Lease renewal notices – To serve or not to serve?

The question of whether or not to serve a lease renewal notice at the end of a contractual term is an important one for commercial property landlords and their tenants.

Harrison Drury’s Laura Hallett Lea looks at this tricky issue and the considerations of both parties.

Part II of the Landlord and Tenant Act 1954 gives business tenants a right (subject to certain exclusions and grounds for opposing a new lease) to a new lease on the expiry of a contractual term.

To invoke this statutory process the landlord or the tenant needs to serve a lease renewal notice. Whether and when to serve this notice is a question worth some serious tactical consideration in most circumstances.

We are finding that the property market is shifting and the balance of power is moving slowly back to the landlord – with increased rents and a higher demand for business space in some sectors.

Take the following examples of considerations for landlords and tenants:

Landlord’s considerations:

1. Do you want to keep the tenant? If you do, the best approach might be to discuss the expiry of the lease without the need to invoke the process. This will at least give you an idea of the tenant’s wishes to help you decide on your next move.

2. Is the current passing rent ‘market rent’? If there is going to be a new lease then it will be at market rent. If the market rent is lower than what is currently being paid (perhaps in a dwindling high street), you might want to hold off for as long as possible before serving a notice. If it is higher (perhaps in a thriving out-of-town retail park) then you probably want to serve a short notice as quickly as possible. You should take advice from a specialist surveyor as to the likely rental value achievable.

3. What is the wider rental market like? If you are to be left potentially with an empty property, how long is this likely to be for? If the market is buoyant you have more options, if not, you might wish to do what you can to keep the current tenant.

4. Do you know what the tenant wants? This is very useful and we see often that the landlord hasn’t had this conversation with the tenant and perhaps the relationship has gone sour. This is sometimes unavoidable. However, if you know the tenant wants out then we wouldn’t advise you to serve a notice refusing a new lease (especially if there is compensation due – see below).

Tenant’s considerations:

1. Is the passing rent more or less than market rent? If your rent is lower, you might want to leave matters as they are (though bear in mind interim rent – see below). If your rent is higher, perhaps because the rent was set many years ago in different economic times, and all other things are equal, you will want to serve a notice as soon as possible.

2. Does your business need the security of a longer lease? If this is very important to the future planning of the business then even if in normal circumstances you wouldn’t wish to serve a notice, a notice straight away may be advisable.

3. Is there a potential liability for dilapidation? If there is you might want to take advice from a surveyor as to getting those works done before a notice is served as the landlord can oppose a new lease on this ground and you could face a monetary claim at the end of the lease.

4. Has there been any other breaches of the lease? The landlord can use these breaches, such as persistent delay in payment rent, to refuse a new lease. If there has been such breaches then take advice before serving a notice and perhaps get some idea of the landlord’s intentions and the buoyancy of the market so that you know what negotiating position you are in.

5. Do you want out? If you do, and you suspect the landlord wants the same, perhaps to redevelop, the advice may be to wait for the landlord to serve a notice which may entitle you to compensation.

6. Do you know the landlord’s intentions for the property? This is vital information and can give you an idea as to if and when to serve a lease renewal notice.

Based on these factors and many others, you should take legal and valuation advice before deciding your next move.

In all cases you should consider:

1. Checking that the lease is not contracted out of the Act, which would alter the position considerably.
2. Ensure any notice to or from a landlord is to or from the ‘competent’ landlord.
3. Either notice must give at least 6 and no more than 12 months’ notice.
4. All notices must be in a prescribed form.
5. The notices must be served correctly (check the lease terms – usually it must be by recorded delivery).
6. The landlord has fault-based and non-fault-based grounds to oppose a renewal.
7. If the landlord relies on a non-fault-based ground, statutory compensation may be due to the tenant.
8. A notice can be served as early as 12 months before the end of the contractual term.
9. If one party serves a notice, the other can’t. This is very important.
10. Either party can apply to the court for a new lease or declaration that no new lease is granted, or for interim rent to be paid from the expiry of the new lease to the start of the new lease or end of occupation.

Laura Hallett Lea is an expert in contested commercial property matters, and advises commercial landlords and tenants on all aspects of business leases. For more information on serving lease renewal notices call Laura on 01772 258321.