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Lease Expiry for Landlords

  1. Outline
    1. The primary legislation covering the renewal of business tenancies is:

      Landlord and Tenant Act 1954 Part II
      Law of Property Act 1969
      Landlord and Tenant (Covenants) Act 1995
      The Regulatory Reform (Business Tenancies) (England and Wales) Order 2003

      (Please note: in this ML Guide, all references to Landlord and Tenant Act 1954 (“LTA54”) include the above legislation, unless otherwise stated.)
    2. The function of the Landlord and Tenant Act 1954, Part II is threefold:

      1) to provide business tenants with the right to renew on expiry of a qualifying tenancy;

      2) to enable the landlord to obtain possession of the premises; and

      3) if possession is given for reasons nothing to do with any breach of covenant by the tenant during the tenancy, then for the tenant to be paid compensation.
      1. I emphasise ‘right’, because a business tenant only has automatic security of tenure on expiry of the contractual term of lease in the absence of a statutory notice. As soon as statutory notice is served by the landlord or given by the tenant then security must be applied for and, whilst procedure is straightforward, the procedure must be strictly adhered to. Failure to comply with procedure will result in loss of renewal and negotiating rights, which means the landlord can dictate terms, including requiring vacant possession of the premises.
  2. What happens when a lease expires?
    1. A business tenancy is a contract for a fixed term, but tenancies of business tenancies, to which the 1954 Act applies, do not come to an end on expiry of the lease, but continue until terminated by the prescribed form of notice.
    2. Provided the tenancy qualifies for renewal, and if no notice is served, then the lease would continue after expiry until notice is served, whereupon the term would be extended to the termination date in the notice. During that holding-over period, covenants and conditions in the existing lease will apply.
    3. Provided the premises exist, and the tenant occupies at least part of the premises for a business purpose, and the lease does not contain a clause excluding renewal - per sections 24-28 of the Landlord and Tenant Act 1954, the parties can contract out of the 1954 Act, but only before a lease is granted - then the tenancy would qualify for renewal rights.
    4. A tenancy-at-will, or licence, does not qualify for renewal rights (but calling a document a licence does not make it one, so advice must be obtained).
      1. Since the definition of ‘business' does not require a profit motive, a fine line exists in renewal rights between business and a hobby or an activity for pleasure and enjoyment.
    5. Occupation is the element of control with a “thread of continuity” of the business user, whereby the tenant claiming renewal rights must quality for those rights. For example, if the premises have closed down, the tenant ceased trading, or has abandoned the premises.
      1. However, if events of which the tenant has no control force non-occupation, then renewal rights would be possible if the claim to continue were exerted and the intention to occupy remains - for example, after fire damage or condition or state of repair of the premises in consequence of the landlord’s action.
    6. The tenant is the person(s), company or organisation in whom the tenancy is vested.
    7. Occupation, or the carrying on of a business by a company in which the tenant has a controlling interest is treated as equivalent to occupation or, as may be, carrying on of a business by the tenant.
  3. Sub-tenancy
    1. If there is a subtenant, or you are a head-tenant that has sublet, then only if your head-tenancy occupies at least part of the premises on a qualifying tenancy would renewal rights be possible: otherwise the head-tenant’s interest ends on expiry of the head-lease.
    2. For the subtenant, and provided the tenancy qualifies, renewal rights can be obtained.
    3. Where a sub-tenant only occupies part of a property, renewal rights do not extend to any part which is unoccupied, but the superior landlord can require the sub-tenant to renew on the whole property in the holding (even if the sub-tenant would not want the unoccupied part).
