Whether you are a landlord or a tenant of a business premises, it is important to consider what will happen when the fixed term of a lease expires and whether the parties wish to enter into a renewal lease of the same premises. This article will only consider the end of a lease by effluxion of time and not by any other methods, for example by the exercise of a break clause.
What will happen at the end of the term will be affected by whether the tenant’s lease has the benefit of ‘security of tenure’ under the provisions of the Landlord and Tenant Act 1954 (LLTA 1954). Security of tenure means that the tenancy granted by the lease does not automatically end when the fixed term of the lease expires, and the tenant has the right to remain in occupation and to a new lease on broadly the same terms as their original lease. The Landlord has very limited circumstances under the LLTA 1954 whereby it can oppose lease renewal (e.g. for development of the property).
From a tenant’s point of view, where it has security of tenure there may be no urgency to agree terms for a new lease because of the protections that the LLTA 1954 gives the tenant, and the tenant may decide it is best for it to continue to occupy the premises under the terms of the expired lease, paying the rent at the agreed rate under that lease (known as ‘holding over’). If the Landlord wishes to increase the rent, however, it might want to serve what is known as a Section 25 Notice ending the existing tenancy and proposing terms for a new tenancy at an increased rent. If the landlord wishes to take the property back, it would need to serve a Section 25 Notice stating it is opposed to renewal of the lease and on what grounds in the LLTA 1954 it is relying upon.
The tenant may also initiate the renewal process under the LLTA 1954 by serving a Section 26 Notice on the landlord. This process operates in a similar way to the service of a Section 25 Notice by a landlord for an unopposed lease renewal. The tenant’s Notice will state an end date for the existing tenancy and the terms requested by the tenant for the grant of a new lease.
If the tenant’s lease does not have these rights having been what is known as ‘contracted out’ of the LLTA 1954, if it wishes to remain in occupation after its lease terms expires, it must negotiate terms for a new lease with its landlord. Where occupation continues after the end of the fixed term of a contracted-out lease this might create some uncertainty for both parties as to the basis of the tenant’s occupation. In practice this is more likely to present problems for a landlord rather than a tenant as if the situation is allowed to continue for a long time, the landlord could find that it has inadvertently given the tenant security of tenure. This could adversely affect future plans that the landlord has for its building if it cannot regain possession from the tenant.
To avoid this issue for the landlord, it is good practice to contact the tenant 6-8 months prior to the expiry of the lease term to ask what its future plans are for the property and, if it wishes to continue its occupation, commence negotiation of the terms for a new lease. It is also a good idea for the landlord to instruct its solicitor at an early stage so that the new document can be prepared, sent to the tenant (or its lawyer) to agree and then finally complete.
If you would like to discuss a lease renewal or require advice concerning matters to consider when negotiating a new lease for business premises (whether you are a landlord or a tenant), please contact Miriam Carr.