If you lease commercial property from a landlord and your current lease period is due to expire, you may be wondering how to start the process of commercial lease renewal.
For some tenants, this process is nothing to worry about, but for others or those who wish to change the terms of their current lease agreement, the commercial lease renewal process can quickly become an ordeal.
Thankfully, our team of experienced commercial property solicitors are here to guide you through every step of the process. In this post, we will provide a comprehensive breakdown of commercial lease renewal, answering some common questions about the process and offer advice to ensure you are in the best position to negotiate a better lease agreement.
Common Questions About Commercial Lease Renewal
Does a Landlord Have to Renew a Commercial Lease?
Depending on the type of lease you have agreed with your landlord, there are situations where a commercial lease may be renewed. If you have a ‘protected lease’ under the 1954 Act, you have the legal right to request a renewal of your commercial lease once it expires. Both parties must agree to the renewal terms, such as referencing the existing lease for those terms.
While protected lease agreements are less common nowadays, some national and large regional institutional landlords still offer 1954-Act protected tenancies on their commercial estates. This decision is often based on commercial considerations and precedents, such as existing tenancies of adjoining properties or land.
If you have an unprotected lease, you may need to negotiate new terms with your landlord if you wish to remain on the premises after your lease expires. However, the likelihood of renewal can depend on factors such as the commercial relationship between the parties, the tenant’s bargaining power, and whether any rent arrears have accrued.
What Happens After a Commercial Lease Expires?
As your current commercial lease is coming to the end of its term, you can enter into informal negotiations with your landlord to agree upon the terms of your commercial lease renewal.
These negotiations may be as simple as asking for the extension of your commercial lease agreement, such that you can continue to occupy and conduct business on the premises with as little disturbance as possible.
Extending a prior commercial lease agreement would normally allow you to secure the property for another five to ten years. However, you may wish to negotiate for a longer or shorter tenancy, depending on your current or future plans for your business.
Maintaining a cordial relationship with your landlord is always advisable in these situations, as they may be more inclined to grant you a longer lease period or be more lenient should you want to reduce the duration of your commercial lease agreement.
What Happens if New Lease Terms Cannot Be Agreed?
Reaching an informal agreement is not always possible. In these cases, the next steps depend on whether the initial lease agreement is subject to the security of tenure provisions of the Landlord and Tenant Act 1954.
If the commercial lease is within the security of tenure provisions, or as it is sometimes called, the ‘automatic rights of renewal’, either the tenant or the landlord has the opportunity to serve notice on the other to propose new terms or termination of the commercial lease.
However, if the security of tenure provisions were waived when creating the initial commercial lease agreement, the lease will automatically expire when it reaches its appointed end date. At this point, the tenant may lose their legal right to remain on the property unless the landlord chooses to offer them a new lease agreement.
How Does a Landlord Renew a Commercial Lease?
For a landlord to propose a commercial lease renewal agreement of a protected lease, they must serve their tenant with a Section 25 notice. Alongside the notice, the landlord must outline their preferred terms for a new lease agreement. It is important to note that these terms are not contractually binding, and a tenant is under no obligation to accept them.
A Section 25 notice is an incredibly time-sensitive document that cannot be sent more than 12 months or less than six months before the commercial lease is due to expire. Furthermore, the landlord cannot request that the lease agreement be terminated before it has reached its contractual end date.
How Does a Tenant Renew a Commercial Lease?
The commercial lease renewal process for tenants of a protected lease is very similar to that carried out by a landlord, the main difference being that the tenant must serve their landlord with a Section 26 notice.
Another distinction is that the landlord must then respond within two months of receiving a Section 26 notice to prevent their tenant from being granted a new lease.
Once either party has served the other with their appropriate notice, the other party forfeits their ability to serve notice. However, serving notice is only the beginning of a more formal period of negotiations.
Before we get into the specifics of the commercial lease renewal process, we will provide a brief overview of each stage in the process, as well as indicate where you may wish to seek legal advice to ensure the terms of your commercial lease renewal agreement are favourable and fair.
1. Review your current lease
Check the terms of your current commercial lease, making note of its type, expiry date, and whether you waived your security of tenure provisions. You may wish to consult a solicitor if you have difficulty reviewing this document.
2. Enter informal negotiations
Reach out to your landlord to see if they would be willing to renew or amend the terms of your commercial lease agreement.
3. Serve a Section 26 notice
If informal negotiations are unsuccessful, serve your landlord with a Section 26 notice outlining your desired terms for a new commercial lease agreement. You may wish to consult a solicitor to ensure there are no errors in your proposal that might invalidate the document.
4. Enter formal negotiations
After your landlord has replied with a counter, you can begin to negotiate the terms of your commercial lease renewal, such as rent charges, duration, and any additional clauses. We strongly advise that you seek a solicitor’s aid to protect your interests.
5. Document new lease agreement
When an agreement has been reached, the terms of the new commercial lease agreement can be documented. Business lease solicitors representing you and your landlord should create and finalise this document.
6. Sign a commercial lease agreement
Once the document has been finalised, both parties are required to sign the commercial lease agreement to validate its renewal.
What to Consider When Negotiating New Lease Terms
As a tenant, you have multiple opportunities to negotiate more favourable terms for your commercial lease renewal. We have included those with the most potential below.