    4. If the unoccupied part were sublet, or a flat sublet on a protected or assured shorthold tenancy, then the landlord could, if it wants, retain the sublet part (exclude it from the renewal), or renew on the whole of the premises (including the sublet part).
  4. Notices and Procedure
    1. The Notice must be in a prescribed form, per Landlord and Tenant Act 1954, Part II (Notices) Regulations 1983 (as amended).
    2. Correct service and wording of Notices is vital. Methods of service vary. Notices can be served by hand, but usually served by Royal Mail recorded or special delivery, with proof of posting or delivery.
    3. Where Notices are served is important: some leases, for example, require Notice to be served on the tenant’s registered office (if a company), or a different address to the premises.
    4. Provided service is undertaken correctly, a Notice can be served without the tenant personally receiving the Notice. Please note that serving s. 25 Notice which states renewal would not be opposed does not mean the tenant can assume it has no need to protect renewal rights. Until procedures have been complied with, the tenant has no renewal rights.
    5. Only one Notice can be served to terminate a business tenancy. If you have served Notice, then a tenant cannot: if the tenant has served Notice, then the landlord cannot.
    6. Often the landlord or their agents will ask for a copy of the covering letter and/or Notice to be receipted and returned, but a tenant is not obliged to do so, and may not until the Notice has been checked for accuracy. If a tenant acknowledges having received the Notice then that could prejudice any claim for invalidity of the Notice.
    7. Whether or not you, or the tenant, wants to renew the tenancy on expiry, the first step is to end the existing tenancy. For a landlord, ending the tenancy can only be done by statutory notice. If the tenant does not want to renew and provided the tenant vacates the premises on or before expiry of the contractual term then the tenant does not need to give notice.
    8. You cannot get the tenant out merely because the contractual term is at an end. Where a tenancy qualifies for renewal rights, the only grounds for opposition are in the 1954 Act. If you would like to renew then the Notice would state that you would not oppose the grant of a new tenancy, and your proposals for the new tenancy would be set out in the Notice.
  5. Tenant's Notice - Section 26: Landlord and Tenant Act 1954
    1. Under s26, a tenant can give Notice to terminate the tenancy at any time up to 12 months, but not less than 6 months, from when the Notice was served - even if that date is after contractual expiry.
      1. Inexperienced landlords can get into a muddle over this. It is only when the tenant wants to end the existing tenancy on expiry of the contractual term must the s26 notice be given not less than 6 months before the contractual expiry date. Otherwise, when the tenant wants to end the existing tenancy after the contractual expiry date, presuposing a qualifying tenancy, also provided a s25 notice has not been served already, the s26 notice can specify an end date up to 12 months but not less than 6 months from the date of the s26 notice.
    2. If the landlord intends to oppose renewal then the landlord must serve counter-notice within 2 months of the s.26 stating ground(s) for opposing renewal. A landlord cannot oppose merely because he doesn’t want to renew: the only grounds for opposition are stated in the Landlord and Tenant Act 1954.
    3. Serving s.26 Notice does not give the tenant renewal rights and obtaining security still requires Court application by the termination date in the notice (or a later date by agreement to defer).
      1. Serving s.26 Notice does not force the landlord to negotiate. All it does is to initiate the procedure. Although the landlord may and probably will negotiate at some stage, it is not necessary for a landlord to fit in with the tenant’s plans.
    4. Even though the tenant has served s26 Notice, tenants prefer to avoid Court proceedings for two reasons:

