Whether you're a landlord or tenant, negotiating the best deal when renewing your commercial lease should be at the top of your priority list. Sweeney Miller Law's Managing Partner, Surbhi Vedhara, gives her top tips for removing stress and getting the most from the lease renewal process.
Commercial leases set out the terms by which a landlord and tenant agree to respectively let and occupy a commercial property, including the rent, length of the agreement and any specific conditions such as break clauses and rent reviews. When the lease period ends, a process of renewing the lease should be initiated ensuring that the most favourable terms are negotiated at that point.
Understanding how to negotiate the best terms for your situation, whichever side of the agreement you are on, is a significant opportunity that shouldn’t be wasted.
Understanding the Landlord & Tenant Act
Most commercial leases fall under the protection of the Landlord and Tenant Act 1954 (“the Act”), under which the tenancy can be renewed on the expiry of the contract, to avoid tenants being evicted with little to no notice. For leases protected by the Act, at the end of the contractual term, tenants are given the automatic right to be granted a lease renewal on the same terms as the existing lease – apart from any necessary market adjustments – this is known as ‘security of tenure’.
Leases protected under the Act will automatically renew under the existing terms unless the landlord can successfully refuse renewal by relying on certain statutory grounds such as that the tenant is in breach of their obligations (such as non-payment of rent), or they wish to live in or operate their own business from the premises.
Savvy landlords may want to take away this security of tenure from their tenants so that the tenants do not have an automatic right of renewal. This would put the landlord in a better bargaining position when it comes to renewing the lease. However, this needs to be carefully negotiated before the start of the tenancy.
The renewal process
If the market is stable and the existing lease conditions are agreeable, a lease protected by the Act can continue with no formal renewal under Section 24 of the Act; however, both landlords and tenants can trigger a formal renewal by serving a notice:
Landlords can serve tenants with a Section 25 Notice
Tenants can serve landlords with a Section 26 Notice
If the landlord is happy to continue with the existing tenant, a Section 25 Notice will outline the terms of the new lease including any changes in rent, break clauses, and new lease start date and duration.
A Section 26 Notice will outline much the same proposal but with the tenant’s requests, such as rent reductions in line with market conditions – something to seriously consider given the current economic climate. This might also be considered if the tenant is yet to hear from the landlord as the lease termination date approaches.
These new terms are not set in stone and are rather suggestions that the other party is not obliged to accept; however, agreeing terms at this stage will hopefully avoid expensive legal action.
Time is of the essence
Lease renewal negotiations and drawing up new terms can take a lot of time, so if either the landlord or tenant is interested in doing so, it is best to start the process sooner rather than later.
The renewal process should be initiated between 6 and 12 months before the expiry date to allow both sides to negotiate and, if this fails, start looking for alternative arrangements such as new premises or a new tenant.
The longer you allow for your lease renewal strategy, the more breathing space you have for negotiations, any necessary property inspections, lease amendments, and the final document.
Ask the experts
Expert help at the start of the lease renewal process is invaluable and key to securing the best terms for the future.
While negotiations can take place informally directly between parties, getting early advice from an experienced commercial property law team removes the guesswork from the process and ensures that the right provisions are in place for the next lease term. As expert advisors, we can liaise with all parties involved, including any valuation or property experts, such as chartered surveyors, ensuring the negotiations go smoothly and cost effectively.
Commenting on lease renewals, Surbhi said: “At Sweeney Miller Law, our Commercial Property team regularly helps both commercial landlords and tenants as lease renewals come up. We can advise on whether the existing lease falls under the Act, draft and serve Section 25 and 26 Notices, and advise on any legal action should the renewal be contested. Our Commercial Dispute Resolution team is also best placed to robustly assist with any litigation issues that arise when renewals become contested.
Each lease is different and we aim to ensure that our clients get the best possible outcome during the negotiations based on their circumstances and existing lease conditions. The team works with large established commercial clients, through to fledgling businesses that may have never dealt with a renewal before.”
If you are a landlord or tenant coming towards the end of your commercial lease term and want advice from a team of experienced and pragmatic commercial property lawyers, get in touch today, call 0345 900 5401, email enquiries@sweeneymiller.co.uk or visit sweeneymiller.co.uk