Renewing or Ending a Commercial Lease Agreement?
If you are a business tenant and the commercial lease for your business premises is due to expire you will need to consider your next steps. You must determine whether you want to end or renew your lease, and if the latter under what terms, and communicate your intentions to your landlord.
To ensure a successful outcome, it is essential that you understand your rights and responsibilities when dealing with the end of your commercial lease.
The legal position for business tenants on commercial leases
The key piece of legislation concerning UK commercial leases is the Landlord and Tenant Act 1954.
One of the most important rights for business tenants is security of tenure, your right as a business tenant to occupy the premises.
As with anything regarding the security of your business, the matter of securing your tenure should be addressed well before the set end date of your lease. It is equally important that you start to address whether you want to end or renew your commercial lease 12 to 24 months before the date it is due to expire. You will find this date in your tenancy agreement.
If you do not have a written tenancy agreement, seek legal advice as the enforcement of your rights may be more difficult to execute without a physical contract as documented evidence.
When you come to the end of a commercial lease you can either opt to end the lease and seek a new one elsewhere, renew the lease on new or existing terms, or simply stay on past the fixed term.
Each of these options has its benefits and drawbacks so it is important to understand your choices and how they affect your business.
You will also need to factor in your landlord’s position and response to your request. You may face opposition from your landlord with regards to how you want your agreement to proceed (or not) and will have to come to an agreement with them either inside or outside the courts.
Renewing a lease:
If you are on a fixed term lease and wish to stay longer your landlord must agree to extend your tenancy. This could take the form of a new lease or through an agreement that you simply stay on in the property past the original fixed term. If you choose the latter option, once you have passed the end of the original lease you will need to give 3 months’ notice before leaving and are obligated to pay rent until that point. Whether this route is suitable for you depends on the circumstances of your business. You lose some of your rights and so are less secure, on the other hand, your flexibility is increased making it easier for you to change location or seek a better deal at a later point. If you choose to stay on but later want more security, the landlord should offer you a new rental agreement at a later date.
For commercial tenants looking to renew their commercial lease, the Landlord and Tenant Act enshrines in law your right to renew a commercial tenancy when the original agreement ends. To renew your tenancy you must submit a Section 26 form to the Landlord outlining your proposed terms for a new tenancy. The Section 26 form must be delivered to your landlord 6 to 12 months before you want the new lease to begin. Landlords have 2 months after receiving the form to either confirm or oppose the tenancy. If they refuse to grant you a new tenancy, the Landlord and Tenant Act 1954 gives you the right to apply to the courts who will settle the terms of a new tenancy. The Act also protects you in circumstances where the landlord has agreed to a new tenancy but not the terms, in which instance both parties can apply to the court to settle the matter.
In some cases, the landlord may pre-empt any requests for a commercial lease renewal by sending the tenant a “section25” form stating whether they are willing to renew the tenancy. The landlord must submit this form to you between 6 and 12 months before the lease termination date. If they miss this deadline, they must renew your tenancy. If you receive a Section 25 form and your landlord is opposing a lease renewal, you must apply to the courts for a new tenancy. Unless you do so, your tenancy will automatically end on the date specified in the section 25 form.
If the matter goes to court, the Landlord and Tenant Act 1954 generally rules in favour of the tenant. However, there are certain circumstances when the court will grant the landlord a lease termination. A landlord could successfully oppose a renewal of your lease for a number of reasons including:
- The tenant has failed to pay rent
- The landlord is looking to use the premises themselves, for example as their personal residence
- The landlord wants to redevelop the premises
- The premises are in a state of disrepair
- The landlord is offering an alternative accommodation option of similar value
- The lease is for a farm or mining tenancy
- The original lease was a fixed-term tenancy of less than 6 months. Here the tenant will have rights but only once they’ve occupied the premises for over 12 months
- It was a private not a commercial lease i.e. the landlord did not agree to business use of the property
- The tenant has sub-let the premises and isn’t occupying them themselves (there are exceptions if the property was being occupied by someone under the tenants’ employment)
- The tenancy was on a long lease extended via the Leasehold Reform Act 1967
- The tenancy was under a licence rather than a lease
- The tenant agreed to a “contract out” in the original lease or subsequently agreed to “surrender the lease”
If you are unsure about your legal standing in regards to any of these conditions it is imperative you seek legal advice immediately. Assuming your case is not undermined by the above, you will win the right to renew a commercial tenancy and the court will order the grant of a new tenancy.
