In terms of what is a lease renewal at a commercial property, then it’s basically agreeing to a whole new lease for a tenant to continue occupying a property for their business.
It sounds simple, and in actual fact, it is – a new lease.
What can confuse this is talk of maybe an extended or ‘holding over’ lease, or even ‘re-gearing’ a new one.
These are more about changing or stretching-out the current business lease, whereas a lease renewal is a brand-new lease into the future.
Here is a video of five key factors to appreciate these lease renewals:
The ‘1954 Act’ Protection
The key to understanding how you can approach such renewals is a piece of legislation called the Landlord & Tenant Act 1954, which helps tenants agree to new ones with landlords.
So, a greedy landlord can’t simply kick a tenant out if they don’t agree a new lease at say double the rent going forward. Instead, a tenant has two forms of help.
Firstly, to immediately continues on after the end of the lease on the same basis as this current lease. This legislation, therefore ‘holds over’ and stretches-out the current lease indefinitely, rather than being left with nothing.
The landlord and tenant must therefore take steps to agree to a new lease, or formally end this current one.
Secondly, if they can’t agree on a new lease between themselves, then they can have the court decide the term of a new renewal business lease for them going forwards.
Open Lease Renewal Negotiations
Before we get into more detail about this protective legislation which is key to business lease renewals, it’s important to take a step back and appreciate that this is actually really only there for backup when things go wrong between a landlord and tenant.
Therefore, both parties still need to try and agree on a new lease between themselves. The law won’t do this for them unless specifically asked to.
And this should be through open and fair negotiations to what the current market terms and rent are.
Landlords should not be bullying tenants into harsh terms, or tenants delaying matters.
Ideally, they should both have a good Property Manager or Surveyor acting for them in this process, not just solicitors to draw up the final agreed version - here’s a resource on agreeing to these Heads of Terms.
Therefore, don’t be rail-tracked in accepting any initial proposal from your tenant or landlord.
Investigate for yourselves what fair and reasonable terms are in order to try and negotiate a lease renewal openly with them.
The Landlord & Tenant Act 1954
Now let’s go back to the main legislation when it comes to the renewal leases for commercial properties – this ’54 act’.
The first things to establish is whether the current lease has actually been what they called ‘contracted out’ of the act. Even though circumstances would normally enable the protection of the lease afterward, there is a process where the landlord and tenant can agree to exclude this right all together – check out our resource on this here.
If this is the case, there should be a clause in the current lease saying so, and a statutory declaration then authorising this.
On the first point earlier about this legislation automatically preserving and continuing the original lease afterward, once this kicks-in the day after lease expiry then neither the landlord nor tenant can formally end or renew things without certain notices.
So, a landlord has to serve a prescribed Section 25 notice with 6 to 12 months’ notice, stating the terms of any proposed renewal, or one of seven grounds if the refusal of one.
A tenant has two different notices to hand. A prescribed Section 26 also with 6 to 12 months’ notice with a request to renew the lease, or Section 27 notice with three months’ notice if they don’t wish to renew.
This later Section 27 notice can cause real issues when tenants don’t realise that this is required once this legislation protection begins after lease expiry, meaning they can’t just simply walk away and end the lease then.
With the other two 25 and 26 notices, then the notice period is key to then shape how things are timed in the future, as you may be left with a gap in between the end of the old lease and the start of any new lease.
An actual application to the court must then be made by either party after their notice (or counter-notice) and the final determination date in the notices. You’re then heading into court proceedings and procedures and a whole different method of lease determination by them rather than open negotiation.
An interim rent adjustment may then be required by either the landlord or tenant to the court for this middle period of rent.
But going back to an earlier point, all this talk about notices and procedures under this act is only there if you need it – otherwise simply progress with normal negotiations, as is often the case in the majority of most modern business property lease renewals.
How to Process a Lease Renewal
Therefore, as we look at the basics of how you renew a commercial property lease, the first point is good preparation by each side ahead of time.
In terms of how does a lease renewal then works in reality, you have to carefully consider what terms, length, and of course, rent is acceptable under a new lease; the easier it will be to then go through the negotiation and completion process.
Next up then is how you make contact with the other side, often just in open negotiation, although you may want to service notices under the 54 Act as above to protect your position in the meantime.
Such notices and harsh requests from the landlord or tenant are just that though, and not set in stone at this stage. They’re okay to question and provide your own feedback, not just blindly accept.
Landlords can’t simply refuse or deny a lease renewal request, so long as you have this legislation protecting you in the background. Worst case scenario then is that a tenant does have to legally vacate a property at lease expiry if nothing has been agreed upon, which the landlord may well try and play upon.
In regards to when to offer this and how long before you look at renewing the lease, then providing you’ve done your homework, then the rule of thumb is ideally six to twelve months before the current lease end date. This is well ahead of time to allow space to agree on something and benefit from the 54 Act protection if required.
Even when you’ve started a renewal process but you have a change of mind, then you can look at simply canceling or breaking this and simply not agreeing to any further lease. However, if you do have the benefit of the holding-over lease there are still notices and time scales to be aware of, and possible abortive costs to the other party as well.
The Final Lease Renewal Documentation
As you head towards signing the new lease renewal document, make sure this is in the right form and has been suitably checked.
You can use standard templates and sample lease renewal agreements; however, you really need to use a full document through solicitors and advice through a good property manager, who knows how to draft the correct lease.
Rather than a straight new lease, you may have to look at addendums to the existing lease, and even options to renew in current leases affecting how things are then renewed going forwards.
Even standard Law Society leases need careful consideration into the unique clauses being required in order to reflect the reality of that particular property and situation.
Whatever lease or form you end up using, then ensure all the correct people then sign and date this, and complete any final administration like registration with Land Registry, and copies to other interested parties like funders and insurers.
How Much Lease Renewals Cost
As you head towards agreeing a lease renewal for business premises, then don’t forget the all-in cost for completing this.
This is on top of the actual rent or incentives you have agreed to as part of the new lease, for example, reduced or no rent to begin with, and contribution towards certain building works.
Look carefully at all the legal and advisor costs that are due, including court costs if you had to go that far – for both the landlord and tenant.
Don’t rely upon just standard cost calculators – uncover everything else.
Plus, check to see if the landlord has to issue compensation to a tenant for not being able to renew a lease on what they call non-hostile grounds, along with anything towards improvements made to the property.
In regard to who pays this lease renewal fee, then generally each party covers their own, however, you may need to come to an agreement to share otherwise – but only by fair agreement.
Often this lease renewal fee can be deducted from rents and other monies, therefore, look carefully at any completion statement with solicitors.
Also, look at any tax implications, including SDLT stamp duty for larger-value and length leases due by tenants. Also, the consequence of say new rental levels with income tax, outlay payments for capital gains, and any changes in VAT status.
The Basics of Business Property Lease Renewals
Whether you’re a landlord issuing a lease renewal, a tenant accepting, or an advisor in between – it’s essential to take a step back and understand that you’re trying to achieve a fair and market-level lease renewal.
It has to work for both sides, with no one being bullied into something they assume must be automatic.
You then have the Landlord & Tenant Act 1954 to help tick the current lease along whilst a new one is still agreed after the expiry of the current lease if required, and even have a court determine if the landlord and tenant just can’t agree on the terms of the new lease.
Therefore, serve or accept the right notices and make the court application if needs be – but try and keep normal negotiations going until you agree on the right deal.
And make sure all the property-management details are then ironed out, the Heads of Terms are comprehensive, and the full rental and cost implications are quantified and budgeted for.
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