How do Commercial Tenants renew a business lease?

If you are a commercial tenant occupying a property under a commercial lease and you wish to ask your landlord for a renewal of that lease then you can do so via a s.26 of Landlord and Tenant Act 1954 (the 1954 Act) . Many tenants do not even know that such a request exists.

As a commercial tenant you may want the certainty which a new lease brings or should a tenant have concerns over whether a landlord has any plans to redevelop premises then a s.26 request should be considered.

Provided the existing tenancy is inside the 1954 Act and the landlord has not served a s.25 Notice or a notice to quit then a s.26 request can be made.

Tenants requiring certainty

Sensible businesses strategically plan ahead and the premises they occupy together with the location can be integral to that strategy. A tenant may be planning to sell its business (which may include the premises) and its prospects may radically improve if they are able to offer any prospective purchaser a newly granted lease with a number of years left on the term.

Some tenants go through the process of trying to negotiate a new tenancy only for those negotiations to break down or become protracted. It is not unheard of for landlords to suddenly becomes evasive and unresponsive putting the tenant’s strategy at risk.

Serving a s.26 Request forces a landlord to act and either give the tenant a new lease or provide grounds as to why a new lease is not being offered. If the ground is not validly applied under the 1954 Act then they may be able to challenge and still secure a new lease.

Tenants with concerns over redevelopment of their work premises

A tenant may become aware of the landlord planning to redevelop the premises. The tenant will want to clear any doubts about whether they must relocate or to be aware of the extent of the potential disruption this may cause to its operations due to the redevelopment works.

Any landlord intending to redevelop the premises must have a “real, as opposed to fanciful, prospect” of the proposed development being carried out. “Real prospect” not only includes the merits of securing planning but also the funding of the redevelopment. If a “real prospect” is shown, whilst a tenant cannot then ultimately stop a landlord seeking possession a s.26 notice could buy time to continue occupation whilst an alternative premises is found.

What is included in the s.26 Request?

The s.26 request should include the proposed terms for the new tenancy. These terms include:

• The new rent which the tenant is prepared to pay
• Any other terms of the new tenancy
• A start date for the new tenancy

Before serving a s.26 notice a tenant should consider speaking to a commercial surveyor, as the surveyor will be able to advise on the proposed terms for the new tenancy. Speaking to a surveyor at an early stage can save time should the premises need to be inspected to provide advice on the proposed terms.

Once served what happen next?

A s.26 notice enables the tenant to request a new lease commencing not less than six months but not more than 12 months into the future. Once served, the landlord has two options:

a. Within two months to serve a notice objecting to a new tenancy; or
b. Serve counterproposals to the tenant’s proposed terms.

What happens if a Landlord serves notice objecting to a new tenancy?

If the landlord opposes a new tenancy the ground for refusal must be provided and some of those grounds carry with them a right for statutory compensation to the tenant. The maximum statutory compensation would be two years rateable value depending on length of occupation.

If a s.26 notice results in a refusal to renew, even where there are arrears of rent or alleged breaches of the existing lease, professional advice should still be sought as there may be circumstance in which a new tenancy may still be granted.

What happens if a Landlord serves counter-proposals?

If a landlord serves counter-proposals then the tenant may want to consider negotiating its proposed terms. The final terms of the new tenancy must be agreed by both the landlord and the tenant. The negotiation and grant of the new lease must complete before the deadline set out in the s.26 notice. Both parties can agree to extend this deadline in reasonable circumstances.

If parties cannot agree on proposed terms or only one remaining item is yet to be agreed, for example the rent, then the tenant can ask the court to decide. The deadline to apply to court would be before the deadline set out in the s.26 notice or before the expiry of any reasonably agreed time extension.

What happens if a Landlord serves no response?

A tenant who has served a s.26 notice and has received no acknowledgement from the landlord should be concerned and proceed with caution. The tenant can still ask the court to grant the new tenancy even if the landlord does nothing.

Summary

There are a number of situations in which it is strategically advantageous for the tenant to serve a s.26 notice triggering the lease renewal procedure under the 1954 Act. This is of particular importance if you believe a landlord may be considering redevelopment as the landlord may not have time to meet the required standard in the timeframe of the notice. If you are a tenant nearing the end of your lease term our commercial property team can clearly and concisely discuss your options, decide a way forward and implement the agreed-on method.