      1) as soon as application to Court is made, extra costs are incurred; and 2) the Court is likely to take an active interest in the proceedings.
      1. In the past, it was possible, after the tenant had protected renewal rights, for the parties to allow a renewal to be left in abeyance: not any more. To ensure the matter is resolved as soon as possible, the Court is likely to issue a timetable for proceedings.
    5. There are cost considerations. Although the intention underlying deferment of application by agreement is to avoid costs of proceedings, your solicitor is likely to charge for dealing with the deferment. Whether or not the application is deferred more than once, legal costs can mount up and exceed the cost of application.
    6. Since agreement to defer can have the effect of putting back the date of termination in the notice, it may be prudent for a landlord to (try to) agree to defer on condition the renewal term and rent commencement date(s) if entered into would be the end date in the s26 Notice.
    7. If the tenant wants to renew, then, to protect renewal rights, the tenant must either apply to the Court at any time before the termination date in the s26 Notice, or at any time before the specified termination date the tenant must obtain the written agreement of the landlord to defer proceedings.
    8. In practice, agreement to defer is normally requested about a month or so before termination date, so as to allow more time for negotiation, but if the landlord would not agree, then before the termination date the tenant must apply to Court to protect renewal rights.
      1. The landlord is not obliged to agree and there is no legal obligation to co-operate, so if the matters ends up in court then the court would not think badly of a landlord that had refused to agree to a tenant’s request to defer application.
    9. Many tenants prefer landlords to start the procedure, but the tenant’s right to serve Notice is a lawful process and making the first move can often be cost-effective for a tenant. However, merely serving the s26 Notice neither obliges the tenant to protect its renewal rights nor keep the landlord informed of the tenant’s intentions. Provided the tenant’s application to court is made before the termination date in the s26 Notice, assuming the tenants wants to renew, that is all the tenant needs to do. Even then that does not oblige the tenant to renew.
    10. I recommend you take advice on the best course of action for your circumstances. The time to seek advice is approximately 18 months before expiry of the lease.
    11. Before Notice is served, it may be necessary to ascertain the “competent” landlord within the meaning of the 1954 Act by serving s. 40 Notice to identify the landlord.
    12. The competent landlord is not necessarily the immediate landlord, but the landlord able to grant the new tenancy.
    13. Where the property is sublet, the head- leaseholder only has renewal rights if its interest would not expire within 14 months.
  6. Landlord’s Notice - Section 25: Landlord and Tenant Act 1954
    1. To terminate the lease, the landlord must serve a section 25 Notice, giving a maximum of 12 months and a minimum 6 months notice.
    2. Although the landlord cannot end the lease before the contractual expiry (assuming no other reason), the landlord does not have to serve Notice to end the tenancy on the contractual expiry. In other words, provided neither less than 6 months nor more than 12 months notice is given, the landlord could serve Notice at any time.
      1. If Notice is not served to terminate on expiry, then the tenancy would continue (holding over) until the termination date in the s25 Notice.
    3. Before June 2004, the tenant had to incur costs to protect renewal rights without necessarily being told beforehand what the landlord would be proposing. Following changes in the law, - per The Regulatory Reform (Business Tenancies) (England and Wales) Order 2003, effective 1 June 2004 - the landlord and tenant have greater control, and the outline terms of the proposal must be disclosed in the Notice.
    4. Whether or not the landlord, or when the tenant wants to renew, a lease cannot be brought to an end until service of a statutory Notice. Also, a lease cannot be brought to an end before expiry - unless for forfeiture or at a break clause.
      1. lease note: assuming the lease enables the landlord to exercise the break clause, and provided the tenancy is within the 1954 Act, the only way a landlord can use a break clause to end a tenancy is by serving s25 Notice and satisfying grounds for opposition per the Landlord and Tenant Act 1954 Part II.
    5. On expiry and provided renewal rights exist, a new tenancy can only be granted if, after Notice, the tenant then applies to Court for security, or the application is deferred by agreement.
    6. Since renewal rights do not apply until Notice is served, the existing tenancy can continue beyond contractual expiry, until either party serves Notice.
    7. If the tenant does not want to renew and the landlord has not served Notice, then at least 3 months notice must be given to terminate the tenancy on a date, but not before expiry. (The not less than 3 months notice does not have to expire on a quarter day unless the proceedings were commenced before 1 June 2004).
