Commercial lease agreement: everything you need to know before you sign

If you’re looking for business premises or have just found them, do you know your rights and obligations with regards to your lessor? myLIFE highlights the key points to consider, preferably before you sign your commercial lease.

Audrey is a florist. She is in the process of setting up her company in Luxembourg. After searching for several months, she has finally found premises that seem to meet her requirements. The shop is in an ideal location, close to home and on a busy street. It’s big enough to have a small display and there’s room for a storage area behind the shop. The rent is standard for the sector and a florist business is permitted under the lease. It all seems perfect! But before signing up, Audrey wants to find out more about a commercial lease and what she is committing to.

Who is a commercial lease for?

A lease is an agreement between the lessor and the lessee or tenant. The lessor undertakes to make premises available to the tenant in exchange for rent. There are several types of lease in Luxembourg: residential, commercial, agricultural, etc.

The type of lease governs how the rented site can be used (e.g. as living accommodation or business premises) and defines the rules to which lessor and tenant are subject.

In Luxembourg, a commercial lease is governed by the Law of 3 February 2018. It is designed for tenants who wish to run a commercial, industrial or artisan business in the rented premises.

→ Useful info: the Law of 2018 does not cover office leases, short-term leases (of one year or less) or premises for freelance professions such as physiotherapists, doctors, architects, lawyers, etc., which are subject to the general provisions of the civil code.

It is therefore a commercial lease agreement that Audrey will sign for her florist business. It is drawn up in writing and signed by both parties to serve as evidence of their respective duties in the event of any dispute.

A rent guarantee to cover obligations under the lease agreement (…) may not legally exceed six months of rent.

Check certain clauses before signing the lease

Before signing her commercial lease agreement, Audrey should read the clauses of the agreement carefully and check that they establish the rights and obligations of each party.

• • The services included in the rent: the lease should provide an exhaustive list of the elements included in the rent (the area of the relevant premises, parking space, cellar, rear courtyard, etc.).
  • The condition of the premises: a full review of the state of the premises is highly advisable – before taking up residence and at the end of the lease agreement. This will protect the interests of both tenant and lessor in the event of disputes. If a review is not carried out, the premises are considered to be in good state at the start of the agreement and must be returned in the same condition.
  • Use of the premises: Audrey must check that the florist business she intends to run from the premises is authorised by the lessor in the lease.
  • Lease term: a commercial lease may be agreed for an indefinite or fixed term. The lease is assumed to be for an indefinite term unless specified in the agreement.
  • Rent and rent reviews: the amount and timing of rent payments and the terms of any rent reviews should be recorded in the lease agreement. Rent is often linked to the consumer price index. In principle, the official rate in the month prior to signature of the lease is considered as the base index.
  • Charges: the lease should detail the level of charges and what is included: water, electricity, maintenance of communal areas, etc. To avoid disputes, the lease may also indicate how any maintenance costs (repairs, renovation) are to be split between lessor and tenant.
  • Rent guarantee: the lessor will generally require a rent guarantee to cover obligations under the lease agreement (rent and any damages). This may not exceed six months of rent and may take the form of a bank guarantee of payment on first demand or insurance to cover at least six months of rent.
  • Sub-letting or assignment of the lease: the conditions for assignment of the lease or any sub-letting agreement may be detailed in the lease. This may offer the opportunity for the tenant to sub-let or assign a part of their premises, for example, if they are in economic difficulties.

→ Useful info: the Law of 2018 puts an end to the practice of key money payments, also known as a “lease premium”. New agreements cannot include the payment of extra rent or an additional charge payable to the lessor or an intermediary for making the premises available.

A fixed-term lease agreement that is not terminated by the lessor upon expiry is tacitly renewed for an indefinite term.

Can a commercial lease be renewed?

