The current uncertain times combined with the trend for generally shorter leases, mean lease expiries are more regular and potentially a concern for landlords. For the purposes of this article, we are assuming that the lease is covered by the security of tenure provision of the Landlord & Tenant Act 1954 (which all leases will be by default unless expressly excluded). In addition, that the landlord does not wish to oppose the tenant’s right to a new lease – in fact the landlord may be very keen to secure a new lease to continue the income stream from the property.
Regarding the 54 Act there are two key aspects that are important to be aware of:
- If nothing is done and the tenants remain in occupation beyond the end of the lease, then the lease will continue indefinitely at the same rent and on the same terms – with the tenants effectively having a rolling three month break option – until brought to an end by either landlord or tenant.
- The legislation is biased in favour of tenants, in so far as the landlords are obliged to offer the tenants a new lease on similar terms to the existing at a market rent. The tenants are not obliged to take a new lease and can serve notice to leave at any time (even after going to court – although this would mean that the tenant would be responsible for any costs incurred).
It must also be remembered that the rent can go up or down at lease renewal, and landlords must be conscious of this.
In an uncertain market, landlords could be tempted to simply do nothing, but this could seriously affect the value of the freehold, which can be important if they are either looking to sell or raise finance against the property. Also, this leaves an ongoing uncertain situation where the tenant could give three months notice at any time under Section 27 and leave the premises.
In this and many other situations, we would always suggest that a dialogue should be entered into with the tenant as early as possible to establish their intentions and any pressing issues for them. The tenants may genuinely or tactically advise that they wish to keep their options open and do not wish to commit to a new lease and part of the skill of the negotiating surveyor would be to assess how genuinely fragile their business is.
It is a fact of life that businesses cannot continue without premises and there is a significant cost in moving. Unless the prospects of reletting are very poor, if a tenant is genuinely fragile it may be worth the landlord biting the bullet and forcing them to either take a new lease or leave so that a re-letting can be obtained to a better longer-term tenant. If a landlord wishes to secure a new lease then the existing lease must be brought to an end and this is done by giving between six and twelve months notice under Section 25 and offering new lease terms.
The existing lease can’t be brought to an end before the end of the original term, and we would always recommend that notices are served by a solicitor. Too often we see landlords engage with tenants in amicable discussions only for these to break down – normally over the question of rent – or because the tenants wish to delay the issue and then, often after many months, a Section 25 notice needs to be served giving at least six months notice, delaying the whole matter by a further six months. Therefore, we would always recommend serving a Section 25 notice as soon as possible, perhaps politely advising the tenants that this is a legal process that needs to be gone through and that they shouldn’t be worried by this.
Again, the legislation and case law is generally favourable to the tenant with regards to the terms of the new lease. If tenants wish to obtain a shorter lease or insert break options then case law would indicate that the courts will generally allow this, although this may command a higher rent.
If the matter cannot be agreed then there is an option for this to go to court, and therefore case law is always the backdrop to negotiations.
The rent is normally settled by reference to comparable evidence of other lettings, rent reviews or lease renewals in a similar manner to a rent review.
The Court process is expensive, and tenants often exploit this by seeking delays and extensions to their Court application (which must be made before the expiry of the Section 25 notice) and landlords must be conscious of this and seek to prevent indefinite delays. Where it is reasonably certain that a tenant wants to remain, often a firm hand needs to be taken to avoid this dragging out too long. Landlords also need to be aware of either a rising or declining market and, like rent reviews, lease renewals do not have a fixed date for valuation, with a valuation date being the date of the Court hearing, and so delays can be used tactically for both landlord and tenant.
Negotiations and case law surrounding lease renewals are highly complex and involve a variety of tactics and strategies depending on the particular case. At Aitchison Raffety, we deal with such matters day in day out and have a highly experienced lease advisory team who can ensure that you obtain optimum results. Please feel free to make contact should you be facing such a situation and wish to have an initial discussion.
For further information, please contact Mark Bunting, Regional Director, on 01727 843 232 or via email to mark.bunting@argroup.co.uk.