Commercial Lease Renewals: What Tenants and Landlords Need to Know
For many businesses, the question of whether or not to renew a commercial lease constitutes a crucial component of their strategy and impacts their ability to achieve their commercial objectives.
Therefore, businesses need to understand the rights provided by their current lease and the parties’ scope to renegotiate their terms.
Understanding the Right to Renew: The Landlord and Tenant Act 1954
The legislation governing a commercial tenant’s right to renew its lease is the security of tenure provisions contained within Part II of the Landlord and Tenant Act 1954.
Protected Tenancies vs. Excluded Tenancies
Unless contracted out, tenants occupying property for business usually have the right to stay after their tenancy expires and seek a new one on similar terms.
This is commonly referred to as a ‘protected tenancy’.
Conversely, where a lease has been ‘contracted out’ of the security of tenure provisions, the tenant’s right to occupy the property will end on the expiry of the contractual term granted by the existing lease, and the decision as to whether to grant a new lease and the term s on which such grant would be made are at the landlord’s absolute discretion.
This is commonly referred to as an ‘excluded tenancy’.
In some circumstances, following the expiry of an excluded tenancy, a tenant who has remained in occupation of the property and continued to pay the rent to the landlord in a manner consistent with a continuation of the lease can acquire the rights of a protected tenancy.
Preparing for Commercial Lease Renewal: Timing and Considerations
In either case, as the end of the existing lease approaches, the tenant should begin considering whether or not it wishes to renew its lease of the property as soon as possible, at least twelve months before the expiry of the contractual term.
Key Questions for Tenants to Consider
When establishing whether or not to renew a lease, the questions a tenant may wish to consider include:
- Are the premises still suitable and sufficient for the business’s objectives?
- If not, will the business be able to carry out the required work and alterations?
- Is the rent payable under the existing lease, or is the rent the tenant might expect the landlord to seek in any renewal lease commensurate with the market value of the premises?
- Will any works carried out by the business during its occupation of the property be disregarded in any subsequent conversations about rent?
- Has the business complied with its obligations in the lease, including as to the state of repair and condition of the property? What are the likely dilapidations the landlord may seek to recover on the business vacating the property? Can the tenant afford to meet these costs?
- Does the existing lease give the tenant sufficient flexibility? For example, does it contain a right to terminate the lease before the expiry of the term (commonly referred to as a break clause), and if so, on what terms? Alternatively, does the existing lease allow the tenant to assign, underlet or share occupation of its lease of the property with the landlord’s consent, and if so, what conditions may the landlord attach to such consent?
- Is the landlord likely to be willing to grant a new tenancy
Commercial Lease Renewal Process for Protected Tenancies
In the case of protected tenancies, either the landlord or the tenant can initiate the renewal process by serving notice on the other between 6-12 months before the commencement of the proposed new tenancy, setting out their proposed terms.
Alternatively, if the landlord does not wish to grant a new lease, the landlord can serve notice of this, provided they are able to satisfy one or more of the statutory grounds for opposition set out in section 30(1) of the Landlord and Tenant Act 1954.
These include:
- The premises being in substantial disrepair and in breach of the tenant’s repairing obligations in the lease.
- The tenant has been in persistent arrears of rent;
- The tenant has been in substantial breach of other terms of the tenancy;
- The landlord being able to provide suitable alternative accommodation;
- The landlord has a settled and demonstrable intention to redevelop or occupy the property for its own terms.
Seeking Legal Advice on Commercial Lease Renewals
Whether you are a landlord or a tenant of commercial premises and wish to consider your options regarding the renewal of commercial property, our experienced team of commercial property solicitors would be pleased to advise you.
Contact our West Sussex offices today in Worthing or Chichester to see how we can help.