A glossary of commercial property terms
When reading a legal commercial property document, you may find the content rather ‘jargon-filled’, with some words that you might not be familiar with.
This glossary explains all the most commonly used (and potentially confusing) commercial property terms, to provide you with better understanding of legal documents in the future.
Commercial Property Glossary
Absolute compliance
If you see this on your contract, it means that you must meet the requirements of the agreement in full. You may see ‘absolute compliance’ in a break clause, which means certain conditions must be met in order to bring the lease to an early close.
Alterations
It’s common for contracts to mention alterations, which refer to how much you can modify the premises; for example, adding partition walls, replacing the electrics or changing the interior décor. Read these carefully, as there may be some restrictions in place.
Break clause
Most commercial property leasing contracts will have a break clause in them; which is an agreement made between the person leasing the premises and the vendor to bring the lease to an early end, usually by providing written notice. This gives added peace of mind if, for example, your business is struggling financially and you wish to move out of the premises.
Business rates
This refers to the tax payable on commercial property, and is assessed in a rating list. To obtain details of your rateable value, contact the local authority in which the building is located in and provide the address including post code.
Change of use
Change of use refers to altering the way in which the premises are occupied. There are scenarios where changing the use will not require consent by the local authority, for example, a sandwich shop changing to a hairdresser (both are classified under A1 Shops). However, if you’re making significant changes (e.g. changing a residential property to a business premises), you will be required to obtain full planning permission to change the use of the property.
Covenant
Quite simply, a covenant is an agreement or promise. In terms of a lease, it refers to the obligations of both tenant and landlord.
Demise
The term demised premise refers to the space occupied by a tenant, under the lease contract.
External valuer
You or your landlord may wish to use an external valuer; someone who will value the property but who is acting purely on a 3rd party basis, with no connections to either of you.
Forfeiture
If the tenant fails to pay the rent or breaches the terms of the lease, the landlord has the right to forfeit. In simple terms, this means they can end the tenancy, as long as they comply with section 146(1) of the Law of Property Act 1925.
Ground lease
The ground lease is granted at a ground rent, and requires an initial payment. On average, a ground lease lasts from 30 years to 999 years.
Internal repairing lease (IRL)
In this type of lease, the landlord is responsible for external repairs. It’s also their responsibility to take on the costs of these repairs, and as such, may result in a slightly higher rent being charged.
Landlord’s consent
If you wish to make certain changes to the property, you may have to seek ‘landlord’s consent’, which means formal permission (usually written).
Mediation
Mediation is the preferred way of resolving disputes these days, and seeks to avoid cases being taken to court. It involves an independent mediator, who attempts to resolve the situation between both tenant and landlord.
Net yield
Net yield consists of the profits generated from purchasing or renting a property, minus the costs involved.
Prime investment
If a property is regarded as being ‘premium’, either in terms of its location or condition, then it may be referred to as a ‘prime investment’.
Rent review
Usually, the landlord will review the rental rate every five years (against the current market plus the value of the property, or the Retail Price Index).
Service charge
It’s common to have a service charge in place, which the tenant must pay, in exchange for services provided by the landlord; such as maintenance and repair of the building, plus management (in some cases).
Tenant’s improvements
This term refers to a range of improvements that a tenant can legally make (at their own cost), without seeking permission from the landlord.
Term
This refers to the length of time granted to the tenant to rent out the premises. Some premises are short-term (i.e. six months or less), others are long-term (at least a year).
Use class
All commercial property is given a use class, unless it is classified as sui generis – i.e. it doesn’t fall into any of the established categories, such as a theatre or nightclub. If you'd like to learn more, check out our visual guide to commercial property use classes. Here are the basics:
A1 Shops
Shops, retail warehouses, hairdressers, undertakers, travel and ticket agencies, post offices, pet shops, sandwich bars, showrooms, domestic hire shops, dry cleaners, funeral directors and internet cafes.
A2 Financial and professional services
Financial services such as banks and building societies, professional services (other than health and medical services) and including estate and employment agencies. It does not include betting offices or pay day loan shops - these are now classed as “sui generis” uses (see above).
A3 Restaurants and cafés
For the sale of food and drink for consumption on the premises - restaurants, snack bars and cafes.
A4 Drinking establishments
Public houses, wine bars or other drinking establishments (but not night clubs) including drinking establishments with exapnded food provision.
A5 Hot food takeaways
For the sale of hot food for consumption off the premises
B1 Business
Offices (other than those that fall within A2), research and development of products and processes, light industry appropriate in a residential area.
B2 General industrial
Use for industrial process other than one falling within class B1 (excluding incineration purposes, chemical treatment or landfill or hazardous waste).
B8 Storage or distribution
This class includes open air storage.
C1 Hotels
Hotels, boarding and guest houses where no significant element of care is provided (excludes hostels).
C2 Residential institutions
Residential care homes, hospitals, nursing homes, boarding schools, residential colleges and training centres.
C2A Secure Residential Institution
Use for a provision of secure residential accommodation, including use as a prison, young offenders institution, detention centre, secure training centre, custody centre, short term holding centre, secure hospital, secure local authority accommodation or use as a military barracks.
C3 Dwellinghouses
this class is formed of 3 parts:
- C3(a) covers use by a single person or a family (a couple whether married or not, a person related to one another with members of the family of one of the couple to be treated as members of the family of the other), an employer and certain domestic employees (such as an au pair, nanny, nurse, governess, servant, chauffeur, gardener, secretary and personal assistant), a carer and the person receiving the care and a foster parent and foster child.
- C3(b): up to six people living together as a single household and receiving care e.g. supported housing schemes such as those for people with learning disabilities or mental health problems.
- C3(c) allows for groups of people (up to six) living together as a single household. This allows for those groupings that do not fall within the C4 HMO definition, but which fell within the previous C3 use class, to be provided for i.e. a small religious community may fall into this section as could a homeowner who is living with a lodger.
C4 Houses in multiple occupation
small shared houses occupied by between three and six unrelated individuals, as their only or main residence, who share basic amenities such as a kitchen or bathroom.
D1 Non-residential institutions
Clinics, health centres, crèches, day nurseries, day centres, schools, art galleries (other than for sale or hire), museums, libraries, halls, places of worship, church halls, law court. Non residential education and training centres.
D2 Assembly and leisure
Cinemas, music and concert halls, bingo and dance halls (but not night clubs), swimming baths, skating rinks, gymnasiums or area for indoor or outdoor sports and recreations (except for motor sports, or where firearms are used).
