Leases are usually granted from anything between 3, 5, 10 or 20 years and invariably at some point they will expire. Renewing a commercial lease does not have to be a troublesome process for tenants or landlords, provided early advice is taken from an accredited Chartered Surveyor.
Inside or Outside the Landlord & Tenant Act
Agreeing terms for a new commercial lease will include whether the lease should be inside or outside The Landlord & Tenant Act 1954 (also known as contracted in or contracted out), which gives business tenants automatic renewal rights when a lease expires. If you are a prospective business tenant or landlord negotiating terms for a new lease, it is vital to understand the implications of agreeing whether the lease will be inside or outside the Act as it will have a direct impact on the options available to you when the lease expires.
If the lease is outside the Landlord and Tenant Act then the tenant does not have the right to a new lease at the end of the term, although a landlord may be prepared to grant one and, if required, the tenant must vacate by the due date if agreement has not been reached with the landlord. When renewing a commercial lease, it is vital that your lease is checked to establish whether it is inside or outside the Landlord and Tenant Act.
If the lease is inside the Landlord and Tenant Act then the tenant has the right to a new lease for up to 15 years from the expiry of the old lease at the market rent from the time the lease was taken out, which may be above or below the rent that is currently payable. In order to start the renewal process either the landlord or tenant can serve a notice on the other between 6 and 12 months prior to the end of the contractual term specifying whether they are prepared to grant a new lease (in the case of a landlord), or in the case of a tenant, whether they desire a new lease and the preferred terms of this.
If a lease is inside the Landlord and Tenant Act a landlord can only ask tenants to vacate on a number of specified grounds, such as:
- The landlord has an intention to redevelop
- The landlords requires it for their own occupation.
These are known as “non-fault grounds” in which case, compensation is payable as a multiple of the rateable value.
- In some instances, where the tenant has not complied with the terms of the lease, the landlord can refuse to grant a new lease.
Ultimately, if the landlord and tenant cannot agree the terms of a new lease, or that it is appropriate that a new one should not be granted at all, it may be determined by the Court. The Civil Procedure Rules (CPR), which came into force on 1 April 2013, are intended to avoid expensive legal disputes between landlords and tenants where a tenancy renewal is opposed or the disagreements on renewal terms. Lawyers will in the first instance try and get agreement and a settlement, or use independent arbitration before resorting to the courts. In any event, opposed and defended lease renewal disputes can be very expensive.
Landlords of commercial properties should be aware that once let, a commercial property lease agreement may not easily be reverted and so it is very important to sign tenants up to a good strong lease agreement at the onset. Fundamentally, it is highly advised, that at least 12 months before the end of a commercial lease whether it is for a shop, office or warehouse, from either perspective, for renewing a commercial lease, landlords or tenants should seek professional advice from a Chartered Surveyor.