    8. If the tenant is not in occupation of the property then renewal rights are normally lost - but, to be on the safe side, Notice to confirm termination should still be served.
    9. Although, to protect its rights, a tenant must apply to Court before the termination date (or afterwards by agreement to defer, or not at all if the matter is agreed beforehand in a Consent Order), the landlord can apply to Court at any time after service of s. 25 Notice.
    10. The reason for the landlord having the right to apply to the Court is that since the tenant has at least 6 months (less 1 day) to respond to the s.25 Notice before application to the Court must be made, the landlord will be none the wiser until the tenant does, so the landlord’s right to apply to the Court at any time can enable the landlord to ascertain the tenant’s intentions.
    11. Assuming the landlord does not oppose renewal
      1. When s. 25 Notice is served and assuming the landlord does not oppose renewal, the landlord must set out proposals for the renewal: the property to be comprised in the new tenancy, the rent to be payable under the new tenancy and the other (outline) terms and conditions for the new tenancy.
      2. The tenant should not assume some if not all of the landlord’s proposals in the s. 25 Notice are negotiable, but can accept the proposal if the tenant wishes.
      3. Important: even if the Notice states the landlord will not oppose renewal, it is essential, for operation of the Landlord and Tenant Act 1954, for the tenant to apply to the Court before the due date to protect renewal rights, or, also before the due date to defer application by agreement, even though there may be little dispute between the landlord and tenant that could not be resolved amicably. As I have said, a business tenant does not have automatic security of tenure on expiry of lease: it must be applied for and the requirements of the Landlord and Tenant Act 1954 complied with.
    12. When the landlord opposes renewal
      1. When the landlord opposes renewal, the only grounds for opposition are in s. 30 of the 1954 Act: actual or intended redevelopment; re-occupation (provided the landlord has owned the property for at least 5 years); breach of covenant such as failure to repair, non-payment of rent, etc; if the landlord has offered alternative premises, subject to criteria; if the tenancy was a sub-tenancy and the aggregate value of separate sub- lettings would be substantially less than the rent obtainable on a letting or disposal of the property as a whole.
      2. Depending upon the ground(s) and validity, compensation, based on Rateable Value, may be payable by the landlord in the event of non-renewal of the existing tenancy.
      3. Mere opposition is not enough: the test is whether the opposition would be successful if challenged. The test is satisfied either by informed opinion beforehand having regard to case-law or by the court.
      4. Similarly, just because the tenant might be entitled to compensation does not mean a landlord would necessarily have to pay: it may be possible to avoid payment by including non-compensatory grounds, which is not successfully rejected could give rise to deemed acceptance.
  7. Court Proceedings
    1. In outline, proceedings start with a case management conference, or pre-trial review, at which a timetable for each stage of the procedure is agreed. Costs of attending can be avoided by agreement, whereby a timetable is agreed between the parties - for example, dates for exchange of expert witness reports, preparation and approval of the renewal lease.
    2. A hearing date is fixed and, if the matter goes to court, then lawyers and witnesses present their case for the parties, the court considers the evidence and orders a new tenancy. (If a decision were unacceptable then either party could appeal to a higher court.) Even if a hearing is avoided, it is usual to prepare for the possibility, alongside negotiations to settle beforehand.
      1. Please note: when the court is actively involved in conduct of the proceedings, and even if terms for the renewal will likely be agreed amicably, or have already been agreed ‘subject to contract’, and solicitors instructed, it is vital to comply with each stage of procedure, failing which the tenant could still lose renewal rights.
    3. Even if the matter has been agreed ‘subject to contract’, it is not unusual for a court, of its own volition, to issue an order striking out proceedings if it considers the matter has been dragging on unduly. Failure to restore proceedings would result in loss of renewal rights.
    4. Compliance with procedures is vital. The court will grant an extension of time where there has been an error on the part of the court in failing to serve proceedings within the time limit. However, where that failure is the result of the claimant or its solicitors failing to take appropriate steps, the court may not grant the extension of time and the claimant will lose its rights over the new tenancy.
    5. It is often the case that the tenant is the claimant, so even if you have protected renewal rights before expiry of the s. 25 Notice or s. 26 Notice, it is nevertheless still possible for a tenant to lose its renewal rights after court procedures are underway, through not complying with the requirements.
  8. PACT
    1. A less-expensive alternative to the cost of going to court, the parties can agree to the use of PACT: Professional Arbitration on Court Terms.
