Commercial Lease Renewals: A guide for Landlords & Tenants

Commercial lease renewals are a topic that every commercial landlord and business that rents commercial premises should have at the forefront of their minds. It is essential for good succession planning, though it is often neglected until the expiry of an existing lease term is looming or once the existing term has come to an end and the tenant is holding over.

The process for a commercial lease renewal is somewhat archaic and technical and therefore it is important that both landlords and tenants of commercial premises are alive to the potential complications.

In this article, our newly qualified solicitor, Maggie Berry, explores the process that landlords and tenants can expect when navigating this complex area of law.

In England & Wales, most businesses occupy their premises under leases, and those leases are likely to be protected leases under the Landlord and Tenant Act 1954 (LTA 1954).

There will be instances where a commercial lease is not protected, and careful consideration will need to be taken to ascertain whether a commercial tenant has the protection afforded under the LTA 1954. To have contracted out of the LTA 1954, landlord and tenants, in advance of entering into any commercial lease, will have had to agree to the exclusion and certain statutory provisions will have to have been complied with by the parties (unprotected commercial leases are beyond the scope of this article but if you are a landlord or tenant and consider that you may have a contracted-out lease, please do not hesitate to get in touch with our Property Disputes Team and we can help guide you through the process).

Where a lease is not contracted out of the 1954 Act, commercial tenants have a statutory right to renew their lease (unless the landlord is able to prove one of the limited grounds for refusal).

Whilst often referred to as a ‘lease renewal’, in reality, the tenant is entitled to an entirely new lease that replaces the existing lease. The terms renewal lease and new lease are used interchangeably throughout this article.

The renewal process under LTA 1954 gives both parties the opportunity to update the terms of the lease whilst providing security and continuity for the tenant’s business.

Even where the renewal is unopposed (i.e. both parties agree the lease should be renewed), there is still a complex formal process to be navigated by the parties which involves formal notices being properly served, strict statutory deadlines and often the matter will still end up before the Courts. Legal advice and assistance at an early stage in the renewal process is therefore imperative.

Initiation of the renewal process

There are two ways to initiate the renewal process:

• The landlord can serve a section 25 notice on the tenant; or
• The tenant can serve a section 26 request on the landlord.

Whichever party initiates the statutory renewal process is then the party in the driving seat, and it is a case of who blinks first on initiation, because once, for example, the landlord serves a section 25 notice, the tenant cannot then serve a section 26 notice, and vice versa.

Whomever goes first, the respective notice must comply with certain statutory requirements and be in a prescribed form. Consideration will also need to be given to ensure that any notice is properly served in accordance with the terms of the existing lease and/or any statutory requirements and care will need to be taken to ensure notice is served by, and on, the correct party. Dates of service and expiry are also very important.

Getting notices right and ensuring they are valid is a technical exercise, and our Property Disputes Team are well versed in acting for both landlords and tenants of commercial premises at an early stage and ensuring that notices are properly drafted and served.

What happens after a valid notice is served?

In an unopposed renewal, a valid notice is the starting point for negotiations between the parties.

Typically, the landlord and the tenant will exchange proposals on rent, term, repair obligations, and modernisation of older clauses.

Any notice will include the proposed terms, but these are not binding and are usually just the starting point for discussion. Whilst negotiations are ongoing, the previous lease remains in place automatically.

Service of a valid notice will create a statutory deadline for issuing court proceedings if the landlord and tenant cannot agree the terms of the new lease. Where the renewal is initiated by the landlord, either party can apply to the court. Where renewal is initiated by the tenant, neither party can apply until two months have passed since the service of the section 26 notice, or until the landlord has served a counternotice.

If proceedings are not issued by the statutory deadline, the tenant will lose its right to renewal, it is therefore extremely important, for the tenant not to miss that deadline, though the parties can agree to extend the statutory deadline.

Where proceedings are required, the Court will need to consider what the terms of the new lease will be. The Court’s starting point in this regard is the existing lease, though it will not be tied to the existing terms and will have regard to the position of the parties where, for example, modernisation is required or one of the parties seeks to impose a term into the new lease which was not in the existing lease. If a landlord or a tenant wishes to include additional terms or amend an existing term, the party seeking to include any such term will have to demonstrate to the Court why there is good reason for that change. The Court will consider departing from the current lease, for example, where circumstances have changed or an old term has become outdated or unworkable.

What about rent during this time?

After the service of a valid notice, either party can ask the court to determine interim rent. This will usually run from the date stated as the termination date in the notice. The purpose of interim rent is to ensure that rent levels remain fair during a drawn-out period of negotiation or proceedings. The level of interim rent set is often what the court considers to be the market rate for the premises.

How our Property Disputes Team can help

Although an unopposed lease renewal is generally a collaborative process, it is still likely to require the involvement of the Court, either in the issuing of protective proceedings or where the parties cannot agree on the terms of the new lease and require the Court to determine certain provisions.

When that situation arises, we work closely with our colleagues in our Commercial Property Team to ensure that your position is protected and that there is a smooth transition from the existing lease to the new lease.

Even where a renewal is unopposed, the LTA 1954 imposes strict statutory deadlines and requirements on both parties. Missing a deadline can jeopardise the tenant’s right to a new lease or expose the landlord to additional time and expense spent on the renewal process.

Our Dispute Resolution Team and Commercial Property Team work together to support clients with their lease renewals. For more information on how Leathes Prior can assist, please contact us via email at info@leathesprior.co.uk or by telephone at 01603 610911.