If you are coming towards the end of your lease, it is strongly advisable to consider the various options and processes available as early as possible. Timing is critical and getting this right will ensure the best outcome in any lease renewal negotiations.
Opportunity for both parties
Whether you are a tenant or a landlord, the lease renewal process should be viewed as an opportunity. From a tenant’s perspective, there is the possibility of securing a lower rent or even a rent free period, together with the chance to minimise liabilities around repair, known as dilapidations. From a landlord’s viewpoint, there is the opportunity to maximise the value of the property asset and to secure rental income into the future. It is also an opportunity for the parties to negotiate and modernise elements of the lease wording – for example, a widening of the Use Class provisions or the introduction of break options.
Understand your position
From both perspectives, it is vital therefore to have a good understanding of both informal and formal procedures that can be used to negotiate terms for a renewal, together with an in-depth and up to date overview of the local property market.
Pivotal to any discussion between landlord and tenant at lease expiry will be whether the tenant has security of tenure under Sections 24 to 28 of the Landlord and Tenant Act 1954. This Act governs the relationship between the parties, alongside the lease, and sets out the rights and obligations at lease expiry.
Is the tenancy ‘unprotected’?
A tenancy that falls ‘outside’ of the security of tenure provisions of the 1954 Act will require both the landlord and tenant to consider the timings of any renewal discussions with great care, in order to ensure the best possible negotiation position.
An ‘unprotected’ tenancy does not provide the tenant with automatic rights of renewal. Tenants need to be acutely aware of approaching expiry dates as the closer this date becomes, the weaker their negotiating position - and the greater the control the landlord has over the terms to be set at renewal. Equally, landlords must be careful as to how they manage negotiations and the collection of rent if the tenant remains in occupation following the lease expiry date. If not managed correctly, the landlord could inadvertently bring the tenancy inside the 1954 Act, thus granting the tenant statutory rights that it did not previously have – i.e. the creation of a periodic tenancy.
Recent case law puts the onus back on the tenant and suggests that there needs to be strong evidence for the parties to infer the creation of a periodic tenancy and that the default position is a tenancy at will. Both parties therefore need to conduct their discussions and actions carefully to ensure that their respective positions are protected.
A lease ‘inside’ the 1954 Act on the other hand grants the tenant a statutory right to renew its lease at expiry. It enables both parties to serve formal notices to seek new terms or to set out timeframes for the termination of the lease. Early engagement and understanding of this process can protect both the occupational and rental position of the parties. A landlord may wish to serve a Section 26 notice at the earliest opportunity in order to protect its position on interim rent if it feels that rents have moved on. Conversely, a tenant may withhold serving an early Section 25 notice if it feels that the property is currently underented. If a market is moving swiftly in a particular direction then this will impact on whether 6 or 12 months notice is given. The serving of notice or otherwise can therefore greatly enhance either party’s position. The greater the understanding of the 1954 Act and the local market, the more it can be worked to your businesses advantage.