A timely and stress-free commercial lease renewal is beneficial for both tenants and landlords, but without proper guidance, the process can quickly become fraught with complexities.
To ensure there are no unwanted surprises as the end of a lease term approaches, it’s vital that both parties seek legal advice in advance of the renewal date. By doing so, you can determine what your rights are and find out how to make sure they are upheld.
Does a Commercial Tenant Have an Automatic Right to Renew a Lease?
The Landlord and Tenant Act 1954 gives tenants the right to remain on the premises on the same terms (and at the same rent) after the lease comes to an end. In certain circumstances, this means the tenant will have the right to automatically renew a commercial lease.
However, not all leases are covered by the Landlord and Tenant Act 1954. If the original lease includes an opt-out clause, for example, a tenant might be surprised to learn that they don’t have the right to renew their lease. This is one reason why it’s advisable to seek legal advice before entering into a commercial lease agreement.
While some lease agreements feature opt-out clauses, most are covered under the Act, which means the majority of commercial tenants can rely on the legislation when it comes time to renew their lease.
Can a Landlord Refuse a Commercial Lease Renewal?
Even if a commercial lease is covered by the Landlord and Tenant Act 1954, this doesn’t necessarily mean that a tenant will successfully be able to renew. The Act sets out specific circumstances in which a landlord can legally refuse a renewal request, such as:
- The tenant’s failure to repair the premises
- The tenant’s repeated non-payment of rent
- The landlord plans to occupy the premises for their own business purposes
- The landlord plans to redevelop the property
Due to this, tenants shouldn’t assume that a lease renewal will be simple and straightforward. If a landlord objects to the renewal and can meet the prescribed circumstances in the Act, they will be able to end the tenancy and the tenant will need to vacate the premises.
Disputes over redevelopment or occupation can sometimes overlap with commercial property ownership disputes, particularly when title boundaries or beneficial interests are unclear.
How Is a Commercial Lease Renewed?
Either the tenant or landlord can initiate the renewal process. To do so, a landlord is required to serve a section 25 notice under the Landlord and Tenant Act 1954, whereas a tenant will need to serve a section 26 notice.
If a landlord serves a section 25 notice, it must state a termination date for the tenancy between six and 12 months from the date of the notice and, if they oppose a renewal, they must state their reasons why.
N.B.It’s at this stage that prior oversights, like agreeing to unclear or overly rigid terms, can come back to bite you. Many renewal disputes originate from mistakes made when entering commercial leases.
Once either party has issued a section 25 or 26 notice, counter-notices may be issued by the opposing party. If a landlord argues they do not want to renew the lease because the tenant has failed to repair the property, for example, the tenant may want to rebut this claim. Alternatively, if a tenant proposes new lease terms under their section 26 notice, the landlord may wish to negotiate these terms.
The Landlord and Tenant Act 1954 sets out definitive time limits for when notices and counter notices must be served, so it’s vital that both parties are proactive in managing the commercial lease renewal process. Failure to meet the relevant time limits can mean your right to renew (or to end the lease) is lost, so it’s important to seek legal advice and take action before time runs out.
Negotiating the Terms of the Lease
If both parties agree to renew the lease, they will have the opportunity to negotiate new terms, if they want to. The terms of the ‘new’ lease can be whatever the parties agree to but, in reality, it’s common for lease renewals to feature the same terms and an updated rental amount. Typically, the open market rent for the premises will be used to determine what the updated rental amount will be.
However, either party may want to negotiate new terms, such as repair liabilities, break clauses and/or insurance liability. If so, they can rely on third-party experts, such as surveyors, to provide professional insight to support their position.
If the parties cannot agree on the terms of the new lease, the matter can be decided by a court. While this is an effective (but costly) remedy, it’s rarely necessary. With professional and legal advice, parties can typically negotiate terms that are acceptable to both the landlord and tenant without having to go to court.
Common Pitfalls to Avoid When Renewing a Commercial Lease
If you want the renewal process to be as simple and straightforward as possible, be sure to avoid common pitfalls, such as:
Missing Deadlines
One of the most common ways landlords and tenants mismanage the renewal process is by missing deadlines and failing to adhere to the time limits set out in the Landlord and Tenant Act 1954. This can result in an erosion of your rights and leave you without the opportunity to renew (or object to a proposed renewal), so it’s essential that you act in accordance with the relevant time limits.
Accepting the Same Terms
If a landlord or tenant has been happy with the current lease, they may simply agree to renewing the lease on the same terms, subject to a rent review. However, it’s important to consider whether the same terms will remain favourable in the mid- to long-term.
Failing to Get Legal Advice
Assuming that a commercial lease renewal will be a simple process is one of the biggest pitfalls to look out for. Too many tenants and landlords expect a renewal to be a matter of signing an updated document, only to find that the terms of the new lease are much less favourable or that they are unable to renew the lease at all.
Legal advice isn’t only beneficial if a section 26 notice is opposed by your landlord or you find yourself at odds with the other party; it’s a vital way of protecting your rights, mitigating the risk of disputes and planning for your future.
Get Legal Advice Before a Commercial Lease Renewal
Whether you want to renew a lease, end a tenancy or negotiate more favourable terms, our commercial property team is on hand to provide the help you need. To find out more, get in touch with our expert team on 01276 680000 or send us a message.
