The termination of a business lease can be a complex process.. The Landlord and Tenant Act 1954 provides tenants with significant protections, setting out strict procedures for both landlords and tenants when it comes to bringing a lease to an end. Understanding the different routes to termination and the rights and obligations of each party is crucial to avoiding costly mistakes or disputes.
So how is a Lease terminated?
The Landlord and Tenant Act 1954 (the Act) contain provisions and protections relating to business tenancies and sets out a procedure for termination of leases that are protected by the Act.
If the lease excludes the Act, then the lease will terminate at the contractual expiry date or earlier by agreement between the parties which is known as a surrender of the lease.
How do you terminate a lease within the Act?
A tenant has a choice to remain in the premises or leave on the contractual expiry date but in respect of the latter if it does not leave by the contractual expiry date then the lease will continue under s24(1) of the Act on the same terms unless terminated in accordance with the Act. If a tenant has failed to vacate at the end of a lease within the Act and it does not want a new lease it will be required to serve a s27 Notice giving 3 months’ notice of termination to the Landlord and the rent remains payable until termination.
What happens if a Tenant wishes to terminate the lease within the Act?
The Tenant can serve a s26 Notice requesting a new lease from the landlord setting out its proposals for a new lease. The s26 Notice is in a prescribed form and must be signed by the Tenant or its agent an be served in accordance with the Notice provisions within the lease. If the landlord objects to the new lease, then the landlord will be required to object within 2 months of the Notice. The reasons why a landlord may object to a renewal lease are set out below as they are the same reasons why a landlord may wish to serve a hostile s25 Notice.
What happens if a landlord wishes to terminate the lease within the Act?
The landlord will need to serve a s25 Notice terminating the existing lease in order to initiate the renewal of the lease on improved terms, known as a “friendly” s25 Notice or serve a s25 Notice terminating the existing lease and opposing a new one known as a “hostile” s25 Notice. A hostile s25 Notice must clearly state the reason for refusing a new lease and there are seven grounds that a landlord can rely on which are:
- Failure to repair
- Persistent rent arrears
- Other substantial breaches of lease by the tenant
- Landlord offers suitable alternative accommodation
- The tenant has a sub-lease of part, and the landlord believes that it can let the whole premises for more than the parts
- Landlord intends to demolish or reconstruct the property
- Landlord intends to occupy the property itself.
Grounds (f) and (g) are mandatory which means that if the landlord can prove them with evidence, the court must refuse a new lease. As an example, if a landlord is seeking to redevelop it has two separate proof points being the subjective intention being the planning permission, board minutes etc and a reasonable probability of intended works actually being carried out eg the landlord has the finance and there is no reason why the redevelopment cannot proceed. A landlord who intends to rely on ground (g) must have owned the property for 5 years.
What is included in a friendly s25 Notice?
The s25 Notice, s26 Notice follows a prescribed form and must contain certain information, including the names and address of the parties, property description, the date on which the current tenancy will end and the proposed new terms of the lease. The minimum notice period is 6 months, and the maximum is 12 months.
How do you serve a s25 Notice or a s26 Notice?
This must be completed by the landlord or is solicitor/agent. The s25 Notice, s26 Notice must be served in accordance with the Notice provisions set out in the lease. If it is silent then to ensure it has been served, registered post is regularly used.
What happens once the s25 Notice or a s26 Notice is served?
This sets the timetable in the case of a friendly s25 Notice and s26 Notice to commence negotiations seeking a new lease or for the tenant to consider seeking alternative premises in the event of a hostile s25 Notice. In either case if a new lease is required under the friendly s25 Notice or s26 Notice the tenant must apply to Court seeking a renewal lease before the termination set out in the s25 Notice, s26 Notice. If a tenant fails to apply to Court and has no agreement from the landlord to extend the period then the tenant will lose its right to a renewal and will either have to vacate the property or agree the terms of the lease on offer from the landlord which may be a take it or leave it situation.
Is there compensation for a tenant who has been served with a hostile s25 Notice or objection to a s26 Notice?
There is compensation which a landlord must pay where it intends to rely on grounds (e ), (f) or (g). compensation is 1 x rateable value unless the tenant has been in occupation for 14 years or more in which case it is 2 x rateable value.
What is Interim Rent?
Interim rent is the rent paid between the termination date in the s25 Notice, s26 Notice and the completion of the new lease. After serving a s25 Notice, s26 Notice either party can apply to court for interim rent that may be ordered by the Court while the parties negotiate a new lease. In most cases when the period between the s25 Notice, s26 Notice and the new lease is relatively short the interim rent will be likely be the same as the new rent which is the market rent so there is a commercial advantage for the landlord to serve the s25 Notice as early as possible if the rents are increasing and indeed the same applies for a tenant if the rents are decreasing.
Speak to a Commercial Property Solicitor
Whether you are a landlord seeking to regain possession of your property or a tenant considering your options at the end of a lease, it is essential to follow the correct procedures under the Act. Getting it wrong could lead to financial loss, disputes, or missed opportunities.
At DTM Legal, our Commercial Property team has extensive experience advising both landlords and tenants on lease negotiations, renewals, and terminations.
Visit our Commercial Property services page to learn more about how we can support you.
