Renewing a Business Lease

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Commercial Property:

A commercial lease is based on contract law and a contractual agreement between landlord and tenant. The rules laid down are those as agreed in the lease agreement and are largely unencumbered by statutory rules, unlike the case with a residential tenancy, which is just the opposite – largely governed by statutory rules.

However, when a business (commercial) lease (England & Wales) comes to an end, that’s when statutory rules start to apply. Under the statutory rules laid down by the Landlord and Tenant Act 1954 Part II, a business tenant has security of tenure – i.e., most tenants have an automatic right to renew their lease at a revised (market) rent on similar terms to the original lease.

This article applies primarily to England and Wales. Other regions and jurisdictions are often similar but there may be important differences. This is not a definitive interpretation of the law, every case is different and only a court can decide. If in doubt seek expert advice.

There are a few obscure exceptions but the main exception to this is where the tenancy is “contracted out” of the Act – where a tenant agreed with the landlord BEFORE the lease is signed that they would not be bound by the statutory rules. All other commercial tenancies default to the Landlord & Tenant Act protection rules.

If the proposed new lease is to be “outside the act” there are strict procedures which must followed before the lease is signed. The process necessitates the tenant receiving a specified form of noticed in advance that there is no automatic right of renewal and confirming its agreement.

The landlord has the right to refuse renewal, but only on very limited grounds, namely: if the tenant is in serious breach of its lease obligations (e.g. rent arrears, continually late paying rent etc), the landlord wishes to use the premises for their own business use, or to redevelop the property  – see schedule 3 of the Act.

Where the tenant is refused renewal by the courts on these grounds, and the where landlord successfully claims the premises back, the tenant usually has a right to compensation using a formula laid down in the Act.

The process of lease renewal is started off either by the landlord serving a notice with strict time constraints under section 25 of the Act (either proposing a new tenancy with proposed new terms, or opposing renewal) or the tenant serving a request for a new tenancy under section 26 of the Act.

There are prescribed forms for this in the Landlord and Tenant Act 1954, Part 2 (Notices) Regulations 2004. It is of course important to ensure these notices are valid in every respect and served correctly meeting the time deadlines: valid dates, names and addresses, entitlements etc.

The Civil Procedure Rules (CPR), which came into force on 1 April 2013, are designed to avoid costly legal disputes between landlords and tenants where a tenancy renewal is opposed or there are disagreements on renewal terms.

Lawyers will in the first instance try to get agreement and settlement or use independent arbitration (usually specified in the lease agreement) before resorting to the courts, but in any event opposed and defended lease renewal disputes can involve legal processes, can be time consuming, cause long delays and can therefore be expensive.

Landlords of commercial premises should be aware that once let, a commercial property may not easily be recovered. Tenants may remain in possession theoretically indefinitely,  and so it is very important to sign tenants up to a good strong lease agreement – a cheap off-the-shelf lease is unlikely to be sufficient in most cases.

However, reversion is not impossible, as the following case shows:

In the case of Youssefi v Mussellwhite 2014, the judge said that a tenant’s “persistent and wilful refusal” to comply with the terms of the lease would be good enough reason for the landlord to oppose a request for renewal under the Act.

The tenant had a lease of a house, shop and premises covered by the Landlord and Tenant Act 1954.

The tenant served a request for a new lease but the landlord opposed it under section 30(1)(c) of the Act on the ground that the tenant (1) was in breach of her repairing obligations, (2) was persistently late in paying rent, (3) repeatedly refused to allow the landlord access to inspect the premises, and (4) had failed to use the premises as per the lease user clause, that is as a shop.

After considering all these points both individually and collectively the court had to consider if it was fair that this tenant, given her past behaviour, was to be “foisted” on the landlord for a new term, or the property should revert back to the landlord.

Although the court found some of the points to be not serious enough of the others were considered serious, mainly the breaches of the access covenant and the user clause.

Finally, the judge considered that it would be unfair and prejudicial to expect the landlord to continue with the present tenant due to her past behaviour. The lease had contained a positive obligation to use the premises for a stipulated purpose.

Covenants to keep the property in repair and to use the property for a specific person are there to preserve the value of the reversion of the landlord’s and adjoining property, so the tenant’s actions (or inaction in this case) were deemed prejudicial to the landlord’s interests and the breach had been substantial.

This case is good news for landlords with difficult commercial (business) tenants; landlords can use evidence of a tenant’s bad behaviour in support of their case coupled with other substantial breaches of the lease as legitimate grounds to oppose a request for a new tenancy.

Landlords should always be diligent in recording all information relevant to a tenancy including all correspondence and communications between the parties, in case this should be required for legal proceedings.

The case may serve as a warning to commercial tenants and a useful bargaining counter for landlords to use when insisting on appropriate behaviour during the lease term.

If you have any questions about any of the issues here, post your questions to the LandlordZONE® Forums – these are the busiest Rental Property Forums in the UK – you will have an answer in no time at all.

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