Commercial Lease Renewal (A Guide!)

At the conclusion of a commercial lease, both parties can enter into informal discussions to renew the lease.

The process of renewing a commercial lease in the UK is governed by the Landlord and Tenant Act 1954, which offers protection and clear guidelines for both landlords and tenants.

If an agreement on the renewal terms is not reached and the lease is protected under the Landlord and Tenant Act 1954, which grants ‘automatic renewal rights’, either side can issue a notice, making timely resolution critical.

 

How to Renew a Commercial Lease

 

The process to renew a lease covered by the 1954 Act varies based on who initiates the process.

Both the landlord and the tenant must issue a formal notice if negotiations stall before resorting to court action.

 

Section 25 Notice

 

A landlord initiates the end of the current lease and proposes terms for a new one by issuing a Section 25 notice. These proposed terms are negotiable and are not obligatory for the tenant to accept, although negotiation is advised to avoid court proceedings. This notice must be issued by 12 months and by six months before the lease’s intended end date, respecting the lease’s original expiry date.

 

Section 26 Notice

 

The tenant may request a new lease by issuing a Section 26 notice outlining their conditions for the renewal. This notice also needs to be served between six and 12 months before the desired commencement date of the new lease, which can begin once the existing lease has expired. Upon receiving a Section 26 notice, the landlord has two months to contest the new lease proposal.

Once a notice is served by one party, the other is precluded from issuing their notice. Following a tenant’s Section 26 notice, they may be liable for interim rent starting from the proposed commencement date of the new lease.

Suppose the lease is not subject to the 1954 Act’s security of tenure provisions. In that case, it concludes on the agreed expiration date, leaving the tenant with no automatic renewal right unless the landlord offers a new lease at their discretion.

 

Refusal to Renew a Commercial Lease

 

Under the 1954 Act, a landlord’s refusal to renew a commercial lease is permissible only for specific, valid reasons. Under Section 26, the landlord has a two-month window to object to a tenant’s request for a new lease based on one of seven legally recognised grounds.

 

1. Ground A (Breach of Repairing Obligation)

 

The landlord must prove that a new tenancy should not be granted due to the tenant’s failure to maintain the property. However, the tenant’s failure alone does not automatically justify the refusal. The court may consider a tenant’s proposal to include a clause in the new lease requiring immediate repairs.

 

2. Ground B (Persistent Late Payment of Rent)

 

The landlord must demonstrate that the tenant consistently pays rent late, which should preclude them from being granted a new tenancy. The critical issue for the court is whether the landlord can depend on the tenant for future timely payments.

 

3. Ground C (Breach of Other Lease Terms)

 

If the tenant has breached other lease terms, the landlord must argue that these breaches justify denying a new lease. The court will weigh the nature of these breaches, any past leniency shown by the landlord, and the tenant’s overall behaviour.

 

4. Ground D (Alternative Accommodation)

 

The landlord must have offered the tenant suitable alternative premises under reasonable conditions.

 

5. Ground E (Sub-letting)

 

If the lease was created through sub-letting part of a larger tenancy, the landlord must demonstrate that reletting the entire property would be more beneficial. This is contingent upon the termination of the overarching lease by the renewal date.

 

6. Ground F (Demolition or Reconstruction)

 

The landlord must show a genuine plan to demolish or substantially renovate the property and proceed with reclaiming the space from the tenant.

 

7. Ground G (Landlord’s Personal Use)

 

The landlord must have a genuine intention to use the premises for personal business or residential purposes, and the tenant must have owned the property for at least five years before the end of the current lease.

These grounds allow a landlord to challenge the renewal of a lease, each requiring specific evidence or conditions to be met, emphasising the balance between landlord rights and tenant protection under the law.

 

Post-Notice Negotiation

 

Following the issuance of a notice, the negotiation phase for the terms of a new lease commences. A tenant with a clean track record during their tenancy can leverage their position to secure more advantageous lease conditions. The negotiation landscape for renewing a commercial lease offers various opportunities, including:

 

a. Rent Reduction
Given the fluctuations in the property market since the original lease agreement, particularly in light of the economic impacts of COVID-19, which led to many vacant properties, tenants find themselves in a stronger bargaining position to negotiate a lower rent. Hiring a surveyor to assess the property’s market value can arm tenants with the data needed to negotiate a rent decrease effectively.

 

b. Break Clauses
Break clauses emerge as critical features for businesses navigating uncertain conditions or potential difficulties. By incorporating a break clause into the new lease, a tenant secures the option to terminate the lease prematurely under specified conditions, offering a strategic safety net.