    2. Devised by the Law Society and RICS, this method of dispute resolution, whereby the matter is heard by a surveyor, barrister or arbitrator can prove cheaper, particularly for low rented premises and where the only contentious issue is the rent.
      1. Please note: the costs are not always cheaper. The courts are competitively priced, a judge is free and there is no extra charge if the judge needs help in writing the judgement.
  9. What happens if a tenant changes its mind about renewing?
    1. A tenant does not have to commit to renewing before the termination date in the Notice, a tenant can change its mind at any time beforehand, regardless of how far negotiations have progressed.
    2. The cheapest time for a tenant to change its mind is before the date in the Notice for application to court for renewal rights. Thereafter, it gets expensive. If, after applying to court, the tenant serves Notice of Discontinuance of Proceedings, then the tenant has to give three months notice and becomes responsible for the landlord’s legal costs and its surveyor’s fees as well as its own costs and fees.
  10. Market Rent
    1. The rent on renewal is the market rent, as defined by s34 and s35 LTA54. s34 defines the market rent, s35 requires the market rent to take account of the terms and conditions in the existing lease.
    2. Regardless of any 'upward-only' rent review in the existing lease, or any formulaic uplift such as index-linking, the initial rent for the renewal lease will be the market rent. It doesn't matter if the rent immediately before the renewal were higher, the rent on renewal could be lower.
    3. More information in paragraph 17.0+ below.
  11. Interim Rent
    1. The renewal lease and rent commencement do not automatically start on expiry of the old lease.
    2. Unless otherwise agreed, and if the matter is resolved amicably then the term of renewal lease would run from completion of documentation. However, if the matter goes to Court then the renewal lease would start 3 months and 14 days after the Hearing, per s.64.
    3. Since the renewal lease can be completed at any time after expiry of the old lease, either the landlord or the tenant may apply, per s. 24A, for an interim rent to cover the period between expiry of the old lease and renewal.
    4. Although application for interim rent rent is often included in the claim form, or acknowledgment of service, or defence to renewal right, application can be made separately.
    5. Even if proceedings for the renewal are discontinued, the applicant can still pursue an order for an interim rent.
    6. The interim rent starts from the earliest date that could have been specified in the s. 25 Notice or earliest date that could have been requested in s. 26 Notice.
    7. The amount of interim rent is either the same as the market rent per s34 or may be less if could be proved that there is a substantial difference between the rent per s34 and the rent at the earliest date the existing lease could have been brought to an end, per the s25 or s26 notice.
  12. Summary
    1. I am reiterating this because it is so very important. Even if the Notice says the landlord does not oppose renewal, it is essential, for the security of tenure offered by the Landlord and Tenant Act 1954, for the tenant to make application to the Court by the date specified in the notice and comply with procedure, or to defer by agreement, even if any differences in arriving at an agreement would most probably be resolved amicably.
    2. The tenant must not regard the procedure as a formality that can be dispensed with. It is only because the tenant could apply for renewal rights that the landlord would be amenable. The protecting of rights and negotiations for the renewal lease are entirely separate issues.
    3. For as long as negotiations, or an agreement, remain ‘subject to contract’ and/or ‘without prejudice’*, the landlord could withdraw, thereby exposing the tenant to losing the premises, because the tenant did not protect its renewal rights in time.
      1. If negotiations were ‘without prejudice’ only, and if during negotiations an offer were made and the tenant or the landlord were to accept, then the offer would become binding. Therefore, it is best to ensure negotiations are also ‘subject to contract’.
    4. Whilst not necessary to involve your solicitor in renewal proceedings even if you could do-it-yourself, even so, I recommend getting legal and surveyor advice, because compliance with procedure is essential and experienced advisers are familiar with procedure.
    5. Problems can arise not only by something that may go wrong, or not be done on the tenant's side, but also on the part of the landlord. For example, the s. 25 Notice may be invalid because the wrong dates are used, or the period of notice too short, or the landlord’s proposals omit important facts.
      1. Even if an invalid Notice might not be deemed to have misled a reasonable recipient, there is a need to comply with procedures.
  13. Legal Costs and Fees
    1. There is a difference between a new letting and a lease renewal. If the tenant paid the landlord’s legal costs (and/or surveyor’s fees) when it took the lease on a new letting, and even if that fact is mentioned in the existing lease, that does not mean the tenant has to pay the landlord’s costs on renewal: Costs of Leases Act 1958.

