Tenants - renewing a commercial lease

When a commercial lease reaches the end of its term, as a tenant, you can either leave the premises and end your lease, or approach your landlord to agree terms for a renewal lease. Your approach on any renewal lease will depend upon the type of lease you have.

Laura Saul, Director in the Commercial Property team and Sophie Kerry, Solicitor in the Litigation & Dispute Resolution team at Wake Smith, look at the key issues and the options available on lease renewal.

This article includes:

• What are the different types of commercial lease?
• How does a tenant renew a contracted out lease?
• How does a tenant renew a lease within the Landlord and Tenant Act (The 1954 Act)?
• Statutory notices for the negotiation of a renewal of a lease within the 1954 Act
• Reasons for the landlord to refuse to grant a renewal of a lease within the 1954 Act
• What to do next

 

What are the different types of commercial lease?

1. A lease within the 1954 Act

Commercial property leases have the benefit of the ‘security of tenure’ provisions of the 1954 Act unless the Landlord specifically excludes these security provisions by following the strict procedure to do so.

This means that, as a tenant, you have a right under the 1954 Act to a renewal lease on similar terms as your existing lease, but alterations may be required due to changes in market terms (including rent), reasonable modernisation and updating if any laws change.

2. A lease outside of the 1954 Act i.e. “a contracted out lease”

Your landlord may exclude the security of tenure provisions of the 1954 Act by inserting the relevant wording into the lease serving the required formal notices on you and any guarantor to your lease. You would then need to swear a declaration to confirm that you accept this exclusion.

This means that you would not have a right under the 1954 Act to a renewal lease, although this does not prevent you from discussing the option of the renewal lease with the landlord, who may still be happy to offer one to you.

If you are considering renewing your lease we can assist you in advising which type of lease you have and provide advice accordingly. You should seek this advice as early as possible.

 

How does a tenant renew a contracted out lease?

If you wish to stay in your premises at the end of the term of your lease, allow plenty of time before the end of the term to negotiate the renewal with your landlord.

A landlord may either:

• negotiate with you to agree terms for the renewal lease. Once terms have been agreed, each party will instruct their own solicitors to draft and negotiate the renewal lease; or
• refuse to agree terms for a renewal lease and ask you to leave the premises by the end of the term of your existing lease. The landlord can do this for any reason including use of the premises themselves, or grant a new lease to a different tenant. They do not have to justify their decision to you.

If you do not approach the landlord, they could approach you to negotiate renewal terms, or to tell you that a renewal lease will not be granted.

The parties should agree the approach and discuss terms before the end of the term of the lease. If you remain in occupation after the end of the term there is a risk of uncertainty.

 

How does a tenant renew a lease within the 1954 Act?

If you wish to stay in your premises following the end of the term of your lease, you should first approach your landlord informally as soon as possible (ideally at least six months before the end of the term of your lease) to negotiate the terms of a renewal lease.

The landlord may then either:

• negotiate with you informally to agree terms for the renewal lease. Once terms have been agreed, each party will instruct their own solicitors to draft and negotiate the renewal lease;
• negotiate with you to agree terms for the renewal lease by the service and receipt of the required formal notices in accordance with the 1954 Act (“statutory notices”), as discussed below. Both parties will instruct solicitors to deal with these statutory notices on their behalf and then, once terms have been agreed, to draft and negotiate the renewal lease. If terms cannot be agreed, the parties can apply to Court for a decision on the terms of the renewal lease; or
• refuse to agree terms for a renewal lease and tell you that you must leave the premises by the end of the term of your existing lease. However, the landlord can only refuse to grant a renewal lease if they can do so by relying on one or more of the seven specific reasons for refusal (“the statutory grounds”) noted below. If the landlord does not formally terminate the lease in accordance with the requirements of the 1954 Act, the existing lease will not come to an at the end of the term stated in it.

Alternatively, if you do not approach the landlord, they can instead approach you to negotiate terms for a renewal lease or to tell you that a renewal lease will not be granted, in each case by serving the relevant statutory notices, as discussed below.

Statutory notices for the negotiation of a renewal lease within the 1954 Act

Section 25 Notice:

The landlord must serve this notice on you to either:

• terminate your existing lease and refuse to grant a renewal lease to you. This notice must be served on you six to twelve months before the end of the term of your existing lease. The notice must specify the reason (the statutory ground or grounds, as below) the landlord is refusing to grant a renewal lease to you; or
• terminate your existing lease and suggest terms for a renewal lease.

Section 26 Notice:

You must serve this notice on the landlord to request a renewal lease six to twelve months before the end of the term of your existing lease.

This notice will terminate your existing lease at the end of the term stated in that lease, as a new lease is being requested, and so it is vital that you take legal advice and instruct a solicitor to deal with this notice on your behalf.

If the landlord refuses your section 26 request for a renewal lease, the landlord can serve a counter notice on you setting out the reason (the statutory ground or grounds, as below) the landlord is refusing to grant a renewal lease to you.

Reasons for the landlord to refuse to grant a renewal of a lease within the 1954 Act (i.e. the statutory grounds)

Under the 1954 Act, the landlord cannot refuse a request by you for a renewal lease unless there is good reason, which must be one of the following set statutory grounds:

• you have not complied with your repair obligations under your existing lease
• You persistently pay the rent due under your existing lease late
• You have substantially breached other obligations in your existing lease
• If your landlord is able to instead offer you suitable alternative accommodation
• If your existing lease is only of part of the landlord’s property and your landlord requires possession of the whole of their property to grant a lease to a new tenant of the whole of the landlord’s      property or to sell the whole of the property
• Your landlord intends to demolish or reconstruct the premises
• Your landlord intends to start occupying the premises itself

A landlord must prove the specific requirement to validly rely on that ground. 

Compensation may be payable to you by the landlord if they refuse to grant a renewal lease to you based upon the last three grounds above.

If a landlord refuses to grant a renewal lease to you on any of the above grounds, it is important that you obtain legal advice as soon as possible.

What to do next?

This is an incredibly complex area of the law and good legal advice is essential.

For further advice on renewing lease a lease in relation to a commercial property, contact Commercial Property Director Laura Saul or Litigation and Dispute Resolution Solicitor Sophie Kerry on 0114 266 6660.

Find out more about commercial property law and property litigation services

Published 10/03/2023