Commercial leases and their expiry and renewal can feel like a daunting prospect.
Generally, if a party is leasing or occupying a property for the purposes of a business, is paying a market rent, and has exclusive possession of the property, then it is likely to be a tenancy which falls under the provisions and protections of Part II of the Landlord and Tenant Act 1954 (“the Act”). Part II of the Act, amongst other things, sets out rules for ending and renewing a commercial tenancy which falls under its remit.
Commercial leases are usually granted for a defined term, for example 5 or 10 years. When that term expires, the lease does not automatically come to an end. It will continue indefinitely on the same terms, assuming the tenant remains in situ. This is known as a ‘holding over’ period. If one party does wish to bring their lease to an end, assuming this cannot be done by agreement, by way of a formal surrender (which I don’t intend to cover in this article), they will need to serve a notice on the other in order to effect the end of the lease.
Landlord Notices
Section 25 – opposed
If a landlord wishes to bring a commercial lease to an end and regain possession of their property, they will need to serve notice under Section 25 of the Act, stating that they do not wish to renew the lease, and giving one of 7 statutory grounds (a) – (f) as set out in Section 30(i) of the Act. These are, in simple terms, that:
(a) the property is in disrepair;
(b) there are rent arrears;
(c) there are breaches of covenant of the lease
(d) the property forms part of a wider property and a better rent could be obtained by letting the whole of the property;
(e) the landlord wants to redevelop the property;
(f) the landlord wants to occupy the property itself;
If one of the above grounds cannot be satisfied, then the landlord will not be able to refuse the grant of a new lease.
Section 25 – non-opposed
If a landlord wishes to bring a commercial lease to an end, but is agreeable to granting the tenant a new lease, they will need to serve notice under Section 25 of the Act, giving between 6 and 12 months’ notice, and setting out the proposed terms of a new lease. The expiry of the notice must not fall before the expiry date of the lease term.
Tenant Notices
Section 26
If a tenant wishes to bring their commercial lease to an end, but they would like a new lease to be granted, they must serve notice under Section 26 of the Act. They must specify a date on which they would like the new lease to begin, and must set out heads of terms for the new lease. As with the Section 25 notices, the proposed new lease date must be between 6 and 12 months of service of the notice, and must not fall before the expiry of the current lease.
Section 27
If a tenant would like to bring their lease to an end and leave the premises altogether, they should serve notice under Section 27 of the Act. This should give at least 3 months’ notice, and the end date must not fall before the expiry date of the lease term.
Serving a Valid Notice
For all the above notices, ensuring their validity is an important consideration. Validity (or invalidity) of notices has been the subject of numerous court cases, and an invalid notice can cause delay and additional cost.
Service
There are provisions under the Act in respect of service of notices – they should be served in accordance with Section 23 of the Landlord and Tenant Act 1927. This sets out that the notice should:
- be in writing
- served personally; left at the party’s last known address in England or Wales, or sent by registered letter to the party’s last known address in England or Wales.
Notices should also be served in accordance with the provisions of the existing lease – commercial leases usually contain specific clauses relating to the service of statutory notices. Any such clauses should be checked carefully to ensure compliance. If there is a discrepancy between the lease requirements and the statutory requirements, it is advisable to serve in accordance with both methods, even if that requires serving multiple copies.
Notice Periods
As stated above, both Section 25 and Section 26 notices must give at least 6 months but no more than 12 months’ notice. Time should also be allowed for service; if served by post, an additional 2-3 days should be allowed to ensure a clear full 6 month notice period upon receipt.
Prescribed Form and Content
Section 25 and Section 26 notices must and be in a prescribed form, which contain certain information and elements, in order to be valid.
These prescribed forms are contained within Schedule 2 of the Landlord and Tenant Act 1954, Part 2 (Notices) Regulations 2004.
Served on or by the ‘competent landlord’
It is key that any notice is served upon the correct party. Freehold interests and headleases can be transferred or sold on without reference to the tenant. It is therefore important for a tenant serving a notice to ensure they know who their landlord is. A landlord serving on the correct tenant is equally important, although in reality this is perhaps less of a uncertainty, given that most leases contain clauses prohibiting assignment or subletting without the landlord’s consent.
If there is any uncertainty as to who the landlord or tenant is, a separate notice can be served under Section 40 of the Act. This requests information from the recipient as to who occupies and trades from the premises in the case of the tenant; and ownership and any third party/superior interests in the case of the landlord.
After a notice has been served
Section 27
Once a Section 27 notice has been validly served, on its expiry, the tenant is expected to vacate the property and the lease will come to an end. The position is not so simple for Section 25 and Section 26 notices.
Section 25 notice seeking to end the tenancy
After this notice has been served, if a tenant wishes to renew their tenancy and stay in the property, they must apply to court by the date the notice expires. The court will then determine whether the landlord’s ground(s) of opposition have been made out, and ultimately decide whether the tenant is entitled to a new lease or not.
Section 25 notice offering a new lease
After this notice has been served, before the notice expires, a tenant must either:
- enter into and complete a new lease;
- agree a statutory extension to the notice period;
- apply to court for a new lease to protect their position;
If they do not do one of these things, they lose their statutory right to renew their lease under the Act, and will become reliant on the landlord’s good will to grant them a new lease.
Section 26 notice
When a Section 26 notice has been served, if the recipient landlord does not want to grant the tenant a new lease, it must serve a counter-notice within two months of service of the notice, setting out the statutory grounds (a) – (f) on which it relies.
If it fails to do this, it will lose the right to oppose the renewal and will have to grant a new lease to the tenant.
If the landlord is not opposed to a new lease, there is no requirement to serve a counter notice, even if it does not agree with the terms proposed by the tenant. It can negotiate with the tenant in respect of terms, and if those negotiations become protracted, it can apply to court to determine the matter by deciding the terms of the new lease.
As set out at the beginning, this article gives a high level overview of how to end or renew a lease under the Act. However, each of the areas outlined above is subject to intricacies and case law in its own right. There are also ancillary areas which are not covered. If you are a landlord or a tenant and you are seeking to end or renew your commercial lease, we recommend you seek professional advice, and we can help. Contact a member of our Property Litigation or Commercial Property teams