    2. Although Court procedures are involved, most renewals are settled amicably, but if the matter ends up in Court then the judge may award some or all costs to the winning party.
    3. To protect your interest on costs, a Part 36 offer may be made beforehand. It is vital to obtain advice.
  14. The Renewal Lease
    1. Unlike rent review when the rent itself is normally the only issue, a lease renewal is opportunity for landlord and tenant to re-negotiate all terms, and conditions to be included in the new lease.
    2. In practice, the tenant can expect to renew on the same terms and conditions as in the existing lease, subject to mutually-acceptable updating, and/or quid pro quo adjustments.
    3. Subject to updating, much content will remain similar to the existing lease and, if I were acting for you, then my task would be to negotiate outline terms and conditions and liaise with your solicitors on procedure and approval of the renewal lease.
    4. The tenant is entitled to a tenancy of up to 15 years, more by agreement, but no longer term than the existing lease.
    5. Whether or not you have a good relationship with the tenant, the tenant should not assume special treatment: business tenancy law says it is wrong of a tenant to expect the 1954 Act to convey a saleable asset; also there is no ‘sitting tenant’ discount.
    6. Following change in the law regarding privity of contract, which has resulted in a more favourable treatment for the first tenant of a lease, landlords can specify the criteria for any application for assignment or sub-letting. It is vital to ensure such conditions in the renewal lease are not unduly onerous, to avoid problems with assignment and to avoid or minimise problems at future rent reviews.
  15. Redevelopment Intention
    1. Where the landlord does not oppose renewal on expiry, but intends to redevelop the premises in future, the proposal may be for a new tenancy for a short term, the lease to include a redevelopment clause. In such instances, it can be difficult for the tenant to object, because it is no part of the 1954 Act to confer upon the tenant a saleable asset.
  16. Excluding the 1954 Act - “contracting out”
    1. The 1954 Act provides for the right to renew to be excluded by agreement before grant of the lease. The procedure is known as ‘contracting out’ or s24-s28 exclusion, or simply ‘outside the Act’.
    2. However, unless the existing lease is already outside the Act, (in which case the tenant has no renewal rights), the landlord cannot require the renewal lease to be outside the Act unless the tenant agrees.
    3. It may pay the tenant to agree the lease to be excluded, if that would result in a lower rent on renewal and/or advance payment of statutory compensation.
    4. Where the existing lease is contracted out, the tenant has no rights under the 1954 Act. The tenant must vacate the premises on expiry of the tenancy. If the tenant does not vacate, then the tenant would have no legal right to remain in occupation of the premises.
      1. However, if the landlord continues to demand the rent, the tenant continues to pay and the landlord continues to accept rent for at least 1 year after expiry of the lease and no negotiations for renewal are taking place then that could create a periodic tenancy. If that should happen then the tenant could claim renewal rights under the 1954 Act, which means the tenant could serve a s. 26 Notice requesting a new tenancy within the 1954 Act, or the only way the landlord could end that periodic tenancy would be serve s. 25 Notice and if possession were wanted then the landlord must satisfy one or more of the grounds for opposition in the 1954 Act.
      2. When a tenant fails to protect its renewal rights, but remains in occupation of the premises after the end of the contractual term whilst a new tenancy is negotiated, possibly paying no rent during the holding-over period, the tenant becomes a tenant-at-will. The rent during the holding-over period would be the annual rent the tenant would pay for a further year at the end of the tenancy, and not the rent payable under the existing lease.
  17. Negotiations for Renewal
    1. To agree the market rent and other terms of the renewal lease, landlord and tenant will have regard to s.34 and s. 35 of the Landlord and Tenant Act 1954 and the provisions of the existing Lease.
    2. Unlike an “upward-only” rent review, where the rent payable previously cannot go down, on lease renewal the rent can go down, depending on the market rent.
    3. Whether or not the matter ends up in Court, compliance with legal proceedings is integral to the renewal process, in parallel with negotiations.
    4. If I were acting for you, then I should negotiate on your behalf. But if and when required to prepare a report or give evidence in court then I should become the landlord's expert witness.

