20 January 2017 #Commercial Real Estate
For the Landlord of commercial premises who has granted a protected lease, what options are available at the expiry of the contractual term?
As a reminder, a protected lease is one where the commercial Tenant has statutory rights to renew at the end of the original lease term and is not, save in specified circumstances, obliged to leave if the Landlord does not wish to grant a new lease.
Questions to consider:
The Tenant may leave the premises at the end of the contractual term and does not have to give the Landlord notice of its intention to do so. The Landlord is able to ask the Tenant if it intends to stay but the Tenant is not obliged to say! If the Tenant does vacate at any time up to the end of the contractual term it will lose any statutory rights to a new lease.
Although the Tenant is not obliged to do so, it may, under Section 27 of the Landlord and Tenant Act 1954, serve not less three months’ notice on the Landlord notifying the Landlord that it does not intend to exercise its statutory right to remain in the premises and will vacate at the end of the contractual term. This gives the Landlord not less than three months’ notice that the premises are to be vacated.
The Section 27 Notice may be served by the Tenant to terminate its occupation even if the Landlord has served the Section 25 Notice referred to below.
If the Tenant remains in occupation of the premises after the contractual expiry date (known as “holding over”), the Tenant will continue to occupy on the same terms and conditions as the expired lease and continue to pay the same rent. It may at any time, serve not less than three months’ notice on the Landlord that it intends to vacate the premises. Once the notice expires and the Tenant vacates, it will have no further obligation to pay rent under the terms of the Lease.
Is the Landlord able to increase the rent under the lease for which the contractual term has expired?
Unless either a Section 25 Notice or a Section 26 Notice has been served, as referred to below, the answer to this is generally no, except in the few cases where leases are drafted to provide a rent review on the penultimate day of the term (this is very unpopular with tenants and is likely to be strongly resisted).
The only way in which a Landlord is able to achieve a greater rent for the premises where the Tenant has given no indication that it intends to vacate is for the Landlord to serve a Section 25 Notice on the Tenant setting out the terms on which the Landlord is prepared to grant a new lease. The Section 25 Notice will provide that the expired lease terminates not less than six months and not more than 12 months after the date of the Notice, with the new rent starting after that date.
If the Landlord decides that it does not wish to grant a new lease to the Tenant and has a statutory ground on which it is able to rely (see Section 30(1) of the Landlord and Tenant Act 1954), the Landlord will use the Section 25 Notice to inform the Tenant of the statutory ground on which it intends to bring the lease to an end.
There are a number of statutory grounds on which the Landlord may oppose an application for a new tenancy. The most commonly used is where the Landlord intends to redevelop the site. Others will apply where the Tenant is in breach or the Landlord wants to occupy the premises.
Any dispute between the Landlord and the Tenant resulting from the service of the Section 25 Notice, whether it be an argument as to the ground on which the Landlord refuses to grant a new lease or the terms of the new lease, will ultimately be determined by the Court.
If the Tenant believes that it is paying a rent that is higher than the market rent for the premises and the Landlord has not served a Section 25 Notice, the Tenant may serve a Section 26 Notice requesting a new tenancy and setting out its proposed terms – including a lower rent. This will bring the existing lease to an end no less than six months and no more than 12 months after the date of the Notice and again, any dispute as to the new terms will ultimately be determined by the Court.
If the Landlord believes that it is entitled to a higher rent (or the Tenant believes that it is entitled to pay a lower rent) after the expiry of the contractual term of the old lease, either the Landlord or the Tenant can apply to the Court to determine an interim rent following the service of a Section 25 Notice or Section 26 Notice. The court has a discretion as to whether an interim rent will be payable and, if so, what level of rent will be payable. Either the Landlord or the Tenant can make an application to the Court to determine an interim rent once the Landlord has served a Section 25 Notice or the Tenant has served a Section 26 request for a new tenancy.
Interim rent is the rent payable during the gap between a business lease expiring and that lease being renewed pursuant to the Landlord and Tenant Act 1954.
Interim rent will usually be the same as the rent payable under the new tenancy unless the market has changed substantially. If the Landlord opposes the grant of a new tenancy, any interim rent may be at a level between the old rent and what the new rent may have been.
This is a very brief overview of points to be considered by landlords when a secure tenancy comes to an end. Many of the provisions are complex and either our Property Team or our Property Litigation Team are happy to provide advice as to the best way forward in any circumstances.