The “term” of the lease means how long it’s for.
You can have a lease which is monthly, which means that it rolls over every month until either the landlord or the tenant’s decides to end it.
But most leases have a start date and an end date, and the period in between is the “term”.
The term may be any period, more or less, that you and the landlord decide on. You could have a lease for a year or for 20 years.
Let’s use a five year term as an example. It’s going to be five years from some date. The most obvious and natural date for it to start is the day you sign the lease. Often that’s how it is. But people in the property business have a thing about “quarter days”, and they like a lease to end on the day before the end of a quarter. So they might make the term runs from a quarter day. They can’t use the next quarter days, because then you’d be waiting to move in. So they might use the last quarter day. If you sign up on 15th May, they might say in the lease that the term is five years from 25th March, which is the most recent quarter day.
However they do it, there is a term commencement date from which the five years is calculated. But that is different from the rent commencement date. Obviously, if you sign up on 15th May, you are not going to agree to pay rent from the previous 25th March. So rent commencement will be different from term commencement.
The term then runs for five years. During that time, you have the right to the property, as long as you pay the rent, and the landlord has to honour your ownership and your right of occupation.
There are ways in which the lease term can end before the end of the five year period.
One situation is if there is a break clause in the lease. The parties to a deal sometimes agree that either the landlord or the tenant, or both, can end the lease early on a specific date, or by giving a particular period of notice, if they want to cancel it. For example, someone who wants to try out a property as a restaurant might want the option of getting out of the deal in two years’ time if it doesn’t work out. But landlords won’t often agree to this – they want certainty.
The second situation is if you don’t pay rent on time. If you are substantially in arrears – you haven’t paid for long time – the landlord can take back the premises and cancel the lease. This is called “re-entry”.
It’s also possible for both parties to get together and agree that the lease should end. That’s called a “surrender”. That can only be done if both parties agree.
When you are considering what premises to take at the start of your business, the length of the term is going to be an extremely important consideration. I can illustrate this best by giving you a few examples.
If you are about to start up a restaurant or a bar, you’re trying to try to build up repeat business. You want your restaurant to gain a name, so people think of it as the place to book when they want to go out for the evening. Same with a bar. Same with a beauty salon. This memory and reputation factor is called “goodwill”. So when you start that sort of business, you want a long term like maybe 20 years so that you can get the business off the ground, establish a reputation, and then be able to sell it on to someone else so that that someone will have enough years left on the lease to make a decent profit from it himself. But if you were to start a restaurant with only a five year lease, you might be fighting over the right to renew it just when you were hoping to sit back and reap the rewards of five years of hard work.
You might say that, as long as the lease is “inside the actor”, so that you have rights to renew it, it doesn’t matter about having an initial 20 years. But it does, because it’s hard to sell a business to a buyer who doesn’t know whether the landlord may come up with some reason like wanting to redevelop the building or occupying it himself which might dash all his hopes. It’s going to reduce his willingness to pay a large cash sum to buy the business from you.
For the restaurant, bar, or beauty salon the famous mantra: “location, location, location” couldn’t be truer. You can’t just switch the business to another location and be sure that everything you’ve achieved in the old one will move with you.
Another example in the other direction. You want to start up an accountancy business. You certainly won’t want to sign up for 20 year lease. The premises don’t matter. As you expand, you can move to different offices in the same general location, and take bigger offices or smaller once depending on the success of the business according to the financial climate. So you want the right to have a point where you can definitely get out of the lease if you need to. A five year lease may be what you want.