Considerations for a tenant when reviewing the end of a commercial lease.
As the end of a commercial lease approaches, there are a number of options available to a tenant – the first being whether or not to renew it. If it is to be renewed, on what basis should this be done? Whilst it may be tempting to leave these decisions until the last minute, it pays to be prepared and, if you wish to stay in your current premises, to have a negotiation strategy to ensure you achieve the best deal possible.
As this is a complicated area of law, we have highlighted below some of the pitfalls to avoid and options to consider when reviewing the end of your commercial lease.
Do you want to remain in the premises? If so, does your lease include a right of renewal? This could be statutory renewal under the Landlord and Tenant Act 1954, a contractual right built into the lease or, more unusually, a reversionary lease.
- Landlord and Tenant Act 1954 renewal rights. The Landlord and Tenant Act 1954 (the 1954 Act) states that a qualifying business tenancy will not automatically come to an end when the fixed term of a lease expires if the tenant remains in occupation for the purposes of a business. If these rights were not excluded when you took your lease, then it will not necessarily be terminated at the end of the term. Unless you vacate the premises before the contractual term date expires, specific notices will need to be served by you and the landlord to establish whether the lease is to continue or not, and if so, on what terms. For further information please see our Information Sheet, Landlord and Tenant Act 1954
- Does the lease contain any contractual rights to renew? Sometimes a clause is included in a lease giving a tenant the right for a new lease to be granted when the old one expires. If this is the case then you must follow the procedure outlined in the lease.
If you have statutory rights to renew under the 1954 Act or contractual rights to renew in the lease, it is always sensible to get a lawyer to advise you and to prepare and serve any notices that are needed. The law in this area is very strict so if procedures are not followed to the letter, rights can be lost.
Reversionary lease. Occasionally, tenants who know that they will need to remain in a property at the end of a lease negotiate a new one to take effect at the end of their existing contractual lease term and enter into this “reversionary lease” well before the existing one expires. The advantage, as a tenant, is that you have achieved your goal of future certainty but care is required in these circumstances. While you can enter into a reversionary lease with your landlord at any time, provided it will start within 21 years of the lease being granted, it must be protected by registration at the Land Registry.
If your lease has no renewal rights, as outlined above, you will need to vacate on, or before, the last day of the term, unless you have successfully negotiated terms for a new lease with the landlord.
Minimum Energy Efficiency Standards Regulations (MEES)
Will MEES impact on the landlord’s ability to grant you a new lease? Since April 2018 all commercial property must have an Energy Performance Certificate rating of E or above when being sold or when a new lease is granted. The legislation is unclear whether this applies on renewal but our advice to a prudent landlord is to assume that it does. Will the landlord have to do any upgrading works to the premises before he can grant you a new lease and, if so, who should be responsible for the cost of such works? This should be specifically covered in the heads of terms for the new lease as you, as the tenant, will most likely be responsible for any statutory compliance under the lease terms, which may not be equitable.
Dilapidations and alterations
If you do not wish to remain in the premises you will usually have obligations to return them in the condition you received them. This may mean that you need to carry out repairs or reinstate alterations that you have undertaken during the term. You need to establish early on, what your liabilities might be and how best to address them. If not, a landlord can serve you with a schedule of dilapidations setting out his losses and what costs he is seeking from you to cover them.
If you are taking a new lease and have undertaken alterations at your own expense during the first lease term, you need to ensure that these are not rentalised under the terms of any new lease. Also, consider whether or not you should have reinstatement obligations in relation to those alterations at the end of the next lease term. Will the reinstatement obligations at the end of the new lease mean the premises will need to be put back into the state of repair and condition they were in at the start of the first lease?
This is a complex area and we recommend that you do not leave it until the last minute to consider whether you want to remain in the premises. If the landlord is not willing to grant you a new lease, then you may find yourself having to vacate the premises before securing alternative ones as this whole process can take time. It also takes time to agree the terms of a new letting, if remaining in the premises, leaving all parties in an unsatisfactory limbo until finalised.
This is a brief overview of some of the things it pays to address at an early stage, but if you have any questions on the above or would like any further information or advice, please get in touch with one of the commercial property team.