When commercial property leases draw to an end, you may wonder about what happens next. If you are a landlord or tenant interested in renewing your commercial lease, it is important to understand the process and the steps you must take to ensure all boxes are ticked and procedures followed. Read on to find out more…
1. What is a commercial lease renewal UK?
A commercial lease is a legally binding contract between a landlord and their tenant when the latter rents a property for commercial purposes, e.g. a shop, warehouse or office space. The contract can be more complex than residential leases, including agreements specific to the needs of the business.
Commercial leases expire at a date specified in the contract, and there is often the opportunity to arrange a lease renewal. This is essentially a new lease agreement which replaces the existing one. Terms such as rent amount and lease duration may be negotiated for the new contract.
2. What is the difference between a commercial lease renewal and a lease extension?
A lease renewal is a new lease: a whole new agreement with potential changes to the contract. A lease extension simply pushes back the expiry date of the existing lease. The terms of the contract remain unchanged (unless both parties agree to modifications).
Lease extensions are usually short term: when the tenant wants to continue their lease without committing to a full new contract.
3. Does a landlord have to agree to a commercial property lease renewal?
The Landlord and Tenant Act 1954 gives commercial tenants the right renew their lease providing certain conditions are met. This is known as security of tenure and provides tenants some assurances.
Tenants have the right to renew their lease unless the landlord has a legally recognised reason to refuse e.g. the tenant has repeatedly missed rent payments or failed to maintain the property as agreed; the owner wants to redevelop the property; or they want to occupy the property themselves.
Keep in mind that this law provides the opportunity for a lease renewal (rather than extension) and there may be changes to the new contract that must be agreed by both parties e.g. a rent increase.
Also remember to read your initial contract very carefully. Some leases are contracted out of security of tenure which means the tenant is not automatically offered the right to renew at the end of the term. This type of contract must follow a formal legal process in its own right.
4. What is a non-renewal lease?
With a non-renewal lease, the tenancy ends with the contract. This means the tenant has no right to remain in the property once the lease term ends (unless the landlord agrees to offer a new lease).
5. Timeline and notice periods
Commercial leases last as long as the contract states and this can be any amount of time. In the UK, 5 and 10 year leases are common. With plenty of time before the lease ends, you should start negotiating the lease renewal. Your contract will state when and what notice you need to give the landlord/tenant.
Section 26 Notice
A Section 26 Notice is a formal request by the tenant for a new lease (subject to agreement) and must usually be served 6-12 months before the existing contract ends.
Section 25 Notice
A Section 25 Notice is issued by the landlord as a request to either end the contract or offer the tenant a lease renewal. Again, this notice must usually be served 6-12 months before the existing contract ends.
Whichever side proposes a new lease, both parties have the opportunity to negotiate or refuse (the landlord must have legal grounds for a latter if under security of tenure). Renewal notices must usually be served no more than 12 and no fewer than 6 months before the proposed renewal date, giving time for negotiations to take place.
You should have agreed and signed a new lease agreement before the current one expires.
6. Negotiation process
Before you agree a commercial property lease renewal, you can negotiate new terms e.g.:
Rent negotiations
Landlord and tenant may have reasons for requesting an increase/decrease in rent e.g. a rent review states a different value is appropriate.
Lease terms
You have the opportunity to suggest different terms such as the length of the lease; your obligations as tenant; and inclusion/frequency of break clauses.
Surveyors play an important role in negotiations. They can carry out structural surveys to assess the condition of the property and any works required; market rent assessments to determine accurate and fair rental value; assist in negotiations, helping to decide lease durations, break clauses and other specific terms.
How to negotiate a commercial lease renewal
Contacting a surveyor is a good first step is negotiating lease renewals. They are able to provide expert advice and guide you through the renewal process. For more information, read our guide to renewing your commercial lease.
7. What happens if I do not renew my lease?
Check your contract but, if you refuse to sign a renewal or if a lease simply expires and neither landlord nor tenant gives notice to terminate/extend/renew, the tenant may have to vacate the property at the end of the term. It is sometimes the case that they will enter a period of ‘holding over’ a situation which can pose risks to both parties.
Tactics for tenants
If you want to negotiate more favourable terms as a tenant when it comes to your lease renewal, there are few ways to help tip the balance in your favour:
- Be a good tenant. If you abide by your contract, pay your rent on time and maintain the property then the landlord is more likely to want to keep you and therefore may agree more readily to your terms.
- Start your negotiations early (approximately 6-12 months before the lease expires).
- Ask a chartered surveyor to advise on terms and rent reviews.
- Conduct market research into the rental rates at other, similar properties.
- If your landlord proposes a rent increase, see if they will compromise or ask for improvements to the contract in exchange. You might request rent-free periods or maintenance to the property, for example. This is where market research is helpful.
- Consider a longer lease in exchange for better terms/lower rent.
- If you struggle to reach an agreement, it can be helpful to find an alternative property which can then be used as leverage.
9. Potential issues
Under the Landlord and Tenant Act 1954, the landlord may refuse a new lease under certain circumstances e.g.:
- They offer a suitable alternative property.
- They want to use the property themselves.
- They want to redevelop the property.
- The tenant has breached the terms of the contract e.g. persistently failed to pay rent, failed to maintain the property as agreed.
If your landlord refuses a lease renewal, the first step is to see if they will compromise. If they still refuse, you may apply to the county court to challenge them and determine if they have legal grounds for their actions. A property litigation solicitor can help in this scenario, assisting with dispute resolution and/or court proceedings.
If your landlord refuses a renewal because they want to redevelop, you may be able to claim compensation.
10. Top tips for a smooth renewal – landlords and tenants
- As with any negotiation, it is extremely helpful to keep lines of communication open and civil.
- Abide by your contract.
- Give plenty of notice and approach the situation calmly. Keep documents and evidence that may be helpful.
- Know your rights.
- Seek professional help from a Chartered Surveyor.
11. Can I cancel my lease renewal
As with any contract, it is all in the details. If you sign a lease renewal you later decide you want to cancel, you may face penalties. If you have not yet signed the contract, you may be able to formally withdraw. Carefully read your documents and seek professional help if needed.
Get in touch
At Trinity Rose, our experienced Chartered Surveyors regularly assist with commercial property lease renewals. The process can feel overwhelming but we are here to help with friendly advice and industry expertise.
If you would like to arrange a survey, request a market rate assessment or need assistance with negotiations, please get in touch. We will be happy to answer all your questions.