Some commercial property leases specifically remove any protection from the Landlord and Tenant Act 1954, dramatically weakening your position. However, you may still have some protection and should seek legal aid before trying to counter the lease termination.
Risks when renewing a tenancy
In cases where you are looking to renew your tenancy and the landlord is not contesting your right, there are several important elements of your lease which you should check.
One important factor is whether and how to include rent reviews. Rent reviews often feature as a part of lease agreements, normally scheduled at 3 or 5 yearly intervals. Contrary to popular belief, a rent review does not always mean a rent increase and can work in the tenants’ favour. When negotiating with your landlord around your tenancy renewal you should consider both how frequently you undergo a rent review and whether it is a fixed rental increase, indexed rent, or through some other determiner.
Whether and under what terms you include a break clause is another crucial element of renewing commercial leases. Break clauses give both you and the landlord potential releases from the lease outside of the protection of the Landlord and Tenants Act 1954.
The aforementioned are just some of the issues which must be considered when renewing a lease agreement. To ensure that you remain protected and negotiate the best terms of your lease, it is strongly recommended that you do not accept your lease renewal, with or without changes, before taking legal advice on how it impacts your rights, both now and in the future.
Ending a commercial lease agreement
Rather than seeking renewal of a lease, you may be looking to end your tenancy early. Even if you’re seeing a lease through to it’s end, there some common pitfalls which can end up costing you extra when the lease is up. Your rights and responsibilities will depend on the type of commercial lease.
If you are on a fixed-term tenancy your lease automatically ends on the date stipulated. Assuming you do not want to stay at the location past this point, you must have fully vacated the premises by the end date. If you are still on the premises after the end date your lease automatically rolls on and you will be required to give the landlord 3 months’ notice before leaving. During that time, you will remain responsible for paying rent, in full, to the landlord. To avoid any misunderstandings or legal complications, you should inform the landlord of your intention not to renew the lease well in advance of its’ end date.
The Landlord and Tenant Act also protects the interest of the landlord by setting out only a few limited circumstances in which the tenant may end a commercial lease early. Under the Act, you may only end a tenancy early if the landlord permits you to “surrender” the lease, the lease has a “break clause”, or you are able to transfer the lease to another tenant. Unless your case meets these conditions, you are committed to paying rent until the end of the lease.
If you have a break clause in your lease agreement, you will normally need to give your Landlord 2 months’ notice before you can leave the contract. Without a break clause, your best bet will be to negotiate with your landlord. Working with the landlord you may be able to find another tenant to whom you can transfer the tenancy. In some circumstances a landlord may be willing to release you from the lease agreement, although they are under no legal obligation to do so. If you need to exit the lease because of severe business downturn, or you feel the landlord has somehow broken the lease agreement, there may be legal options open to you. In these circumstances you should seek legal advice immediately.
Why legal advice is important:
The legal framework surrounding commercial leases is inherently complicated. Whether you are ending or renewing a commercial lease, and whether the landlord opposes your position or not, it is easy to find yourself confused and legally vulnerable.
Alternatively, it may be that your landlord has taken pre-emptive action and contacted you regarding whether they are willing to renew your lease and with what changes to the agreement. If your landlord has informed you that they want to end your lease, or renew it under terms unacceptable to you, it is possible to submit the case to the courts who have the power to grant you a new lease or more acceptable terms.
Given the high stakes at risk to your business should you find yourself either trapped in a damaging lease or without access to a business premises at all, it is strongly recommended that you take professional legal advice from the early stages of negotiating a commercial lease agreement.