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Contact our commercial property solicitors if you need expert legal advice regarding commercial lease renewals:
When a commercial lease term is close to expiring, the parties can enter into negotiations over the terms of a new lease agreement, which is known as a lease renewal.
When renewing a lease, you must first check if the lease is inside or outside of the protections of the Landlord and Tenant Act 1954 (“LTA 1954”).
If the lease is protected by the LTA 1954, you have a legal right to renew your lease once the lease term ends, meaning that you can continue your business from the commercial property.
If your commercial lease is unprotected, you have no legal right to renew once the lease term ends.
However, if you wish to remain on the commercial premises, you can try to negotiate a renewal with your landlord.
Below are our top tips when renewing a commercial lease.
Top tips for lease renewals
1. Know whether your lease is a protected lease or an unprotected one.
If the end of the lease term is approaching, investigate whether your lease is protected by the Landlord and Tenant Act 1954.
This should be done well in advance, around 12 months prior to the expiry of the term but no less than six months, giving plenty of time for negotiations to commence (if the lease is unprotected) and enough time to serve a Section 26 Notice if the lease is protected.
A Section 26 Notice is served by the tenant on the landlord. This notice triggers the renewal process where the landlord has not yet served a Section 25 Notice.
The Section 26 Notice should be provided at least six months before the end of the lease term but should not be provided with more than 12 months’ notice.
The landlord then has two months to respond to this notice. The landlord can also trigger the lease renewal by serving a Section 25 Notice on the tenant. There are two types of Section 25 Notices.
One form is a “friendly” notice, which ends the existing lease but confirms that the landlord wishes to enter a new lease, proposing the terms which he prepared to accept.
The other type of Section 25 Notice is a “hostile” notice. This type of notice ends the existing lease and opposes a new lease on one of the limited grounds available.
2. Know whether the landlord has the right to oppose the renewal of the lease.
When the lease is protected under LTA 1954, the landlord can only oppose the renewal of the lease on specific legal grounds known as Section 30 grounds.
They can oppose this renewal lease with a Section 25 Notice or in their response to the Section 26 Notice, which must be responded to within two months.
The grounds on which the landlord can refuse the renewal of the lease are:
- The tenant is in breach of a repair covenant
- The tenant is persistently late with their rent
- The tenant has been or is in breach of other terms of the lease
- The landlord offers other commercial premises with reasonable lease terms
- The tenancy was created by subletting
- The landlord intends to demolish or reconstruct the property, and this is not possible without obtaining possession
- The landlord intends to occupy the property or part of the property for business or residential purposes
3. Consider whether there are terms of the lease which you wish to negotiate.
Whether you have the automatic right to renew on largely the same terms as the existing protected lease or you must negotiate a renewal, a new lease is effectively entered into in both circumstances.
Therefore, the terms of this lease can be negotiated.
A commercial tenant should consider whether they wish to negotiate any changes to the rent or the lease term and whether they wish to negotiate any break clauses to allow an early end to the lease.
When considering these points, it may be helpful to review and compare other rental prices in the area and the lease terms of other similar properties in the market.
You may request any new terms when serving the Section 26 Notice.
If the parties cannot reach an agreement in relation to any new or changed terms on renewal, the matter can be progressed for the Court to decide.
4. Consider whether a green clause is suitable to be added to the lease.
As legislation is changing around the environmental impact of the built environment, you should consider whether it is worth adding “green” clauses when renewing the lease, making this a “green lease”.
The green lease will contain additional provisions which introduce responsibilities and obligations for both the tenant and the landlord to manage and reduce the environmental impact of a property by making improvements.
This may include sourcing sustainable energy, reducing energy consumption or reducing the waste produced.
Both parties should negotiate and agree on whether such provisions are worth introducing when renewing the lease and who will be responsible for the associated costs.