08 June 2017 #Commercial Real Estate
Members of the Real Estate team at Clarkslegal are often asked by clients whether a lease that has the protection of the Landlord and Tenant Act 1954 is more valuable than a lease which does not have the benefit of such protection.
What is a 1954 Act Protected Lease?
Where a lease of commercial premises has 1954 Act protection (also known as “Security of Tenure”) it means that except in specified circumstances, such as where the landlord wishes to redevelop the building, the landlord is obliged at the end of the lease and where the tenant wishes to remain, to grant a new lease of the premises to the tenant at the then current market rent. Where a landlord is able to prove one of the limited number of grounds which entitled him to refuse to grant a new lease, the tenant will be entitled to some compensation, the amount dependent upon the length of time that the tenant has been in occupation and the rateable value of his premises.
In the current market most landlords are not prepared to grant Security of Tenure for leases of up to 10 years and sometimes longer. This is to ensure that the landlord has the flexibility at the end of the lease to take back the premises if he wishes to do so without any difficulty or cost to himself.
Where a lease of commercial premises is granted which does not have Security of Tenure, a tenant needs to be aware that he can be asked to leave at the end of the term granted without compensation even if leaving the premises means that his business will lose goodwill and he will be obliged to incur the cost of moving to new premises.
A further advantage for a landlord who grants a lease which does not have Security of Tenure is that the landlord is not obliged to grant a renewal of the lease at the then current market rent but is able, if it wishes to do so, to ask the tenant in occupation for a higher than market rent.
Where a tenant has Security of Tenure, it has the following benefits:-
If agreement cannot be reached and the matter does go before the Court, the Court is only able to grant a renewed lease of up to 15 years. If the parties agree without the Court, there is no limit on the length of the new term that may be agreed.
Accordingly, there are substantial benefits in taking a lease that has the protection of the Landlord and Tenant Act 1954 and prospective tenants should certainly press for such protection when taking a longer lease of premises in which they are likely to invest heavily in fit-out. An example would be a lease of a restaurant or bar where fittings tend to be very expensive.
The exclusion of Landlord and Tenant Act 1954 protection is a real benefit for landlords who may be considering the redevelopment of their buildings in the foreseeable future but there are often occasions when the landlord simply sees an excluded lease as its default position. Tenants should always ask whether a landlord is prepared to grant a lease with Security of Tenure even if at a slightly higher rent. It will then be for the tenant to decide whether it wishes to accept a slightly higher rent in return for having the benefit of Security of Tenure.
So the answer to our initial question is that a lease which has Security of Tenure is definitely more valuable both to the original tenant and to a purchaser from the original tenant than a lease which is excluded. It may even allow the original tenant to ask for a premium should it decide to assign its interest in the lease.