SIPP Property Lease Agreements: What Must Be Included

The lease agreement between a SIPP (as landlord) and its tenant — especially where the tenant is a connected party such as the member's business — is the document that makes the arrangement legally and tax compliant. Without a formal, signed lease in place before occupation begins, the SIPP is effectively allowing a connected party to use its asset without a market value transaction, which HMRC treats as an unauthorised payment.

Beyond compliance, the lease protects both parties. It gives the tenant security of tenure and certainty about occupancy costs. It gives the SIPP (and its provider) a legally enforceable claim to the rent if the tenant defaults. A well-drafted commercial lease is not just a formality — it is the foundation of the entire connected party structure.

• Parties: The lease must correctly identify the SIPP (typically in the name of the provider as trustee) as landlord and the tenant by its legal name. Using informal names or incorrect legal entities is a common error.
• Property description: A precise description of the demised premises, including any shared areas, access rights, and any parts excluded from the lease.
• Lease term: The start date and duration. Commercial property leases typically run for three to fifteen years, depending on the size and nature of the premises.
• Rent: The initial rent, the dates on which it falls due, and the method of payment. The rent must reflect the open market value established by the RICS valuation.
• Rent review mechanism: How and when the rent will be reviewed, and the basis on which it will be reset. For connected party leases, upward-only rent reviews to open market value are standard.
• Repairing obligations: Which party is responsible for internal repairs and decoration, and which is responsible for the structure and exterior. Full repairing and insuring (FRI) leases — where the tenant bears all repair costs — are standard for commercial properties.
• Permitted use: The use or uses for which the premises may be occupied. This should align with the property's planning use class.
• Alienation provisions: Whether the tenant can assign or sublet. In connected party leases, subletting is typically restricted or prohibited without the landlord's consent.

Before the lease can be executed, your SIPP provider must review and approve the draft lease. Providers are acting as trustees of the SIPP assets and have a duty to ensure that the lease terms adequately protect the SIPP's interest. They will check that the rent is supported by the RICS valuation, that the repairing obligations are appropriate, and that the lease structure is consistent with their scheme rules.

Most providers require the lease to be in a form they are familiar with — often a standard commercial lease form with amendments specific to the connected party requirements. If your solicitor produces an unusual or overly complex lease, this can slow down the provider's approval process. Agree the lease structure with the provider's requirements in mind before your solicitor invests significant time in drafting.

Once the lease is in place, both the SIPP and the tenant have ongoing obligations. The tenant must pay rent on time, maintain the property in accordance with the repairing covenant, use the property only for the permitted use, and obtain landlord's consent for any works or alterations. The SIPP must insure the property (or ensure the tenant does so under an FRI lease), carry out any landlord's works specified in the lease, and conduct rent reviews in accordance with the lease timetable.

Failure by the tenant to meet its lease obligations — particularly timely rent payment — can have consequences beyond the lease itself. In a connected party context, persistent failure to pay rent can trigger HMRC scrutiny of the arrangement as a whole. The SIPP provider has an obligation to enforce the lease terms even against a connected party tenant. See our article on common mistakes in SIPP connected party deals for what happens when lease obligations are not met.

At the end of the lease term, the tenant has rights under the Landlord and Tenant Act 1954 to renew the lease on comparable terms — unless the lease was specifically contracted out of the Act. Many connected party leases are contracted out of the statutory renewal provisions to give the SIPP maximum flexibility, but this requires a specific procedure to be followed before the lease is signed (a statutory notice and a simple declaration by the tenant).

At lease expiry, the tenant is typically required to yield up the property in the condition required by the repairing covenant — effectively, in the same condition as at the start of the lease. If the property has deteriorated, the SIPP can claim dilapidations from the tenant. In practice, connected party arrangements tend to be renewed on a consensual basis at market rent, and formal dilapidations disputes are uncommon — but the legal position is the same as for any commercial lease.