What Happens When a Commercial Lease Expires?
The legal position of a tenant when their commercial lease expires will depend on whether their lease is subject to the Landlord and Tenant Act 1954.
Commercial tenants usually remain in a property when a lease has expired because they are still negotiating the terms of a new, renewed lease with the landlord or they have an informal agreement to stay on. Whether a commercial tenant is on a protected or unprotected lease their legal status will be affected by the specific circumstances of the case. Particularly important factors include the leases status in terms of the Landlord and Tenant Act 1954, whether the tenant is still paying rent, and whether new lease negotiations are taking place.
Whatever the specifics of a commercial tenant’s expired lease, it is critical that they understand their rights, risks, and the best course of action in order to ensure the best outcome for their business.
Tenants who are 12 months or more from the end of a commercial lease and looking to renew the it, have been served a Section 25 form by the landlord but are hoping to renew the lease, or are looking to end the lease should read guidance on renewing or ending a commercial lease agreement.
Types of commercial lease:
Leases protected by the Act are granted security of tenure, greatly strengthening their rights if the lease expires. For commercial tenants on protected leases, as long as they continue paying rent what happens when the lease expires is largely up to them as the lease will turn into a periodic tenancy and retain protection from the Act. However, landlords can take specific steps to end the lease and tenants sometimes wish to alter the terms of their occupation. In these cases, the expiration of the lease could pose challenges for the tenant.
Leases where the Act has been specifically excluded have considerably less legal protection. However, unprotected commercial leases do still have certain rights and there are steps the tenant can take to reach an acceptable outcome, depending on their aims, should the lease expire.
Unless expressly excluded in the lease agreement, most commercial leases come under the protection of the Landlord and Tenant Act 1954. The Act then gives commercial tenants the right to keep occupying a property on the same terms as expressed in the original lease if the statutory renewal process was not triggered by the lease’s expiry date. The lease will become a periodic tenancy and the tenants will need to give 3 months’ notice prior to vacating the premises.
Commercial lease tenants on a periodic tenancy are also covered by the Act when it comes to the right to seek a new lease with an open market rent. Tenants may wish to do this if there are drops in market-wide rental prices. If the tenant seeks a new lease they should ensure it is also protected by the Act in order to retain legal protection should the landlord try to end the tenancy. If the landlord refuses to renew the lease, tenants can apply to the courts for a new lease to be granted.
In commercial leases protected by the Act, including Periodic Tenancy, landlords can only remove the tenant’s renewal rights if the landlord serves the tenant a notice through a Section 25 form and is able to prove “reasonable grounds” for repossession of the property. Potential examples of grounds which may warrant the tenants relinquishing of the property include:
- The tenant having consistently delayed paying their rent
- The tenant failing to make repairs to the property (if the terms of the lease included an obligation to do so)
- The tenant having seriously breached one or more of the lease obligations
- The landlord has plans to occupy the property themselves, either for residential or business purposes
- The landlord has plans to carryout serious work on the property or demolish the property and needs to remove the tenant in order to accomplish the work
- The commercial lease in question is for part of a larger property owned by the landlord and the landlord wishes to let out the property as a whole
- The landlord is able to offer the tenant alternative accommodation of a suitable quality
Even the more common grounds for serving notice on a commercial tenant are often difficult to prove, leaving commercial tenants with leases protected by the act in a strong position should they wish to remain in the property.
Commercial leases are automatically protected by the Landlord and Tenant Act 1954 unless the landlord has followed a specific protocol and arranged that both parties “contract out” of the Act’s protections prior to the lease being signed. To implement the contracting out requires the landlord to serve the prospective tenant with a formal notice, the tenant to respond with a declaration stating that they fully understand the rights they are forfeiting, and the expressed removal of protection from the Act being written into the lease prior to it being signed.
If the tenant can prove that the above criteria were not met then they can still claim rights under the Act. However, if the correct protocol was undertaken, the commercial lease is not protected and the tenant rights to remain in the property or renew the lease once it has expired are not automatic.
If a tenant’s prior lease was not protected by the Act then tenants can be considered to be in a “tenancy at will”, a vulnerable legal position where the landlord has the ability evict the tenant with minimal notice and there is no automatic right to a new lease.
If the tenants were to refuse to leave landlords would be able to take actions such as “peaceable re-entry” where the landlord could change the locks on the property or beginning court proceedings to obtain a Possession Order. Landlords must operate within the law and should they or anyone hired by them use violence to enter the property or towards the tenants then they could be charged for criminal liability under the Criminal Law Act 1977.
If the tenant was asked to leave the premises by the landlord and refuses, the landlord should have put in place a rent stop. However, the landlord will be able to claim for mesne profits for the duration that the tenant remains in the property after the lease expires. Mesne profits would equate to the letting value of the premises so could exceed what a tenant was paying in rent. Tenants can also be held liable for losses incurred by the landlord during their post-lease occupation as well as the cost of any damages to the property.
In some cases, as long as the tenant is paying rent and has a good history with the landlord courts may rule that the lease has become a periodic lease. This is particularly likely if there are ongoing negotiations with the landlord regarding a potential lease renewal. Tenants who are in rental negotiations should be cautious of signing written tenancy at will which would prevent them from being able to make a claim to periodic tenancy and protection from the Act while allowing the landlord to keep taking rent.
When and why to seek legal advice:
Whether your lease is protected or unpredicted can be confusing to understand but is critical in order to ascertain your rights and responsibilities regarding the business premises. If you are currently renting a business premises on an expired lease it is recommended you seek legal counsel in order to ascertain whether you are protected by the act and what steps you can take to further secure your rights to the property. If you are not paying rent, the landlord has requested that you leave the premises, or there is a dispute and delay in negotiating the terms of a lease renewal, it is critical that you seek legal advice to secure the best outcome for your business.