One of the most important things that business owners can do when considering leasing business premises is to make themselves aware of all the associated ‘hidden’ costs of leasing a property.

There are, for example, different definitions relating to repairs on leases. A Full Repairing and Insuring (FRI) lease is the standard commercial lease, preferred by lending institutions which leaves tenants with full responsibility for all repairs and insurance premiums from the moment they take entry until the moment they leave.

Alternatively, an Internal Repairing Only (IRO) limits the tenant’s responsibility, as the name suggests, to the internal repair of the property whilst the landlord retains responsibility for all external repairs and insurance premiums. However, because there is no external repairing liability, an IRO lease will typically command a higher rent than a FRI lease for the same property.

Tenants should therefore consider carefully the various pros and cons attached to these alternatives prior to committing to a lease agreement. Given that, under an FRI lease, tenants are responsible for all repairs, regardless of cost, they should pay particular attention to the condition of the property before agreeing to the lease since the landlord has the right to have the property reinstated or require that the tenant pay the cost of dilapidations in order to restore the property to its original condition, at expiry of the lease.

Indeed, if a tenant accepts that a property is in good condition at entry, only to discover subsequently that, in fact, it is in need of significant and expensive repair, then the tenant will usually be responsible for the cost of that repair unless he has taken steps to protect himself at the outset. The best way for a tenant to protect himself is to draw up a Schedule of Condition giving photographic evidence of the condition of the property which both landlord and tenant sign and attach to the lease for use as a benchmark for the repairing covenant. As dilapidations can amount to a significant financial liability, such Schedules of Condition are becoming increasingly commonplace.

A prospective tenant, about to sign up to lease space in a large building, should ask the landlord if there are any significant repairs planned for the building. For example if significant roof repairs are required then the landlord is likely to know about this well in advance, so that prospective tenant’s, should seek a written response to their enquiry. If possible the tenant should seek to exclude any significant planned repairs from their repairing liability, or seek to place a limit on their contribution.


Other costs often overlooked by tenants are service, or common, charges, which can be considerable. Indeed, a common charge can be equivalent to, or greater than, rent, depending on the type of property. An old office building, for example, could have a significant common charge to cover such items as the maintenance of the external fabric of the building, security, lift operator costs and cleaning. These and other costs will be collated by the common manager and charged out to tenants on an apportioned basis, with tenant liability usually based on the floor area occupied.

Tenants may seek to cap their liability for service charges. If, for example, there is a historic annual service charge of £2000 per annum, then tenants could request that their liability is capped at that figure for the term of their lease, however, the success of this request will depend on the level of interest in the available space.

As the tenant will almost always be responsible for non-domestic rates, he should ensure that he is aware of the property’s rateable value and the rates payable - the rateable value is the headline figure attributed to a property by the assessor, whilst the rates payable is currently just under 50% of that amount. This cost is in addition to the rent and is paid by the tenant directly to the local authority.

Prospective tenants should also consider if the property is elected for VAT prior to signing a lease. If the landlord has waived the VAT exemption on the building then the tenant’s rent will be subject to VAT and, if the tenant is not VAT registered, then he cannot recover the VAT, which means that he has a further 17.5% on top of his rent to pay.


The tenant will take on the financial liabilities of the lease for its full duration, or until they dispose of the lease. The ‘alienation’ provisions of the lease dicatate whether or not a tenant can sublet, or assign, his lease and is relevant in those circumstances where a tenant has committed himself, for example, to a ten year lease without a break option but discovers mid-way through the term of the lease that the space no longer suits his business requirements. In such circumstances, the tenant will seek either to assign the lease, by selling or passing on the liability to another tenant, or sub-letting it, whereby the tenant maintains the payment of rent to the landlord, while being paid a rent by a sub-tenant, who occupies the premises.

In order to assign or sublet a lease, however, the tenant will require the landlord’s formal consent. In practice, landlords can prove reluctant to permit an assignation, particularly where the proposed assignee is perceived to have a less attractive covenant and so represent a greater financial risk.

Finally, tenants should be aware that the landlord will usually seek regular rent reviews which will always be in an upward-only direction. Tenants should therefore seek advice on the fairness of the rent review clause from both a surveyor and a solicitor. Professional advice should also be sought at the time of each rent review to ensure that any increase in rent is minimised.

In summary, it is imperative that prospective tenants make themselves fully aware of all their liabilities and responsibilities prior to signing on the dotted line because they can rest assured that the landlord will be fully conversant with them. That is why it is advisable that prospective tenants seek professional advice, when considering a lease of commercial premises.

Andy Cunningham is Head of Commercial Management at Ross + Liddell, Property Managers, Surveyors and Estate Agents www.ross-liddell.com
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