Commercial Lease Types: FRI, IRI and Tenant Repairing

Commercial lease structures decide who pays for what, how secure your income is, and how easy it is to get the unit back. If you treat them like a long AST, you will miss the real risk.

1. FRI, IRI and service charge leases

Full Repairing and Insuring (FRI)

Tenant responsible for all internal and external repairs and for insuring the building, either directly or via a recharge.

You get a "clean" rent: in theory you just collect rent and manage the relationship.

Common on single-let shops, industrial units and standalone offices.

Cash flow and responsibility for you:

Best when the building is in good condition and surveys are clear, because major repairs land on the tenant.

You still carry risk at lease end via dilapidations if the tenant has not complied, and if the tenant fails mid-term you face the repair bill anyway.

Internal Repairing and Insuring (IRI)

Tenant repairs and maintains inside the premises only; you handle structure, roof and exterior.

Insurance obligations are often split, with you insuring the building and recharging an insurance rent.

Common in multi-let buildings where you need control over the structure and common parts (small office buildings, mixed-use blocks).

Cash flow and responsibility for you:

Higher ongoing cost exposure: roofs, external decoration and structural issues sit with you.

You pass a lot of this back through service charge, but you typically fund large works up-front and recover over time, and you carry void shares.

Service charge leases

You manage common parts and external areas and recover costs via a service charge.

Charges are usually variable: you budget at the start of the year, collect on account, then reconcile to actual cost.

Used in multi-let offices, small estates and shopping centres so you can control the building as a whole.

Cash flow for you:

You fund big items (for example a roof at GBP 50,000), then recover via the service charge, often over several years.

During voids you pay that unit's share of service charge and business rates yourself. This is where a "10% yield" block often falls over.

Forum mistake: "Just get an FRI lease and the tenant pays for everything." Reality: FRI means the tenant is liable while they are there and solvent. If they cannot afford a new roof, you end up doing a deal or paying to protect your asset.

2. Break clauses: power tools, not boilerplate

A break clause lets you or the tenant end the lease early. It is one of the most heavily litigated parts of a commercial lease.

When breaks benefit you:

Development angle: You want the ability to regain possession in, say, year 5 of a 10-year lease if you get planning or decide to sell with vacant possession.

Weak covenant: You might want a landlord's break if the business is new and you want an exit if they underperform.

When breaks benefit the tenant:

Flexibility: Tenants push for tenant-only breaks at year 3 or 5 in a longer lease.

Negotiation leverage: Having a break on the horizon can force a rent or lease re-gear.

Conditions attached (and where tenants get caught):

Typical preconditions:

Written notice served correctly and on time (common windows are 3-6 months before the break date).

All principal rent paid up to date.

Often: vacant possession, no arrears of service charge or insurance, compliance with covenants.

Courts enforce these strictly: missing the deadline by one day or under-paying rent by a few pounds can invalidate the break, leaving the tenant on the hook for years.

For you, the trick is:

Keep conditions simple if you want the break to be realistically exercisable.

If you want more control, conditions about arrears and vacant possession are standard, but do not get greedy: over-engineered conditions increase the risk of disputes and void periods.

Forum mistake: "Stick in a break clause, it is just a date in the lease." Reality: The conditions are where the value sits. A badly drafted break is either worthless or guaranteed to end in an argument.

3. Rent reviews: open market, index-linked and the 2026 reforms

Rent review is the engine that drives your income over a 10- or 15-year hold.

Common mechanisms:

Open market rent review: Rent is adjusted at (say) year 5 and 10 to the rent a willing landlord and tenant would agree for that property at that time. Traditionally drafted as upwards-only, so rent can stay the same or rise but not fall.

Index-linked (RPI / CPI): Rent increases in line with an inflation index, usually annually or every 3-5 years, often with caps and collars.

Fixed uplifts: Rent steps up on a fixed schedule, for example GBP 20,000 to GBP 22,000 to GBP 24,000.

Turnover-linked: Base rent plus a percentage of the tenant's turnover, mainly in retail and leisure.

2026 position on upwards-only reviews:

Most existing leases still have upwards-only open-market or index-linked reviews.

Government proposals to ban upwards-only rent reviews mean new leases will need upwards/downwards or neutral (market-based) wording once the ban starts.

Any lease you grant now with a long term and a 5-yearly review will run into the RPI transition in 2030, so CPI / CPIH-linked wording is becoming standard.

What matters for your cash flow:

Open market upwards-only is best for you on paper but may be harder to negotiate with savvy tenants in weaker locations now that reform is coming.

Index-linked with a floor and cap gives you visibility on income but ties you to inflation performance, which might be lower than historic rental growth.

