Renewing a business/commercial lease: a step-by-step guide

If your commercial landlord refuses a lease renewal you would need to make a claim pursuant to the Landlord and Tenant Act 1954 (the Act). The process starts either by the landlord serving a notice under s25 of the Act, or the tenant serving a request for a new tenancy under s26 of the Act. There is a prescribed form for the request: Form 3 to Schedule 2 of the Act Part II (Notices) (Regulations) 2004. 

The key point is to correctly name both the landlord and tenant, so it is wise to carry out Land Registry searches against both titles before serving the request to verify, for example,
which company in the group is the landlord or tenant as a matter of law, and that the
person to whom the rent is paid is the reversioner in respect of the whole of the
demised premises. The request must also set out the party’s proposals in relation to
the terms of the new lease, including its proposal as to rent.            

The tenant will of course want to be sure before serving such a request, that it is
entitled to a new tenancy – ie that it, or an associated company, or a person with a
controlling interest in the tenant, is in (lawful) occupation of the premises for the purposes
of its business, and that its existing tenancy is not ‘contracted out’ of the Act.

If there is any doubt about the entitlement to a new tenancy, the content of the request or the validity of a notice served by the landlord, it is possible to obtain a legal advice on the
discrete point.

Whether serving a s25 notice or responding to a tenant’s s26 notice, the landlord will have to state whether: 1) it opposes the grant of a new tenancy per se (on one of the grounds specified in s30(1)); or 2) a new tenancy is unopposed in principle, but some or all of the terms are in dispute. Service of the notice or request and counter-notice is often a trigger for negotiations between the landlord and tenant.

Subject to some limited exceptions, commercial leases in the UK can be divided into two categories: those benefiting from the security of tenure provisions in the Landlord and Tenant Act 1954 (“the Act”) and those that have been expressly excluded from the Act.  If you don’t know whether you have security or not, we recommend that you seek advice. ither way, you should be thinking about your options at least 12 to 24 months before your lease expires, depending on the size of your operation.

Tenancies within the scope of the Act

Introduction to the Act
  • Broadly speaking, the Act provides that a commercial tenant has the right to renew its lease of the premises that it occupies for the purposes of its business.
  • If the statutory renewal process in the Act has not yet been triggered by the lease expiry date, the lease will continue automatically and the tenant can remain in occupation on the same terms. Should it then wish to vacate, it may do so on giving at least 3 months’ notice.
  • Although the lease of the premises can continue automatically, the tenant is entitled to seek a new lease with an open market rent, which may be advantageous if rents are dropping or if the tenant wishes to be certain that the landlord will not try to end the tenancy.
  • Although this article concerns the rights of tenants to renew their leases, it should also be noted that a landlord can also initiate the renewal process. The landlord will do this if rents are rising or if it believes that a longer term fixed lease will enhance the value of the property.
Tenant’s requests for new tenancies
  • In light of the above, the tenant needs to decide which it values more: security or flexibility.  If the tenant wishes to keep its options open, it may wish to avoid triggering the renewal process until it has made up its mind.  However, if the certainty of securing a longer fixed term is more important, or if rents have dropped substantially, then the tenant may choose to start the process.
  • To initiate the renewal process, a tenant must serve a request for a new lease on its landlord. This request will set out the date for the commencement of the proposed new lease. This could be the day after the contractual expiry date of the existing lease, or it could be months or even years afterwards.
  • The tenant must give between 6 and 12 months’ notice to the landlord before the new lease begins.  For example, if a lease expires on 31 December  and the tenant wishes to request a tenancy starting on the following day, the tenant must serve a request for a new tenancy at any time between 1 January and 30 June.
  • The request will state the tenant’s proposed terms for the new lease, such as rent, term length, if the tenancy is to be of the whole of the existing premises and any other terms, such as the insertion of break clauses.
Negotiating the new lease
  • Once a tenant triggers the renewal process, the landlord has a two month period in which to dispute the grant of a new lease, as explained below.
  • If the landlord is happy to renew the lease, the parties then have a window of time to negotiate terms. The majority of uncontested lease renewals are negotiated between the parties, usually at a meeting between opposing surveyors. However, if the parties cannot agree terms and a new lease is not completed, either party may apply to the Court to decide the terms.
  • If an application is not made to Court before the last day of the lease, the lease will terminate, unless the tenant’s position is protected. This is very important, as once security has been lost the landlord will be entitled to possession. This can be disastrous for a tenant’s business.
  • Tenants can protect security of tenure by issuing proceedings at Court for a new lease, or agreeing to extend the deadline to apply by written agreement with the landlord. In either of these cases, the lease will continue on its existing terms. Alternatively, a new lease can be completed before the expiry date.
  • It should be noted that either party may make an application to pay or receive an “interim rent” during the renewal process.  This will usually be calculated to be the new rent ordered or agreed for the new lease, and so the tenant may find that it is entitled to a refund or that it has a shortfall to pay at the end of the renewal process.
  • A tenant that changes its mind about a renewal and wishes to pull out of the process, may do so. However, depending on the stage reached, it will usually be necessary to give at least three months’ notice to the landlord. If Court proceedings have commenced, a tenant may also be obliged to pay the landlord’s costs.
  • How the Court would approach its decision is outside the scope of this article, but as a general rule, the Court will apply a market rent based on expert evidence, together with terms that preserve the status-quo. Generally, the onus will be on a party seeking to depart from the existing terms to prove that the changes should be made.
Landlords that challenge the right of renewal
  • Although tenants with the protection of the Act have a right to renew, a landlord can dispute this if it can prove any of the statutory grounds to deny the renewal.
  • For example, the landlord may prevent a renewal if it wishes to occupy the premises itself, demolish it for development purposes, or if the tenant has persistently breached the lease.
  • A landlord that successfully prevents a tenant’s renewal on the grounds of own occupation or redevelopment will be obliged to pay statutory compensation to the tenant.
  • If the tenant does not accept that the landlord is entitled to dispute the grant of the new lease, either party can apply to Court for the Judge to determine the issue.

Tenancies outside the Act

A tenant that does not have security of tenure under the Act will have to leave at the end of its lease, unless it can agree terms for a new lease with its landlord or its lease contains a right to renew.  In any event, it will be important to ensure that any deal for a new lease is agreed well in advance, so that there is plenty of time to find alternative premises if the landlord pulls out.

Finally, tenants that wish to remain in occupation for short periods after the expiry of their leases will usually negotiate short leases or licences with their landlords.

Recommended action points

In order to avoid being caught out, we recommend that you:

  • check the expiry dates for your leases;
  • review whether you have rights under the Act; and
  • consider your renewal strategy at least 12 to 24 months in advance of the expiry date. 

Owing to the constant variations in the market, lease renewals are often tactical.  We therefore recommend that you seek advice at an early stage to confirm the most advantageous strategy to suit your business needs.

If you have any questions please contact us.

 

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