Emily Seager, Lease Advisory Partner at Knight Frank Newcastle, says if you're a tenant you should find out this one crucial detail about your lease - today.
The single most important detail you need know, is whether your lease is inside, or outside, of the influential 1954 Landlord & Tenant Act (the Act).
If you rent an office, shop or industrial property, there will come a time close to the end of your lease when you want to negotiate new lease terms – or terminate it altogether. But how easy is that to do? Well. That greatly depends on whether your lease is inside the Act so that you have ‘security of tenure’.
Since the outbreak of the pandemic we’ve seen an increasing trend for leases which have been contracted out of the Landlord and Tenant Act 1954 (the Act), particularly on retail and leisure properties.
During 2020 and 2021, many ‘tenant-friendly’ deals for short terms at low/zero rents were agreed by landlords. To help minimise their risk, many made sure the new leases were outside the Act and therefore tenants didn’t have ‘security of tenure’. This is so they wouldn’t be bound by the discounted terms once the leases expired, when hopefully market conditions would have improved.
What is security of tenure?
When entering into a lease, the landlord and tenant will agree whether the lease is ‘protected’ by or ‘contracted out’ of the security of tenure provisions contained in the Landlord and Tenant Act 1954. This gives business tenants the right to renew their lease at expiry on the same terms as their existing lease (subject to reasonable modernisation) and to pay a rent in line with market rents.
If a lease is protected by the Act, the landlord can only take the property back if they can prove one of the statutory grounds for refusal.
Security of tenure therefore gives tenants peace of mind knowing they can invest and grow their business, without worrying about losing their property at the end of their lease. They have protection if they can’t agree mutually agreeable renewal terms with the landlord.
What rights does a tenant have at expiry of an ex-Act lease?
If the lease is outside the Act the tenant does not have security of tenure. In other words, they don’t have a statutory right to remain if a new lease hasn’t been agreed. A tenant that remains in occupation at expiry of an ex-Act lease might be a trespasser/ tolerated trespasser, a tenant on sufferance; a tenant at will, or a periodic tenant – all of which have different and potentially problematic legal and practical consequences.
What new lease terms can you agree on expiry of an ex-Act lease?
If your lease is contracted out, then the landlord is technically in a stronger position than the tenant, depending on current market conditions. The tenant has no rights to renew, or for renewal terms to be in line with their current lease terms and at a market rent. This could well result in a tenant having to pay a premium rent.
This contrasts with protected leases, where the rent and lease terms will be driven by the existing lease and transactional evidence from the open market. And both parties would be able to refer the matter for resolution by a third party/court, if you can’t agree.
In the wake of the pandemic, tenants with recently granted ex-Act leases on manageable terms could find themselves having to agree far less-favourable lease terms, and a higher rent at the end of their leases.
Will the new rent always be higher if renewing an ex-Act lease?
No. The terms agreed very much depend on the nature and location of the property and market conditions at the time. Usually, the strength of the landlord and tenant relationship and the landlord’s longer-term plans for the property will also affect the price offered.
How to avoid problems – useful practical tips
Check your lease to see if it is inside or outside the 1954 Act. If you’re unsure ask a solicitor or surveyor to check for you. Make sure you have a system in place to review your property or property portfolio on a regular basis.
Review your strategy for any properties where the lease is due to expire – at least 12 months and, preferably 18-24 months, in advance.
Pay particular attention to those where the lease is outside the Act and consider your longer-term plans/alternative options.
If you’re a tenant with a contracted-out lease:
Have early discussions with your landlord to gauge their plans for the property. In most cases they will want you to stay, it’s just a case of agreeing suitable terms and a mutually agreeable rent.
Take advice from a property professional on what the market rent should be for your property. Be prepared to have to agree a rent in excess of this, given you aren’t protected by the 1954 Act.
Allow sufficient time to assess alternative properties and relocation costs.
Consider appointing an agent to undertake a stay/go exercise for you, with a lease advisory specialist seeking to agree renewal terms with your landlord while their agency colleagues investigate the alternative premises available. This enables you to make a fully-informed commercial decision.
We advise landlords and tenants on leases which are both inside and outside the Act, providing comprehensive stay/go market advice, and negotiating the best possible terms.
Emily Seager can be contacted on 0191 594 5046 or email@example.com