What to Do as a Landlord When the Lease Expires
In our team we have recently come across several situations where commercial tenants have continued to occupy premises after their leases have expired. Often the landlord and tenant have built up a good relationship over several years. When the lease expires, both parties are comfortable with continuing to demand and accept rent. If the landlord later decides to renew the lease, this can cause a serious problem with what is called security of tenure.
Subject to meeting strict criteria, generally commercial leases automatically benefit from security of tenure. This is unless the landlord and tenant have agreed to ‘contract-out’ of such security when negotiating the lease, which is very common. ‘Contracting-out’ means that a tenant has no automatic right to remain in the premises once their lease expires. They can be forced to leave at any time without notice. This is attractive for commercial landlords, giving them great flexibility. If at the end of the term, there is a buoyant rental market, they can agree a new lease with a third party for much higher rent and simply let the old lease run down and the tenant leave. A leaving tenant is frequently liable to make good any wear and tear caused to the premises during the term. The landlord can then end up with premises as good as new, ready for re-letting and achieving the best possible rent.
For a landlord of commercial property this may sound positive – after all, you could evict your tenant once their lease expires unlike with a tenant in a flat. However, a problem can arise if say the rental market is in a bad state at the end of the term. You may not easily find a new tenant willing to pay a higher or perhaps even the same rent. It could be that a new tenant, with an advantage negotiating a new lease in that market, could demand a lengthy rent free period as an incentive. You would rather your existing tenant, who you have built up a good relationship with, stayed put and continued providing you with a reliable rent. Further, as the economy is not doing well, you would rather not spend money on legal fees to have a new lease drawn up, and you know the tenant would not either. This is just one example of a situation which becomes difficult and complex over time. The longer that a commercial tenant ‘holds over’ after expiry of an unprotected lease, the higher the risk that their continued occupation would amount to a lease which gives them security of tenure. If the tenant is later given notice to quit and takes legal advice, they could discover their possible protection and challenge your decision. This may be worthwhile for them, as security of tenure can add value to a lease.
A tenant with security of tenure is protected from being evicted during the term. Eviction is possible, but a landlord can do so only on certain strict grounds and it is often difficult and expensive. A tenant also benefits from a right to remain in the premises after expiry of their lease and a right to have their lease renewed on the same terms as before (except for the rent and certain modern updating), which include security of tenure.
As a landlord, this could turn the headache of dealing with a renewal lease into a serious problem by giving a tenant leverage against you in negotiations. A well-informed tenant in this situation may be willing to give up their security of tenure, but only in return for something of equivalent value from you, such as a rent reduction, rent free period or a right to break the lease early.
In conclusion, though, the best method of avoiding this risk is to keep a close eye on when your tenant’s lease where it does not have security of tenure and act promptly when it nears the end of the term. If the lease has expired, be sure to act quickly to renew it. Paying to put a renewal lease in place then may just save yourself a lot of time and money in future.