Reaching the end of a commercial lease does not always mean that a business tenant has to leave the property. Equally, a landlord cannot necessarily remove a tenant from their premises simply because the original fixed term has expired.
For many business tenants, the Landlord and Tenant Act 1954 provides what is known as security of tenure. This can give a tenant the right to remain in the property and request a new lease when their existing lease comes to an end. However, there are circumstances in which landlords can refuse to renew.
At AFG Law, our commercial property solicitors advise both landlords and tenants on lease renewals, including whether the 1954 Act applies, notices and negotiations over new lease terms.
Does a Commercial Lease Automatically Renew?
A commercial lease does not simply automatically renew for another identical fixed term when its contractual expiry date arrives. However, where a business tenancy has security of tenure under the Landlord and Tenant Act 1954, the tenancy can continue after the contractual expiry date until it is brought to an end in accordance with the Act. This period is often referred to as holding over.
This means a tenant may continue remaining in occupation and paying rent while the commercial lease renewal process takes place.
This is different from an excluded, or “contracted out”, lease. Where the parties have properly excluded security of tenure before entering into the lease, the tenant will not normally have the same statutory right to renew a commercial lease when it expires.
Can a Landlord Refuse to Renew a Commercial Lease?
Yes, but where the tenancy is protected by the 1954 Act, a landlord generally needs to establish one of the statutory grounds for opposing renewal. A landlord cannot simply say that they would prefer a different tenant or that they no longer want to grant a new lease.
The grounds on which a landlord can refuse to renew include circumstances involving:
- The tenant’s failure to comply with repairing obligations.
- Persistent delay in paying rent.
- Other substantial breaches of the tenant’s obligations.
- Suitable alternative accommodation being available in certain circumstances.
- The landlord intending to demolish or substantially reconstruct the premises.
- The landlord intending to occupy the premises for its own business or residence.
Whether a particular ground can be established will depend on the circumstances and the evidence available.
What If the Landlord Wants the Property Back for Their Own Business?
One of the better-known grounds for opposing renewal applies where the landlord genuinely intends to occupy the premises for its own business purposes or as a residence. However, simply stating that intention is not necessarily sufficient.
If challenged, the landlord may need to demonstrate a genuine and settled intention to occupy the property and a realistic prospect of being able to do so. This can become a significant area of dispute between commercial landlords and tenants, so early legal advice can be important.
What is a Section 25 Notice?
A landlord can start the statutory commercial lease renewal process by serving a Section 25 notice on the tenant. The Section 25 notice will state whether the landlord is willing to grant a new tenancy.
If the landlord is prepared to renew, the notice can propose terms for the new lease, such as the rent and length of the new term.
If the landlord wishes to oppose renewing the lease, the notice must identify the statutory ground or grounds being relied upon.
There are important requirements concerning the timing and content of the notice. A Section 25 notice generally specifies a termination date between six and 12 months after it is served and cannot bring the tenancy to an end before the contractual expiry date. The service and contents of a Section 25 notice are often disputed. It is important that a Section 325 notice is drafted carefully and correctly. Our solicitors at AFG Law are experienced in drafting such notices.
Can the Tenant Start the Lease Renewal Process?
Yes. A tenant does not necessarily have to wait for the landlord to take action. The tenant can initiate the process by serving a Section 26 notice, formally requesting a new tenancy.
The notice proposes a commencement date and terms for the new lease. The landlord then has the opportunity to respond.
If the landlord intends to oppose the request, it must serve the appropriate counter-notice within the statutory timeframe and specify the grounds on which it objects to a new tenancy.
Landlords should therefore act promptly when they receive a Section 26 request rather than allowing the deadline to pass.
The benefits of serving a Section 25 or Section 26 Notice are that the Landlord and the Tenant are then required to follow a set procedure and more importantly comply with certain time limits.
What Happens If the Landlord and Tenant Cannot Agree?
Sometimes both parties agree that there should be a new lease but disagree over its terms.
For example, they may disagree about:
- The new rent.
- The length of the lease.
- Repairing obligations.
- Break clauses.
- Other provisions within the proposed lease.
In many cases, these matters can be negotiated between the parties and their professional advisers. If agreement cannot be reached, either party may be able to apply to the court to determine the terms of the new tenancy.
A lease is a legally binding agreement with potentially significant long-term consequences, so both parties should consider the proposed terms carefully rather than focusing solely on the rent.
Could the Tenant Receive Compensation?
Potentially. Where a landlord successfully opposes renewal on certain “no-fault” statutory grounds (that is where the tenant is not at fault), the tenant may be entitled to statutory compensation.
Whether compensation is available, the amount payable depends on the ground relied upon and the particular circumstances. This should be considered at an early stage where a landlord intends to recover possession rather than offer a new tenancy.
What If the Lease Was Contracted Out?
Not every commercial tenant has security of tenure. Landlords and tenants can agree before entering into a lease to exclude the statutory renewal protections of the Tenant Act 1954.
If the correct contracting-out procedure was followed, the tenant will normally be expected to leave when the lease ends unless a new arrangement is agreed.
This makes checking the existing lease and associated documentation one of the first steps when considering renewal.
Start Thinking About Renewal Early
Commercial lease renewal can take time, particularly where the parties disagree about rent, new lease terms or whether the tenant should be allowed to remain at all.
Landlords should consider what they intend to do with the property well before the lease expires. Similarly, tenants should establish whether they have security of tenure and whether they want to remain in occupation.
Leaving matters until the last minute can limit the options available and increase the risk of a dispute.
How AFG Law Can Help
At AFG Law, our experienced commercial property solicitors advise landlords and business tenants throughout the commercial lease renewal process.
We can review the existing lease, advise on security of tenure, assist with serving a Section 25 or Section 26 notice and negotiate the terms of a new lease. Where a landlord wishes to oppose renewal, we can advise on whether a statutory ground may apply and the steps required.
Whether you are a landlord considering whether to renew a commercial lease or a tenant wanting to remain in your business premises, seeking legal advice early can help you understand your rights, deadlines and options.
Contact AFG Law’s Commercial Property team for advice about renewing or bringing a commercial lease to an end.