If Audrey has signed a fixed-term lease, she has the right to renew the lease during nine years. A renewal request must be sent to the lessor by registered letter with acknowledgement of receipt at least six months before the lease expires. The lessor then has three months to respond. If there is more than one lessor, the request must be sent to each of them (unless otherwise specified in the lease agreement). A lease renewal means that a new agreement will be drawn up and there is no guarantee that the terms will remain similar to those of the initial agreement.

→ Useful info: a fixed-term lease agreement that is not terminated by the lessor upon expiry (with a six-month notice period) is tacitly renewed for an indefinite term.

Can a commercial lease agreement be terminated or the renewal request refused?

The lessor may terminate the commercial lease with immediate effect if Audrey does not meet her obligations under the lease agreement (e.g. if she fails to pay the rent or charges).

In addition, if the premises have been let for less than nine years, the lessor may refuse any request for renewal or may terminate the commercial lease with notice of six months in the following situations:

• • • “for the personal use of the lessor or their first-degree descendants;
    • if leases will no longer be granted for identical activities;
    • if the leased property is to be rebuilt or transformed.”¹

After nine years of occupation by the tenant, the lessor is within his/her rights to terminate a lease with an indefinite term or to refuse the renewal of a fixed-term lease without justification. In this case, the lessor or a third party (e.g. the future tenant) must pay Audrey an eviction indemnity prior to the end of the lease for the loss of her florist store.

→ Useful info: Audrey and the lessor can define the level of eviction indemnity or the method to be used for its calculation in the lease agreement. Failing this, a magistrate will determine this amount based on the market value of the business assets.

A tenant who has rented premises for over 18 years has a pre-emptive right.

Audrey can also cancel her commercial lease agreement if the lessor fails to respect their contractual obligations: if the lessor imposes a rent increase that does not respect the consumer price index or if the peaceful enjoyment of the rented premises is no longer possible, etc.

→ Useful info: a tenant who has rented premises for over 18 years has a pre-emptive right to purchase the rented premises if the lessor wishes to sell, except in specific circumstances². However, in order to exercise this right, the tenant must rent the full building where the premises are located or the premises must be part of an owners’ association.

Is it possible to sub-let a commercial lease?

If, after a few years, Audrey wishes to close the business and to sub-let (or assign) her florist shop, she must notify the lessor who has 30 days to accept or reject the request.

If there is a clause in the lease agreement prohibiting a sub-lease or (assignment) this shall be null and void³ if the “assignment or sub-lease is made together with the assignment of the business assets, providing that an identical business remains in operation”¹. In other words, Audrey can sub-let (or assign) her lease provided that she also transfers her business assets and the sub-tenant (or new tenant) also runs a florist business.

Remember: the 2018 law specifies that the sub-tenant’s rent may not be higher than the original tenant’s rent, unless the tenant has made specific investments related to the business of the sub-tenant. However, a ruling of the Constitutional Court of 23 December 2022 considers the legal ceiling of sublease rent amounts as a restriction of the freedom of trade. This decision could set a precedent.

In conclusion, a commercial lease is a binding agreement creating rights and obligations for lessor and tenant that must be respected. Its contents should be carefully studied. This is particularly the case since the healthcare crisis, which resulted in numerous disputes between lessors and tenants in connection with the payment of rents during lockdowns. The clauses of a commercial lease do not necessarily cover how to manage this type of exceptional situation!

If there is any doubt, and to protect the interests of each party, it is therefore advisable to consult a legal professional before signing an agreement.

Now that Audrey has been informed and reassured, she has complete peace of mind to settle into her new premises. And in a few months’ time, if her business is doing well, she might even consider hiring someone to help her in the shop. Good luck!

¹ Extract of the Law of 3 February 2018 relating to commercial leases and amending certain provisions of the Civil Code.

² The pre-emptive right does not apply if the premises rented are subject to a public auction, are sold to a third-degree or closer relative of the lessor, or are subject to a transfer for no consideration.

³ The ban on assigning the lease or on sub-letting remains applicable if the lessor has reserved a part of the building for themselves or their family to live.