What do I need to know about the termination or renewal of a business lease?
Whether you are a landlord or a tenant of a commercial property let for business use, it is important to know your rights on the termination or renewal of the lease.
Normally under the Landlord and Tenant Act 1954 (‘1954 Act’), a business lease which has been granted for more than six months will automatically have ‘security of tenure’ on its expiry.
Security of tenure gives the tenant the legal right:
- not to be automatically ‘evicted’ from the premises upon the expiry of the lease; and
- to apply to the landlord to renew the lease on reasonable terms in order that the tenant may remain in the property to continue running the business.
After all, the premises are likely to be the tenant’s livelihood – possibly their sole source of income. It would be unfair if a landlord could simply ask the tenant to leave at the end of the term, or for the landlord to impose onerous and unreasonable terms at renewal.
However, the conflicting interests of the landlord and the tenant are recognised under the 1954 Act, and the landlord is not automatically obliged to renew the lease just on the request of the tenant.
Renewal of a business lease
To renew the lease on its expiry, either the landlord can serve a notice on the tenant with proposals to enter into a new lease or the tenant can request a new tenancy under a similar procedure.
The lease can be agreed on either similar terms to the current lease or new terms can be agreed between the parties. If new terms cannot be negotiated, the court will decide which terms are fair and reasonable in the circumstances of the case having due regard to the terms of the existing lease.
If the landlord and tenant decide to negotiate new terms, the terms under the previous lease will continue until the new lease has been agreed and signed.
Termination of a business lease
The landlord can often find himself in a difficult situation should he wish to terminate the lease which is protected by security of tenure, i.e. in a situation where the landlord wants the premises back for their own use, or for development purposes.
The procedure for terminating a lease involves the landlord serving a notice on the tenant setting out reasons why he is refusing a new lease. The grounds for refusal – which are set out in the 1954 Act – are statutory grounds for opposing a lease renewal.
These statutory grounds include:
- the persistent delays in paying the rent;
- substantial breach of a repair obligation or any other obligation in the lease;
- the landlord wishing to redevelop the property;
- the landlord wishes to enter into it for his own business or residential use.
A landlord must be able to provide evidence for each ground they are relying on.
The tenant could be entitled to compensation if the landlord requires possession for redevelopment or upon the own use ground.
If the tenant objects to the termination of the lease, he can apply to court for a decision to be made.
On signing the original lease, the landlord and tenant can agree to contract out of the security of tenure provision. The lease will confirm that on the expiry of the term, there will be no automatic right to renew meaning that the parties will either agree to continue the lease or walk away altogether.
If you are a landlord and need advice on granting a new lease or you are a tenant and intend to enter into a lease, contact our commercial property solicitors on 0800 988 7756.