      Accepting the distinction is important: even though you would pay my fees, my primary duty as expert witness is to the court, so it would be my opinion alone, uninfluenced even if you don’t agree. Shifting the submission from an advocate on behalf of the client to an expert is intended to provide the court with a balanced viewpoint so the court can arrive at a proper conclusion.
    5. Experienced experts are likely to agree on most points, differences in opinion to do with interpretation of facts rather than the facts themselves. In effect, the experts represent both the hypothetical landlord and hypothetical tenant.
  18. Approach to Negotiation and Rental Valuation
    1. Rent is not subjective, as in what the landlord might want, or how much the tenant can afford, but is the objective market rent, having regard to requirements of s. 34 and s. 35 Landlord and Tenant Act 1954 and taking into account the provisions of the existing Lease.
    2. At lease renewal, as at rent review, surveyor opinion is generally preferred to the opinions of the actual landlord and tenant because, in business tenancy law, rent is not based upon how much the actual tenant would pay or could afford, or the actual landlord expect or want, but upon legally-defined postulations of a hypothetical willing landlord letting the premises to a hypothetical willing tenant.
    3. ‘Hypothetical willing’ is defined in FR Evans (Leeds) Ltd v English Electric Co Ltd (1977) - [1978] 1 EGLR 93
      1. In summary, the landlord is an abstraction, a hypothetical person with the right to dispose of the premises. He is not affected by ills such as a cash flow crisis or importunate mortgagees. Nor is he in the happy position of someone to whom it is largely a matter of indifference whether he lets or waits for the market to improve. He is, in short, a willing lessor. He wants to let the premises at a rent appropriate to all the factors that affect the marketability of the premises and the market rent of competitive premises; that is to say premises directly comparable or if not directly comparable would be considered viable alternatives by a potential tenant.
      2. Similarly, the willing lessee is an abstraction, a hypothetical person actively seeking premises to fulfil needs the premises could fulfil. He will take account of similar factors but he too will be unaffected by liquidity problems or other pressures, etc. Whilst the hypothetical tenant is a willing tenant, he is not an importunate one. He wishes to take a lease of the premises, but he is operating in a commercial field and in deciding what to offer in the way of rent will take account, covertly or overtly, of the alternative of taking a lease of two or more other premises. But this is not to say he would prefer that solution. That will depend on the level of rent. He is a willing lessee; and quite content to take the subject premises at the right price. It is just that he is not considering the proposition or negotiating in a vacuum.
    4. If the tenant cannot afford to pay the market rent, then it should not renew. In theory, as simple as that. In practice, there are likely to be wider consequences.
    5. Although any value attributable to the tenant's goodwill and any effect of the tenant’s occupation of the premises is disregarded for purpose of rent and other terms of the renewal lease, the premises may be integral to the tenant's business and not saleable without them. The landlord will also have wider consequences to consider: investment value reflects tenant covenant and ‘cleanliness’ of the lease and so the limit of landlord sympathy will depend upon the effect on the investment.
    6. Although the market rent, as defined in the 1954 Act, is the objective, it is the tenant's subjective ability to afford the rent that will determine whether the tenant renews. Whether a landlord would adopt a tough line depends on that landlord’s investment strategy. The tenant's bargaining power or negotiating strength as to what rent and other terms the landlord would accept depends on whether the landlord would want to keep the tenant.
      1. Because negotiations for renewal under the Landlord and Tenant Act 1954 and a new letting differ, any rent-free period or other inducement that the landlord might have to agree in the open market would not normally be available. Recent case-law on this subject might support another way of thinking It is possible to negotiate terms which reflect a new letting, success might not depend entirely on the landlord’s attitude.
  19. Term - short or long?
    1. One important consideration is the term of the renewal lease. Assuming the landlord is not opposing renewal, or not wanting a redevelopment clause in the renewal lease, how long a term a tenant would agree will depend on subjective factors.
    2. On renewal, the first tenant, per privity of contract law, would after the tenant has assigned the lease remain liable for the performance of the tenant’s covenants for the duration of the first assignee's interest, in the event that first assignee defaults. When a first assignee assigns, that assignee becomes liable whilst the second assignee is the tenant, etc. The renewal lease would contain what is known as an Authorised Guarantee Agreement ("AGA”) which the tenant would enter into on assignment.
      1. Also, the AGA can enable the first tenant to take back the lease, in the event of first assignee default, and so on.
      2. Presupposing the lease permits assignment, subject to the landlord’s approval, such approval not to be unreasonably withheld, the landlord can on grant of a lease specify in the lease the criteria a prospective assignee would have to satisfy before the landlord would have to consent to application to assign.
    3. Lease-cost implications include SDLT (Stamp Duty Land Tax).
      1. Leases for 7 years, or longer, normally have to be registered by the Tenant with the Land Registry. So there is requirement for a Land Registry compliant plan, the cost of which may have to be paid by the tenant.
      2. The future intention is to require registration of leases for 3 years+.
    4. Some advantages for a tenant of a short term lease, say 3 to 5 years, are:

      1) the period is reasonably foreseeable,
      2) there is, at present, no requirement to register the Lease,
      3) a tenant can choose between renewing or not on expiry and,
      4) in the event of renewing, the rent would be set by reference to Landlord and Tenant Act 1954 which may be less onerous than the rent review guidelines in the lease.
    5. Some disadvantages for a tenant of a short term lease, say 3 to 5 years, are:

      1) ownership of the property may change during the term and the new landlord oppose renewal,
      2) even if there is no change of ownership, the landlord may want to oppose renewal,
      3) possibly prejudicial to the marketability of the lease, and
      4) costs/hassle of renewal procedure, which could or might be more expensive and time-consuming than a rent review.
    6. Although shorter terms are popular, in my opinion, it is more cost-time-effective for a tenant to take a long term with a break clause, or a short term with options to extend.
    7. Whilst there could be rent reviews at 5 yearly intervals, possibly more frequently with a 8, 9 or 12 year term (3 or 4 yearly reviews), the cost of agreeing a rent review amicably is normally cheaper than the cost of renewal, because at rent review it is not normally necessary for solicitors to be involved.
  20. Rent during the holding-over period
    1. Assuming renewal rights are protected, the rent payable during the holding-over period will either be the same rent as payable before expiry of the lease, or at any rent review as stipulated in the existing lease during the holding-over period, or the interim rent.
    2. A difference exists between the amount of interim rent and when that amount is actually payable. It is not unusual for the amount only to be agreed. If when it becomes payable were not agreed then it would only be payable on completion of the renewal lease, unless the applicant has obtained a court order for payment beforehand.
    3. Assuming renewal rights are protected and the terms and conditions of the renewal lease agreed ‘subject to contract’, with solicitors in the process of finalising the documentation, tenants can sometimes be encouraged to start paying the new (increased) rent to avoid built-up of back rent, even though the renewal lease is not yet completed.
      1. Also, when a tenant starts paying the increased rent, it can become harder to negotiate changes to the draft lease because the landlord would have no incentive to concede.
  21. Conclusion
    1. For lease renewal (and rent review), multiple retailers will either instruct external surveyors or use in-house surveyors. Similarly, many individual tenants instruct surveyors because they know it makes sense to leave it to those that understand the process and know what to do.
    2. if you have no real experience of business tenancies then I suggest a big mistake not to instruct a surveyor to act for you, or, at least, advise you behind-the-scenes. As well as providing a ‘shield’ between you and the tenant, it makes sense to have someone on your side to negotiate on your behalf to ensure you get a good deal.
  22. When you instruct Michael Lever
    1. For lease renewal, my extensive experience includes serving notices, negotiating outline terms and conditions for the renewal lease, preparing expert witness reports, acting as expert witness in court, and liaising with solicitors on the drafting and approval of leases.
To contact me, please email help@michaellever.co.uk or telephone 01531 631892

I look forward to helping you in some way.

Michael Lever

Please note that I reserve the right to change, modify or delete any or all of the content of any ML Guides at any time, without notice. You will find the last update at the foot of the page.

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