 

c. Lease Term Flexibility
The duration of the new lease can be a negotiation point, with tenants seeking terms that differ from their previous lease to enhance future flexibility. This adjustment allows tenants to adapt more readily to changing circumstances or needs.

 

Litigation

 

When parties cannot agree on granting a new lease or its terms, they may turn to the court for a resolution as a measure of last resort.

The court’s considerations include:

• Lease Term: The court has the authority to mandate the duration of the new lease up to a maximum of 15 years, aiming to align with the tenant’s legitimate needs.
• Rent: The new lease’s rent will mirror the property’s current market value, with the court deliberately overlooking factors like the existence of a sitting tenant, any business goodwill attributed to the tenant, and any tenant-initiated improvements made during the current or previous 21 years, except those mandated by the lease.

 

1. New lease imposed

 

In cases where the court mandates a new lease, the tenant must comply with the specified terms unless an alternate agreement is reached with the landlord or the tenant successfully petition the court to withdraw its decision.

Typically, the new lease begins on the date specified in either the landlord’s Section 25 notice or the tenant’s Section 26 notice. If the matter progresses to court, the commencement date is generally set for three to four months following the court’s verdict, providing a clear timeline for the transition into the new lease terms.

The court will also determine additional lease terms, ensuring they are in harmony with the existing lease terms and the situation’s overall context. This may include provisions for periodic rent reviews.

The court has the discretion to retract its order, possibly briefly extending the current lease to allow the landlord to find a new lessee.

 

2. Lease revoked

Following a revocation, the tenant is required to vacate the property.

 

Professional advice

 

Given the complexities and legal nuances of commercial lease renewals, seeking professional legal advice is strongly recommended whether you’re a landlord or a tenant.

A solicitor specialising in commercial property can provide invaluable guidance through the negotiation process, ensure compliance with all legal requirements, and represent your interests effectively, whether in negotiations or court proceedings.

UK resources such as the Law Society, Royal Institution of Chartered Surveyors (RICS), and legal firms with commercial property expertise are excellent starting points for finding professional advice. These professionals can help navigate the intricacies of lease renewals, protect your interests, and save significant time and resources.

 

Renewing a Commercial Lease FAQs

 

What is a commercial lease renewal?

A commercial lease renewal in the UK involves negotiating a new lease agreement upon the expiry of the current commercial lease under the framework provided by the Landlord and Tenant Act 1954. This process can be initiated informally through negotiations between the landlord and tenant or formally through statutory notices.

 

How do I start the process of renewing a commercial lease?

The process typically begins with informal negotiations between the landlord and tenant to agree on new lease terms. If an agreement cannot be reached, either party can serve a formal notice (Section 25 notice by the landlord or Section 26 notice by the tenant) to initiate the renewal process under the specific provisions of the Landlord and Tenant Act 1954.

 

Can a landlord refuse to renew a commercial lease?

Yes, but only on specific grounds outlined in the Landlord and Tenant Act 1954, such as breach of lease terms by the tenant, the landlord’s intention to demolish or reconstruct the premises, or the landlord’s wish to occupy the premises for personal use. The landlord must provide valid reasons and, in some cases, offer suitable alternative accommodation to the tenant.

 

What happens if we cannot agree on the lease terms?

If the landlord and tenant cannot agree on the new lease terms, either party can apply to the court for a decision. The court will consider the lease term, rent based on the property’s current market value, and other relevant terms to establish fair terms for both parties.

 

What is a Section 25 notice?

The landlord serves a Section 25 notice to formally end the current lease and propose terms for a new lease. It must be issued between six and twelve months before the desired termination date of the current lease.

 

What is a Section 26 notice?

The tenant serves a Section 26 notice to request a new lease formally. Like the Section 25 notice, it must be served between six and twelve months before the tenant wishes the new lease to commence.

 

Should I seek professional advice for commercial lease renewal?

Due to the legal complexities and potential financial implications of renewing a commercial lease, it is highly advisable to seek professional legal advice. A solicitor specialising in commercial property can guide you through the negotiation process, ensure compliance with legal requirements, and advocate on your behalf, whether in negotiations or court proceedings.

 

How can I find professional advice on commercial lease renewal?

Professional advice can be found through the Law Society, which provides a directory of solicitors specialising in commercial property law. The Royal Institution of Chartered Surveyors (RICS) also offers resources and guidance on commercial leases. Engaging a legal professional with expertise in commercial property is crucial to navigating the renewal process effectively and safeguarding your interests.

This FAQ provides a foundation for understanding the critical aspects of commercial lease renewal in the UK, emphasising the importance of professional guidance throughout the process.