What To Do When Your Commercial Lease Expires
Finding the perfect location for your business, then making the necessary adjustments to ensure the space fits your commercial requirements takes considerable time and effort. So once you have the right premises, the last thing you want to worry about is what to do when your lease expires. In this article, we answer the main questions that our clients have regarding managing the expiry of their commercial property lease and what to do if they want to renew it.
The first point to make is that you should be thinking about such matters at least 12 - 18 months before the expiry of your lease. One sure fire way to make your business life extremely stressful is to leave negotiating a renewed commercial tenancy agreement until a few months before expiry. By giving yourself plenty of time, you can enter negotiations with a clear strategy and a confident approach.
Are you covered by the ‘security of tenure’ provisions in the Landlord and Tenant Act 1954?
Commercial leases in England and Wales are normally covered by the Landlord and Tenant Act 1954. This provides what is known as ‘security of tenure’ – a statutory right for commercial tenants to renew their lease.
Landlords and tenants can agree to contract out of the security of tenure provisions. To do so puts the tenant at considerable risk because there is no legal obligation for the landlord to renew the tenancy when it ends. Therefore, at the negotiation stage of the tenancy, if the landlord does not wish for the tenant to have security of tenure, they must give the tenant at least 14 days’ written notice which clearly sets out the consequences of not having a statutory right to renew the lease. If the tenant wishes to proceed under this condition, they must sign a statutory declaration stating they understand the consequences of their decision. Our lawyers for landlords and lawyers for tenants may be able to help with this.
The Landlord and Tenant Act 1954 does not cover every type of commercial tenancy agreement. For example, mining, farming, and fixed-term tenancies of six months or less are excluded. The Act will also not apply if you have a licence to use the premises as opposed to a lease.
Renewing your commercial tenancy if you have security of tenure
The first step to renewing your commercial lease is to provide written notice to the landlord of your intentions. This should be done 6-12 months before the expiry date.
The written notice stating you want to renew your lease is called a Section 26 Notice. This should contain the terms you require, such as the length of the new lease and the rent. Valuers and surveyors should be instructed so you have the information required to prepare the Section 26 Notice properly.
Your landlord has two months to respond to your Section 26 Notice. If they agree to your proposed terms, the new tenancy will begin on the date set out in the new agreement. They may wish to negotiate on some points, which is why seeking legal advice at the beginning of the renewal process is imperative.
If you and your landlord cannot agree to new terms, the Landlord and Tenant Act 1954 provides that the Court can settle the terms of the new tenancy. However, going to Court is expensive in both time, money, and peace of mind, and most landlords and tenants manage to settle disputes regarding a new commercial lease agreement without the need for litigation.
What if I do nothing when a commercial lease expires?
If can be very tempting to sit back and do nothing as the expiry date creeps closer as this means you will continue to pay the same rent and enjoy the same conditions. However, you risk the landlord serving a Section 25 Notice stating they plan to end the lease. If you have security of tenure the landlord must cite one of the following grounds if they do not plan to renew the tenancy:
You have breached your tenancy obligations; for example, you failed to pay rent or sublet without the required permission
- The landlord plans to demolish or rebuild the property
- The landlord plans to occupy the premises themselves
- You are offered other premises which are suitable for your commercial needs
- You are a sub-tenant who occupies only part of the property, and the landlord wishes to lease the building as a whole
If you fail to respond to the Section 25 Notice, the tenancy will end on the date specified. You can claim compensation if the landlord is ending the lease on a ground which is not your fault, for example, they wish to rebuild the property.
A Section 25 Notice can also communicate the landlord’s intention to renew the lease; however, they would have the advantage of setting out the terms, and you will need to negotiate if you don’t agree.
It is best practice for a tenant to serve a Section 24 Notice if you want to remain in the property because once you do, the landlord is unable to serve a Section 25 Notice.
Commercial lease expiry: A game of strategy
Renewing a commercial lease requires careful assessment of current market conditions and building a strategy to ensure your best interests are protected. For example, if there is a glut of empty commercial premises in your area, you may be in a tactical advantage to negotiate your current rent downwards. However, your landlord will be aware of this and may serve a Section 25 Notice with an increased rate of rent, meaning you may have to endure protracted negotiations.
The key to success is to speak to a commercial property lawyer well in advance of your commercial lease expiry. They will know what market conditions are like and will provide pragmatic advice and help you build a strategy to obtain the best deal. If you find yourself in the midst of a disagreement, a property dispute lawyer may be more suitable for your needs.
Guillaumes LLP Solicitors is a Surrey law firm offering a full range of services to Surrey and the surrounding area, including London. We have a highly experienced commercial property team who can assist you with renewing your commercial lease. To make an appointment, please contact us.