By Simon Preston, Director of Commercial Management
For commercial landlords and investors when a lease is approaching the end of its fixed term it is important to have an understanding of the complexities of the lease provisions and the governing laws and regulations. Market forces, the economy, development opportunities, property condition, tenants’ performance as well as the landlord’s objectives all need to be considered before acting.
For landlords, it’s important to know what happens when a commercial lease expires as, usually, tenants are protected by very specific rights under the terms of the Landlord and Tenant Act 1954.
However, under the commercial lease expiry law, the legal status of a tenant changes depending on whether they have a ‘protected’ or ‘unprotected’ lease.
Landlords who are new to commercial property ownership and management, are advised to seek professional advice when negotiating a commercial lease, as nobody wants to become embroiled in a future dispute for failing to meet legal obligations.
At Garness Jones, we draw upon years of expertise negotiating commercial leases throughout England and Wales.
Whilst this article looks at the typical circumstances which occur when a lease is nearing its expiry, please call 01482 564564 to discuss a specific scenario.
The commercial lease expiry law: Protected vs Unprotected leases
What is a Protected Lease?
Unless the landlord has sought a specific exclusion in a lease agreement, a commercial lease will usually fall under the protection of the Landlord and Tenant Act 1954.
To qualify as a ‘protected lease’ three criteria must be met:
· The tenant has exclusive possession
· The tenant occupies the property for business use only and pay a rent
· The lease granted is for a fixed term
At the expiry of the contractual term under a protected lease, the tenancy continues (holds over) on the same terms until either party serves notice to bring the lease to an end.
The 1954 Act gives a tenant the statutory right to request a new lease on similar terms to the existing lease subject to serving the prescribed notice. Should the tenant wish to vacate the premises and the lease is ‘holding over’, the tenant must give 3 months’ advanced written notice to the landlord.
If the tenant is within the contractual period of the lease they can simply vacate at the date of expiry.
What is an Unprotected Lease?
Landlords can arrange for both parties to ‘contract out’ of the Landlord and Tenant Act 1954 before a lease is signed. If this happens, the tenant is bound by an ‘unprotected lease’ agreement. This approach provides the landlord with tighter control of their asset, commonly seen within multi tenanted developments or property with development potential. Tenants typically try and resist unprotected agreement which can limit the potential of the business in-situ.
The ‘contracting out’ procedure is strict and requires a landlord to serve the prospective tenant with a formal notice. The tenant must respond in writing to state that they fully understand the rights and protection they have forfeited.
When the period specified in an unprotected commercial lease comes to an end, the tenant has no automatic right to renew or renegotiate the lease.
If the landlord wants them to leave, the tenant is legally obliged to do so. Or the landlord can propose a rental increase (or completely new terms) to the tenant, who is free to accept these if they wish.
Actions for landlords when a commercial lease expires
Whether a lease is secured or unsecured, landlords should consider their objectives around 18 months before the current lease expiry date.
If a landlord (protected) wants to renew terms or regain possession of their property, they must serve a landlord’s Section 25 Notice (S25) in the prescribed form on the tenant within a period of 6 to 12 months before the specified date of termination.
If a landlord (protected) wants to regain possession grounds stating the reason must be served in the prescribed form. The main grounds for doing so are:
· The landlord wants the property vacated for their own occupation
· The landlord wants to redeveloped
· The commercial tenant has a history of none compliance of the lease provisions
For protected leases, a landlord has two months to dispute a tenant’s request to renew their lease. During this process, the tenant has the right to remain in the property under the existing lease terms, until the either expiry date arrives or new terms are agreed.
If a landlord chooses to grant the renewal request, negotiations can start immediately to set new terms. Sometimes an independent valuation will be required to help determine the new rental amount.
For unprotected leases, the tenant has no right of occupation once the existing lease’s end date arrives. If they wish to, a landlord can demand that the tenant vacates the property immediately.
Our help for landlords
As you can see this can be complex and to avoid becoming embroiled in a complicated dispute, we believe it’s wise to seek professional help and advice before a commercial lease expires. The earlier, the better.
At Garness Jones, our Commercial Property Management team has a proven track record of advising upon all aspects of commercial leases. We are experienced in all areas – from industrial and residential investments to development and retail sites.
With our help, landlords can negotiate the whole process in a straightforward and stress-free manner.
To benefit from impartial and expert advice you can trust, get in touch or call 01482 564564 for an informal discussion.
