Renewal of Business Lease

Introduction

Most leases of premises which are occupied by a tenant for the purposes of a business enjoy certain protection under Part 2 of the Landlord and Tenant Act 1954 (“the Act”).  This applies also in the case of tenancies which do not have a written lease.  It is not a pre-condition of protection under the 1954 Act that there should be a written lease.

There are a small number of types of leases to which the Act does not apply.  For instance if there is a written tenancy agreement and the length of the tenancy is expressed to be for not more than six months but even this exclusion is subject to exceptions.   In the circumstances for all intents and purposes most business tenancies fall within the ambit of the Act.

Can the lease be excluded from the protection of the 1954 Act by agreement between the parties?

Although most business tenancies fall within the ambit of the Act it is nevertheless possible for a landlord and tenant to formally agree to exclude the lease from the protection of the Act.  There are express statutory provisions which regulate such exclusion.  For instance a notice has to be served by the landlord on the tenant.  A declaration has to be executed on the part of the tenant in a separate document and the lease itself must contain a statement in the relevant format confirming that the lease has been excluded.

It is rarely, if ever, of benefit to a tenant to enter into an excluded lease.  Situations in which a tenant may reasonably consider to do so would be where the tenant is certain that it is not likely to require the property for longer than the term of the lease and in addition a below market rent is on offer.

What is the protection of the 1954 Act?

The Act confers a number of benefits to tenants occupying under a protected lease including the following:-

• When the term of the lease ends, the lease automatically continues as a continuation tenancy. The terms that apply to the continuation tenancy are the same terms as set out in the written lease.
• Where the tenant occupies under an oral periodic tenancy, whether monthly, quarterly or yearly, the landlord cannot require the tenant to leave the property at the end of the period of the tenancy.
• The Act provides a set of procedures triggered by the servicing of notices which entitle the tenant to apply to the court for a new tenancy.
• The terms of any new tenancy are subject to regulation by the Act in certain key respects.  For instance, the rent that is to apply to the new tenancy is the open market rent subject to certain disregards such as the goodwill attaching to the landlord’s property as a result of the business being carried out thereat by the tenant.
• As far as all of the other terms are concerned these should have regard to the terms of the current tenancy and to all the relevant circumstances.  A landlord will not therefore find it easy to impose fresh/onerous obligations on the tenant in the new lease.  Also note that although the parties can agree whatever length of the new term, a court can only order a maximum term of fifteen years.

What notices are typically served by a landlord?

• At some point after the expiry of the fixed term in a written lease the landlord may serve a notice pursuant to Section 25 of the Landlord and Tenant Act 1954 (Section 25 Notice).  If the landlord is prepared to grant a new tenancy the notice will state that the landlord does not oppose the grant of a new tenancy and will set out the landlord’s proposed terms.  The notice has to be for a minimum period of six months but cannot exceed twelve months.  If the parties are able to agree and complete the new lease then the tenant will obviously end up with a new lease which would replace the previous lease.  On the other hand if the parties are not able to agree the terms of a new lease, for instance there is disagreement in relation to the proposed new rent, then the tenant must issue an application to the court for a new tenancy before the expiry of the Section 25 Notice.  The notice will have an expiry date and if the tenant fails to issue an application to the court for a new tenancy before that date the continuation tenancy will have come to an end and the tenant will have no right to remain in occupation.  The parties can still negotiate after the issue of court proceedings but if they are not able to reach agreement on all terms then the court will determine those terms in due course.
• If the landlord is not prepared to grant a new lease to a tenant and wishes to bring to an end the existing lease then the Section 25 Notice will state one or more statutory grounds on which the landlord relies in order to oppose an application for the grant of a new lease.  There are a number of statutory grounds that a landlord may wish to rely on including the ground that the landlord intends to demolish the premises or carry out substantial works of construction on the premises and it is not reasonable for the tenant to remain in occupation.  If the tenant does not wish to challenge the landlord’s reliance on a ground of opposition then it would not issue an application for a new tenancy and at the date of expiry of the notice the lease would come to an end.  On the other hand if the tenant wishes to challenge the landlord’s reliance on a statutory ground then it would need to issue a court application before the expiry of the notice and in the absence of any settlement between the parties the court would determine whether or not the landlord can rely on the statutory ground.  If the court decides against the landlord then the parties would have an opportunity to negotiate the terms of a new lease failing which the court would determine the new terms.

What notices are typically served by a tenant?

A tenant of a written lease, as opposed to a periodic tenant, can serve a request for a new tenancy on the landlord pursuant to Section 26 of the Act.   As in the case of the Section 25 Notice the request would set out the tenant’s proposed terms. The notice has to be for a minimum period of six months and a maximum period of twelve months.  In the event that the parties are unable to negotiate the terms of a new lease the tenant would have to issue an application to the court before the expiry of its Section 26 Request and then the court would determine the terms of the new lease in the absence of the parties being able to reach agreement before the final hearing date.

Final word

This is a very brief snapshot of some of the key aspects that apply to the renewal of a business lease.  The law in this area is complicated and a significant amount of litigation results from the operation of the Act.  It is advisable for either party, whether landlord or tenant, to obtain detailed legal advice before deciding whether or not to serve a Section 25 Notice or a Section 26 Request or at the point that such a notice or request is received from the other party.  There are a large number of other provisions in the Act which may need to be considered for instance; compensation payable to the tenant if certain statutory grounds are established by the landlord and the tenant is denied a new lease, compensation for improvements, provisions relating to the payment of interim rent until a new lease is executed, provisions in relation to the calculation of rent and whether certain tenant’s improvements can be taken into account, the identity and competence of the landlord, sub-tenancies and various other such aspects.  There is also a whole field of law relating to whether or not someone occupying without a written lease is in fact a tenant as opposed to a licensee.  A licensee does not enjoy any protection under the Act.

For further information, please do not hesitate to contact Kumer Ali, Head of Property Litigation on kumerali@chadlaw.co.uk, telephone 0113 225 8808.