A guide to Business Lease Renewals

So, you run your own business and very successfully. You beaver away each and every day serving your customers or clients. Life is good. They’re happy. You’re happy.

But soft, something is lurking in the shadows which could mean all your efforts could come to naught. From where do you conduct your business? Surprisingly for a lawyer this is not a trick question. The answer is, of course, your shop or office premises. But what if you could no longer operate from the cherished location that has stood you in good stead for many years?

At any time but, especially in this moment of uncertainty, it is important for both Landlords and Tenants to have some understanding of their position when their shop or office or business lease is coming to an end and what are the statutory rights to renew that lease.

The main legislation is the Landlord and Tenant Act 1954 (LTA 1954) the substance of which has not changed dramatically since it came into force.

There are essentially two types of business lease, one being a “non-renewable” or “contracted out” lease which was excluded from the protection of the LTA 1954 when it was granted.  If a lease was excluded from renewal rights, then the Tenant has no right to renew and no rights to compensation if required to leave.

The other type of lease and the one I wish to discuss with some more detail is what I will call a renewable business lease which most commercial leased premises will be by default unless they are contracted out save for some very short term leases and a few leases outside of the protection of the Act.

While it is not essential for a lease to be in writing to have the protection of the Act for present purposes, I will assume that the lease I am discussing was a written lease for, say, a term of 10 years and which expires in 10 months’ time.

It is always open to the parties to come to an agreement on terms and enter a new lease without pursuing any statutory procedures. 

However, unless something happens to end the lease (such as an agreement to surrender) a tenancy protected by the LTA 1954 will not terminate automatically at the end of the contractual term.  Provided it qualifies under the terms of the Act, which most will unless they are contracted out, then until something happens the Tenant will have a right to continue in occupation for the purposes of their business on the same terms as the expired lease including the same rent.

The renewal procedures under the LTA 1954 can be initiated by the Landlord serving a notice to terminate under Section 25 or by the Tenant serving a request for a new tenancy under Section 26.  The notice must be in the statutory form.

In the case of either notice they have to specify a date for termination of the lease which cannot be less than 6 months nor more than 12 months after the date the notice is served.

It is also important to know that, whatever is decided, a new rent will not take effect earlier than the date of expiry of the notice.

Also, that rents on such a statutory renewal can go up or down. It is often a tactical decision whether or not to serve a notice.

For example, from a Tenant’s point of view they may not want to serve a notice that results in them paying a higher rent sooner and may be quite content to carry on “holding over” for a period of time which gives them the flexibility to leave the premises by serving a clear 3 months’ notice on the Landlord.

A Landlord may not want to serve notice because perhaps they fear the rent will go down or, if they force the Tenants to make a decision about whether to renew that may cause that Tenant to leave and result in the Landlord having empty premises.

There are all sorts of reasons why one might not choose to serve a notice as soon as one can.

Equally there are any number of very good reasons why one would want to serve a notice as soon as possible if only from a Landlord’s point of view to potentially obtain a higher rent.

Also, maybe from both parties’ point of view to achieve certainty.

Often a Tenant will want a new lease because they will realise, they cannot get the best price for their business, or maybe even sell it, without the certainty of a lease term.

For the purposes of the remainder of this outline I will concentrate on a situation where a Landlord serves a notice to terminate which in my experience is more common.

Also, where that notice is in respect of a single business lease and the Landlord is not objecting to the renewal.

The Landlord can object to renewal in the notice but only on certain restricted statutory grounds none of which are that the Landlord just wants the premises back empty to sell or lease to someone else. 

(A situation where there is a notice objecting to renewal will be the subject of a different article).

Where a Landlord serves a notice and is not objecting to the renewal then it must set out the Landlord’s proposed terms for the new tenancy such as the extent of the property, (which usually but not always will be the whole of the current property), the proposed rent, and preferably rent reviews and the term of the lease and any other main terms.

The notice has to be in statutory form.

It is vital that it includes the correct required information, is on the up to date form, is properly served on the Tenant and contains a termination date of between 6 and 12 months (and obviously a date after the contractual term of the lease has expired).

Once such a notice is served it is irrevocable, (although it would not stop you taking action against the Tenant for breaches of covenant such as non-payment of rent and even seeking forfeiture if the circumstances allow).

The Tenant does not have to do anything as far as acknowledging the notice or negotiating or otherwise. The Tenant could leave when the notice expires without giving the Landlord any notice although if the Tenant stays after that date it must give 3 months’ notice. However, if the Tenant does want to renew or stay in the premises but lets the notice expire without doing anything then it loses its right to a new lease and the Landlord can require the Tenant to leave.

That is one of the few absolute time limits in law, so it is very important for the Tenant, if they want to stay, to either apply to Court before that date or obtain a formal written extension from the Landlord of that time limit.

In most such situations the Landlord and the Tenant, often through surveyors, will negotiate terms for a new lease and proceedings are never issued.  However, it is also common that those negotiations continue after the termination date in the original notice has passed and suitable extensions of time are agreed between the parties until terms are agreed and the new lease completed.

However, there are situations where for one reason or another proceedings are issued and then a Court timetable will apply which will involve such matters as production of a draft lease, exchange of experts’ reports, a schedule setting out matters which remain to be agreed, etc.

Often parties will be anxious to avoid the additional expense of proceeding and ultimately, they both have a common aim to agree and complete the new Lease. If an application to Court is made, then in the end any terms the parties cannot agree will be determined by the Court, but it is unusual for matters to go that far.

The essential rule as regards the terms of the new lease, in very simplistic terms, is that the new lease should follow the terms of the old lease aside from any justifiable departures and with a new open market rent.

Within that general rule there are a number of exceptions and cases where one is permitted to depart from the previous lease terms and every case will involve its own different facts and circumstances. I would advise that it is important that parties have careful diary notes of when a lease is going to expire and at least 12 months beforehand so they can decide what they want to do and when, even if that decision is to do nothing for an indefinite period.

If one receives a notice, then the best advice is to immediately take it to a solicitor to discuss your options. It is extremely simple to miss a time limit inadvertently or prepare and/or serve a notice wrongly or just make a wrong decision through a misunderstanding of the law and procedure.  Taking advice early on not only from lawyers but also, most likely a surveyor, who are proficient in the field is recommended whether you wish to renew or not.

If you would like further advice or assistance on any of the points raised above whether as Landlord or Tenant please do contact either myself, Donald Morrison, or David Hards.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.