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Renewal of commercial lease
When a commercial lease term ends, if both parties are happy for the arrangement to continue, negotiations usually begin to agree renewal of commercial lease terms.
Our Commercial Property transactional colleagues have extensive experience advising landlords and tenants in commercial lease negotiations.
Security of tenure
Security of tenure is a tenant’s statutory right under the Landlord and Tenant Act 1954 (‘the Act’) to remain in occupation after a lease term expires. It means the tenancy is protected by the Act and continues until ended in a prescribed way under the Act.
If new terms cannot be agreed and the lease is within the Act’s security of tenure provisions, either party can serve notice on the other, making time of the essence. The renewal procedure under the Act depends on which party initiates the renewal. However, neither party can apply to the court until one has sent the other a notice. If either party has served notice, the other cannot then serve their notice.
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Section 25 notice
To end the current lease, the landlord serves a Section 25 notice on the tenant. If the landlord is willing to renew the lease, the notice sets out the terms of the new lease. However, the tenant does not have to accept those terms, and the notice often triggers negotiations to avoid going to court.
The landlord may serve a Section 25 notice not less than six months or more than twelve months before the date they want the current lease to end. However, the landlord cannot end the lease before the lease expiry date.
Section 26 notice
A tenant serves a Section 26 notice on the landlord requesting a new lease. The notice is similar to a landlord’s Section 25 notice but sets out the tenant’s proposals.
The tenant may serve a Section 26 notice not less than six months or more than 12 months before the date the tenant wishes the new lease to begin. However, the tenant cannot start a new lease until the existing lease has expired.
The landlord must respond to a Section 26 notice within two months of receipt if they object to granting a new lease on those terms.
Renewal of commercial lease: Interim rent
Either party can apply to the court to decide an interim rent following the service of a Section 25 or Section 26 notice. The court has discretion on whether to order an interim rent and, if so, at what level.
Seven grounds to oppose new lease
Under the Act, a landlord cannot refuse a new lease without a sufficiently valid reason. The landlord can challenge a Section 26 notice within two months of receipt on one of seven grounds:
- Breach of repairing covenant.
- Persistent delay in paying rent.
- Breaches of other contractual obligations.
- Availability of alternative accommodation.
- For sub-tenants, possession is required to let or dispose of the whole property.
- The landlord intends to reconstruct or demolish the premises.
- The landlord intends to occupy the premises themselves.
Court settling new lease terms
If negotiations over new lease terms fail, either party can apply to the court for a decision on those terms. The court applies the following:
- Lease Term – The court can order a new lease of up to fifteen years for a fixed term lease. Typically, the court orders a term fitting the tenant’s genuine requirements.
- Rent – The new rent should reflect the property’s current market value, bearing in mind the lease terms. In setting rent, the court should ignore certain points. Those include the fact that there is a sitting tenant and the tenant’s business goodwill. In addition, the court ignores any improvements by the tenant or their predecessors either during the current lease or within the last twenty one years, other than those required by the lease.
- Other terms – The court uses its judgement to determine the other lease terms. However, it must take into account the current tenancy terms and any other relevant circumstances. The court may also decide that the lease should provide for rent reviews.
If the court orders a new lease, the tenant must accept the stated terms unless they and the landlord agree on other terms or the tenant asks the court to revoke the order. In that case, the court can then revoke the order but might extend the current lease sufficiently to allow the landlord an opportunity to re-let the premises. On revocation, the tenant must vacate the premises.
Renewal of commercial lease: Commencement
The new lease usually commences on the date the landlord or tenant sets out in their Section 25 or Section 26 notice. However, where a party applies to the court, the date is usually three to four months following the court’s decision.
