Commercial Property – Leasehold
Tenants Security of Tenure under the Landlord and Tenant Act 1954
This Act provides the statutory regime under which commercial tenants (usually) have a right to renew their tenancy at the end of the contractual term.
The tenant can therefore often require the landlord to grant a further lease on similar terms to the existing lease unless the landlord can take advantage of some of the exceptions in the Act. These exceptions are however very narrow (provided that the tenant has been complying with its lease covenants) and often the landlord has to pay compensation to the tenant even if the landlord can exercise them.
For this reason many landlords require their tenant to contract out of these provisions. This now involves a system of serving a formal notice on the prospective tenant at the outset of the lease. The tenant then needs to sign a declaration confirming that he is prepared to take a lease without the usual statutory protection. Unless a statutory declaration is used there will need to be a 14 day cooling off period between the service of the notice and the signing of the declaration / lease completion.
Where a tenant has the protection of the Act the landlord will need to serve at least 6 months written notice on the tenant prior to termination of the lease. This notice (usually called a “Section 25 Notice”) either contains details of the landlords proposals for any renewal lease or states the exceptions that the landlord is intending to exercise to avoid the requirement to grant a new lease.
The Act is convoluted and both landlord and tenant need to be aware that failure to meet with the formalities and requisite deadlines can easily have serious consequences. Even where these are complied with, court proceedings to determine new lease terms (where a tenant is enforcing its right to renew) or determine the landlord’s exercise of the exceptions are sometimes necessary.
Landlords therefore need to be careful that they do not rush into granting a lease to a commercial tenant without considering whether or not they are actually prepared to let the property on what may, in effect, be a permanent basis.
From the tenants’ perspective they should not agree to contract out without considering what might happen at the end of the term. Potentially the Tenant stands to loose the goodwill they may have built up at those premises and possibly even some value to their stock and equipment, if they have to leave the premises at the end of the term. It may also allow the Landlord to negotiate any new rent under a proposed new lease from a position of greater strength.
Given these competing interests between landlord and tenant it is often an important item to be discussed during lease negotiations and established in the Heads of Terms.
This is a complex area and both parties should take specific legal advice. This note is merely a very basic guide and the applicability of the Act to a particular lease will vary depending on it’s terms and surrounding circumstances.
For more information on this contact James Turner