Fixed uplifts are simple and increasingly popular on small units because they sidestep rent review disputes.

Forum mistake: "Just insist on upwards-only reviews like everyone else." Reality: You will be negotiating in a legal environment that is moving towards upwards/downwards or capped structures. If your clause is not drafted for that, you risk either losing the clause or scaring off good covenants.

4. Lease length, options to renew and the 1954 Act

Lease length

For small units in 2026 you typically see:

3-5 year terms with or without a tenant break for weaker covenants and secondary locations.

10+ year terms (often with breaks) for stronger national or regional tenants.

Trade-off for you:

Shorter leases:

Pros: Easier to re-let or change use, easier to move or redevelop.

Cons: More frequent voids, more legal and agency fees, weaker value for lenders and buyers.

Longer leases:

Pros: More stable income and better valuation if the tenant is strong.

Cons: Harder to react to market falls or to repurpose the building. If you are stuck with a below-market rent, an upwards/downwards review could bite if your drafting is poor.

Options to renew and security of tenure

For business tenancies in England and Wales, Landlord and Tenant Act 1954 Part II is the starting point:

Leases "inside the Act" give the tenant security of tenure: at term end they have a right to a new lease on similar terms unless you can rely on limited statutory grounds to oppose.

You can "contract out" of that security via the procedure in section 38A LTA 1954: statutory notice, tenant declaration, and specific wording in the lease, all before completion.

Two ways renewal is dealt with:

Inside the Act: No express option needed. The statute gives the tenant the right to request a new lease; the court can set terms and rent if you cannot agree.

Outside the Act: You can add an express option to renew, but you are not obliged to. If you do, the wording must be tight: term, rent mechanism, notice period, conditions.

Forum mistake: "Give them a 5-year lease and you get it back automatically." If you do not contract out, a business tenant with qualifying occupation has statutory rights under the 1954 Act, whether you put "no right to renew" in the lease or not.

5. Use, alienation, guarantees and rent deposits

Permitted use clauses

Every lease will state what the premises can be used for, usually by reference to planning use classes (for example "Use Class E for retail and office use").

Tight use: Protects the parade mix and your planning status but narrows your pool of replacement tenants.

Wider use: Easier reletting but can create conflict with other occupiers or trigger planning / licensing issues.

If you want to change use in future (for example retail to office or resi), a narrow clause in an inside the Act lease can make it harder and slower.

Alienation clauses (assignment and subletting)

Alienation provisions tell you whether and how the tenant can get out of the lease or share occupation.

Typical pattern:

Assignment of the whole: Allowed with your consent, "not to be unreasonably withheld or delayed", often with conditions like an authorised guarantee agreement (AGA) from the outgoing tenant and demonstrating the incoming tenant's covenant strength.

Subletting: Often allowed of whole or part on certain terms or prohibited entirely in small units.

Sharing occupation: Often allowed within a group of companies.

The Landlord and Tenant (Covenants) Act 1995 changes who is on the hook when leases are assigned:

Section 5: A tenant who assigns the whole premises is released from tenant covenants from the date of assignment, subject to any AGA.

Your covenants as landlord and any rent deposit deeds can also follow the reversion unless you get releases.

Why you care:

A tightly drafted alienation clause controls who you end up with as a tenant over a 15-year term.

A bad clause means your original careful covenant is gone and replaced by whoever will take the lease off their hands, with you stuck.

Guarantors and rent deposit deeds

Because there is no deposit scheme, your security is whatever you negotiate.

Common security stack:

Director's or parent company guarantee: Personal or corporate guarantee that backs up the tenant company. These often work alongside the 1995 Act and AGAs on assignment.

Rent deposit deed:

Tenant pays a cash deposit, often 3-6 months' rent plus VAT, into a designated account.

The deed sets conditions for drawing down (for example unpaid rent, costs, damages) and for topping back up.

On assignment, you must deal properly with the deposit deed or you risk remaining liable under it as an "assignor landlord" under section 28 of the 1995 Act.

Forum mistakes to flag:

"You do not need a guarantor if you have a rent deposit." One failed tenant and a 9-month void can burn through a 3-month deposit in weeks. You want both where the covenant is thin.

"Just pass the rent deposit on when you sell the building." If the deed is not correctly novated and releases sorted, you can remain jointly liable under the deposit deed after the sale under the 1995 Act.

For PropertyKiln, the angle that cuts through the noise is: "The lease is the deal." FRI vs IRI, break clauses, rent review, and whether you are inside or outside the Landlord and Tenant Act 1954 will do more to decide your long-term profit than whether you got GBP 1 per sq ft extra on day one.

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