Legal Considerations When Leasing Warehouse Space

Ever since the Covid-19 pandemic accelerated the drive for online shopping, warehouse space has been in hot demand. Savills UKWA Report 2024 states:

“The role of the warehouse has never been more important, and the amount of warehouse space needed continues to rise. This is, in part, because warehouses have become central hubs of supply chain activity, absorbing tasks traditionally undertaken upstream by manufacturers and downstream by retailers. Goods are not just stored in warehouses, but are reworked, assembled, personalised, packaged and dispatched. Warehouses manage returns, repairs and recycling, and have become a vital part of the circular economy.”

Demand for warehouse space is not just in the retail sector. In August 2024, it was reported that demand for new bulk storage sold out before construction was complete. Half of the brand new 237,000 sq ft multipurpose warehouse at the Port of Liverpool was assigned for grain, and this space was fully booked up by importers while construction was still ongoing. Interestingly, part of the reason for this was the wet weather earlier this year which destroyed a lot of the UK harvest. As a result, there was a greater demand for imported grain. Given that increased wet weather is linked with climate change, this need for storage space at ports and food distribution centres is only set to increase.

If you are wanting to lease warehouse space, there are several legal aspects you must consider, the first of which is whether you want to buy or lease a warehouse.

Which is best for my business – buying or leasing?

There are advantages to both purchasing and leasing a commercial property – the needs of your business and investment strategy will dictate how you acquire warehouse space. Although the Coronavirus pandemic accelerated the move to online shopping, consumer trends had been heading in this direction for years. Like home working, the pandemic provided the impetus to make a gradual societal shift an established norm. The ongoing demand for warehouse space makes it a relatively safe investment. Buying commercial property also provides the ability to modify the premises to suit your commercial needs and ambitions.

If you do not have the upfront capital to purchase warehouse space outright, leasing is a positive option. Not only is this a more cost-effective way of acquiring space, but it also allows for agility as you can take on bigger or smaller premises as per the demands of your business.

A Commercial Property Lawyer can advise you on the pros and cons of buying and leasing warehouse premises.

If you decide to lease warehouse space, you will need to consider the following:

Protection under the Landlord and Tenant Act (LTA) 1954

Under the LTA 1954, provided the below conditions are met, you will have a statutory right to a lease renewal at the end of the contractual term. Furthermore, the terms of the renewal must be broadly similar to the existing lease. This is known as ‘security of tenure’.

To qualify for security of tenure you must:

• Have a tenancy and that tenancy must relate to the premises.
• The premises must be occupied for the purposes of a business which is carried out by you.
• Have a tenancy that does not fall under the specific exclusions stated in the LTA 1954.

It is possible to contract out of the security of tenure provisions. To do so the landlord must serve notice to you on a prescribed form that explains the risk of contracting out. You must then sign a statutory declaration in front of your Solicitor, acknowledging that you have received notice from the landlord and understand the consequences of forgoing security of tenure.

Do you need a break clause?

Including a break clause in your fixed-term commercial lease agreement allows either you or the landlord to end the tenancy agreement on one or more specified dates before the fixed-term expires.

If you negotiate a break clause, pay meticulous attention to the requirements of serving a valid break clause notice. Failure to serve notice correctly can result in you being unable to break the lease. Lord Hoffman emphasised this point in the leading case Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749:

“if the [notice] clause had said that the notice had to be on blue paper, it would have been no good serving a notice on pink paper, however clear it might have been that the tenant wanted to terminate the lease.”

Do not neglect property searches

Few people would neglect to order relevant property searches if they were buying a commercial property, but many prospective tenants believe that searches are not required as they are merely leasing the premises. However, your warehouse tenancy will be a considerable financial investment, not only in terms of rent, but the initial outlay often required to renovate the premises to meet your commercial needs. The cost of having relevant searches such as those relating to water and drainage, environment, local authority, and flooding pale in comparison to the expense associated with the risk of a dispute with your landlord and/or insurer. And speaking of insurance…

Carefully evaluate your insurance needs

Many organisations have fallen into insolvency following their insurance not responding following a warehouse-related calamity such as an explosion, fire, or flood which destroys some or all of its stock. It is imperative to have adequate insurance and not breach the terms of your contract. For example, if you are insured for a certain type or quantity of stock and the type and/or quantity changes, in most cases you must notify the insurer, otherwise, it may refuse to cover the additional inventory. It is also common for companies to fail to tell their insurer that they have acquired extra warehouse space resulting in insurance not responding when disaster strikes.

Investing in relevant property searches as part of your due diligence will assist you in estimating the type and scale of the insurance you require.

Concluding comments

The above does not by any means cover every consideration and due diligence requirement associated with leasing a warehouse or any other commercial property. You will also need to understand the implications of specific terms common in lease agreements such as FRI (full repair and insurance) lease, the length of the tenancy, and rent review clauses.

The best way to protect your interests is to have an experienced Commercial Property Solicitor review all thedocuments associated with leasing and operating your warehouse space. These include the:

• Lease agreement
• Mortgage agreement (if you are buying)
• Insurance policies
• Property searches
• All related contracts

Investing in quality legal advice can mitigate your risk of costly landlord and tenant disputes, high repair bills, and the catastrophic consequences of insurance not responding.