 days, may be more appropriate.
Statutory demand and insolvency proceedings: If the tenant has failed to pay rent or other sums due under the lease, the landlord may commence insolvency proceedings. Where the amount of debt is not in dispute, the landlord can serve a statutory demand on the tenant. If this is not paid within 21 days, and the amount is more than £750 for commercial tenants (or £5,000 or more for an individual tenant), then this may give grounds to present a bankruptcy or winding up petition.
Draw down on rent deposit: The landlord may be able to draw down from a rent deposit if one exists to recover the rent arrears or other sums due under the lease. A draw down on the rent deposit may waive the right to forfeit so this will need to be taken into consideration.
Pursue guarantor or former tenant: The landlord may be able to recover rent arrears and other sums due under the lease from any guarantors or former tenants under the lease either by way of a contractual guarantee or under the privity of contract rules, subject to certain limitations.
Commercial Rent Arrears Recovery (CRAR): CRAR allows a landlord to instruct an enforcement agent to take control of a tenant's goods and sell them to recover an equivalent value to the rent arrears. Where CRAR may be used against a tenant, it can also be used against an undertenant, which is useful if the undertenant is in a better financial position than the head tenant. CRAR is only exercisable against arrears of principal rent. If any of the arrears relate to service charges, insurance rent, or other sums due under the lease (even if those sums are reserved as rent), CRAR cannot be used to recover them.
Last modified 13 Mar 2025
Generally, stamp duty land tax (SDLT) is payable by the tenant on completion of the lease or occupation of the premises, whichever is first. For non-residential real estate, there will be an SDLT charge where the tenant makes an initial capital payment for the grant of the lease and/or where the tenant pays a rent under the lease. SDLT is charged at 2% on the part of the capital payment falling between GBP150,000 and GBP250,000 and 5% on any part of the capital payment above GBP250,000. A 1% charge applies to the net present value of any rent payable during the term of the new lease for rents with a net present value of between GBP150,000 and GBP5,000,000, with the rate increasing to 2% for the part of the net present value exceeding this threshold.
The amount of SDLT payable can be calculated online at the website of HM Revenue & Customs. For Welsh properties, see the Welsh Revenue Authority website: there are different rates and thresholds and the tax is referred to as land transaction tax.
Tenants will normally pay business rates to the local authority. This is calculated as a proportion of the rental value of the premises.
Last modified 13 Mar 2025
Except in the case of very simple developments, a service charge will normally be established and each tenant of part of a building or estate will pay a share of this based on the size of the premises they occupy in relation to the rentable space in the entire building or estate. In the retail sector, it is common for service charges to be weighted to reflect the costs involved in servicing different sized units, or to provide discounts to important tenants. Normally, certain expenses will be excluded from the service charge, such as the initial development costs of the building.
The service charge may be capped, particularly if the space being let is not in a new building.
Last modified 13 Mar 2025
In a multi-let development with many tenants, the landlord repairs and maintains common areas and the structure of the building and recovers the cost from the tenants via a service charge. Tenants are responsible for the interior of the premises they occupy.
Where a building is single let, the tenant would usually be responsible for the repair and maintenance of the whole building.
Last modified 13 Mar 2025
Services such as electricity, water, gas and telecommunications services are normally purchased by the tenant direct from suppliers, although this may not be the case in a large development.
Last modified 13 Mar 2025
The landlord will pass on the cost of insuring the building to the tenants. Each tenant normally pays a proportion of the cost, based on the size of the premises they occupy in relation to the total rentable space in the entire building or estate.
Last modified 13 Mar 2025
What is the usual length of each type of commercial lease?
There is no minimum or maximum term for a commercial lease. Very long leases (for example 999 years) are relatively common, normally granted for a one-off payment rather than at a market rent. For market rent leases, terms are usually much shorter, with anything from 5, 10 or 15 years being common. The current market trend is towards shorter leases.
If the tenant has “security of tenure”, this means that the lease will not end following the expiry of its contractual term. The tenant will be entitled to a new tenancy unless the landlord has reasonable grounds for opposing it, in which case compensation may be payable.
Leases of more than seven years must be registered at HM Land Registry.
Last modified 13 Mar 2025