- Rent Reduction
The commercial property market may have changed since you signed your current lease agreement. The COVID pandemic severely impacted high streets, and the increased number of empty commercial properties has placed tenants in a stronger position from which to negotiate for more competitive rent.
You could even enlist a surveyor to assess the market value of your commercial space compared to those occupied by similar businesses, such that you can determine its true market value to negotiate for lower rent charges.
- Flexible Duration
Every business is different, and the duration of the lease proposed by your landlord might not align with your plans for the future. Compare the length of your previous commercial lease to those of businesses similar to your own to put yourself in the best position to negotiate.
- Break Clauses
Unforeseen financial difficulties are a worry for any business, and break clauses can offer a lifeline in precarious situations. Including a break clause in your commercial lease agreement allows you to end the lease before its expiration date, should you ever find yourself unable to maintain your rental payments.
Can a Landlord Refuse to Renew a Commercial Lease?
As mentioned previously, your landlord can only refuse to renew your commercial lease on the basis of specific legal grounds outlined in the 1954 Act. Upon receiving their tenant’s Section 26 notice, a landlord will have two months to challenge the notice with evidence of one of the following seven grounds.
- Ground A: Breach of repairing covenant
If the tenant has allowed the property to fall into a state of disrepair during the course of the lease, the landlord may use this as grounds to deny them a new tenancy. However, evidence of the tenant’s failure to maintain the premises does not automatically entitle the landlord to refuse the commercial lease renewal.
If the tenant suggests in their notice that a covenant obliging them to repair the property should be included in their new tenancy agreement, a Court may take this into consideration.
- Ground B: Delayed rent payments
If the tenant has consistently not been paying rent at the time outlined in their commercial lease agreement, their landlord may use this as grounds to dismiss their renewal application. However, if the tenant is able to persuade the Court that they will make rent payments promptly in future, this similarly may be taken into consideration.
- Ground C: Breach of other obligations
If the landlord can demonstrate that the tenant has breached any other material covenants of their original lease agreement, this can be used as grounds to refuse commercial lease renewal. However, if there is any evidence that the landlord has accommodated or permitted these breaches, this will influence the Court to question the relative strength of their complaint.
The Court will also review the conduct of the tenant throughout the period of their lease, as well as the specific circumstances surrounding the reported breach.
- Ground D: Offer of alternative accommodation
If the landlord has offered the tenant an alternative property with favourable lease terms, this will provide them with adequate grounds to deny the renewal of their existing lease.
- Ground E: Superior landlord intends to let the whole property
Some landlords do not own the properties they are leasing. They are subject to the conditions of their own tenancy agreement, known as a superior tenancy, which they enter into with the freehold (or long leasehold) owner of the property, known as the superior landlord.
If the tenant has been subletting part of a commercial property and the superior landlord intends to let the whole property for a more competitive price, then this would be considered grounds to refuse commercial lease renewal. In addition to providing evidence of this alternative offer, the superior tenancy must also be due to expire at the same time as the tenant’s current commercial lease.
- Ground F: Landlord intends to reconstruct or demolish
If the landlord can produce plans for the reconstruction or demolition of the property that could not be carried out without causing major disruption to the tenant’s business, this would serve as adequate grounds for the refusal of renewal.
- Ground G: Landlord intends to occupy the property
Provided they have owned the property for a minimum of five years by the contractual end date of the prior lease, the landlord demonstrating their genuine intention to use the property to house themselves or their own business would similarly be taken as unequivocal grounds to dismiss an application for renewal.
How Does a Court Decide on New Lease Terms?
If you cannot agree on the terms of your commercial lease renewal, or if either side disputes whether the lease should be renewed at all, the tenant or landlord can begin the commercial litigation process by applying to the Court. Please note that neither party can apply to Court until one has served the other their appropriate notice.
Once the Court has reviewed the evidence and circumstances of your dispute, they will decide whether or not to order lease renewal on the commercial property in question, as well as the terms of the new lease agreement.
- Rent
The Court-ordered rent charge will reflect the property’s current market value relative to the other terms of the commercial lease agreement. This evaluation must ignore certain factors, such as the tenant’s business goodwill or any improvements made to the property within the last 21 years, whether they were made by the current or a previous tenant.
Under Section 24B of the 1954 Act, if a tenant has served their landlord with a Section 26 notice, the payment of interim rent could begin as early as the commencement date proposed in the notice.
- Duration
The maximum duration that the Court can order for new commercial lease agreements is 15 years, provided the lease is for a fixed term. In most cases, the Court will order a duration that attempts to satisfy the genuine needs of the tenant.
If the Court decides to order a commercial lease renewal, the tenant must accept the lease terms as outlined by the Court unless they have been able to reach a separate agreement with the landlord. Alternatively, the tenant may choose to ‘revoke’ the Court order, effectively declining the new commercial lease agreement. In such cases, the Court may choose to extend the current lease period to allow the landlord to sign a lease with a new tenant.
Do You Need a Solicitor to Renew a Commercial Lease?
Commercial lease renewal is a complicated process. While there is no legal requirement, seeking legal advice from a solicitor is strongly recommended for anyone about to enter the commercial lease renewal process.
If you need legal advice on commercial lease renewal, or if you are interested in buying or selling commercial property and want to know more about the finance options available to you, get in touch with a member of our team today.