When it comes to commercial lease renewals, Kevan Carrick co-founder of JK Property Consultants advises to plan for the worst and strive for the best outcome.
The renewal of a lease is part and parcel of accessing commercial property for the vast majority of businesses.
It is governed by the Landlord and Tenant Act 1954 and was introduced to avoid overt action and provide some stability for ‘good’ tenants for the continuity of their business in the existing premises. This security of tenure is the foundation for good relations between landlords and tenants.
The working relationship between landlord and tenant has recently been put under stress with the results of both the pandemic, requiring businesses to close for a period, and the changes in trading in the retail sector, resulting in the decline of the High Street. Other impacts are beginning to emerge with firms addressing the social, environmental and governance of their businesses to enhance their brand and improve trading. This can apply equally to both the landlord and the tenant. Sustainability and the need to be more efficient in the generation of, and use of energy, will have a particular impact.
Examples are the collection of rent whilst there is forced closure because of the pandemic and the tenant not being able to trade; who pays for and benefits from the cost of improvements for energy generation and efficiency that increases the rental value and the asset of the investment and or business. The art is to ensure the value of the respective assets can be protected and, where possible, enhanced.
Each of the parties has an asset in the property. The landlord, its investment; the tenant, the value of the ongoing business. The relationship between landlord and tenant, as long as the tenancy exists, needs to be fair and balanced. For the landlord to provide a long-term secure rental income that is paid on time, with a responsible tenant that takes care of the property and is neighbourly to other occupiers, thus maintaining the value of the landlord’s investment. Similarly, the tenant needs the relationship with its landlord to be both reasonable and initiative-taking to support the tenants trade and ongoing business activities.
The Act provides the tenant with the right to renew the lease on expiry, provided the landlord does not wish to redevelop, use for its own occupation, or wishes to address the misdeeds of a tenant, such as non-payment of rent. The Act allows that the provisions of security of tenure for the tenant can be excluded by agreement prior to the contract of lease being completed and an application is made to the Court for approval.
There are specific procedures that must be implemented where the Act applies on lease renewal, with formal notice for termination, the offer of new lease terms, which if not agreed, provided the strict timetable for action is applied can be determined by the Court.
This procedure is technical, requires timely execution and knowledge of the property market and the ability to address issues to achieve the most beneficial outcome for both parties. A wrong step by either, will see the landlord forfeit the right to secure a rent increase for a period, or the tenant having to vacate.
Over the years, as negotiator, mediator, expert witness, arbitrator and independent expert on lease renewals, amendment of existing leases and reviewing rents, I believe achieving an outcome that secures value for money is the key to success. My advice to clients, whether landlord or tenant, is to plan for the worst and strive for the best outcome.
By this, I mean understand the rights available under the Act but maintain a good working relationship with the landlord or the tenant and negotiate the most effective outcome, not necessarily the best, nor the worst, but one that will allow each to maintain the good relationships for the future and avoid the costs, time and stress involved in litigating matters.
This will ensure the tenant maintains a viable and stable business and the landlord a valuable asset with a stable income.
