Many properties in the UK are occupied by people running businesses or for commercial purposes. Commercial property includes shops, factory units, veterinary practices and anything that is being occupied for business purposes and does not involve residential accommodation.
There are several different types of commercial property leases. We will discuss some of the various types below.
What are the different types of commercial property leases?
There are numerous different commercial property leases that you might have. In a simple situation, you might have a building that is owned by one party and leased to another, and the building owner in the context would be the landlord, and the party renting the building would be the commercial tenant.
There can sometimes be several leases in place in relation to the same building, for example, you could have the original lease between the landlord and tenant, which we would call a head lease, and then the tenant might be entitled to sublet the building or part of the building to another tenant. Therefore, there might be another lease in place between the tenant and the subtenant, which we call a sublease.
It is usual for a document to be signed by the landlord and tenant in a commercial lease context, but that is not always the case, and you could still have a commercial lease in place even without any document having been signed. For example, the tenant might be let into occupation before any lease has been signed with the landlord, stating that they can enter and occupy the building but only as a tenant at will. A tenancy at will is an arrangement that allows the tenant to occupy but does not grant the tenant any protection because the landlord can terminate the tenancy at will at any time.
In another context, you might also have a situation where the tenant is allowed to take up occupation of the property, and nothing is said about the arrangement being a tenancy at will, and the tenant goes into occupation and starts paying rent. If that continues for several months, the tenant might arguably have a periodic tenancy again, rather than a signed document.
What is the best form of a commercial lease?
Undoubtedly, this is where the parties have signed a lease document, and this is where the tenant has the benefit of the protection of the Landlord and Tenant Act 1954. If the 1954 Act protects the tenant's lease, then this means that when the fixed term comes to an end, the tenant does not automatically have to move out; they are entitled to remain in occupation and renew their lease.
To trigger the lease renewal, either the landlord or the tenant will serve a notice on the other to start that process. If no notice is served, then the tenant remains in occupation of the property on the same terms as the original lease unless and until a renewal notice is served.
What is the difference between renewing and extending a lease?
Renewing a lease means that you negotiate the terms again, and in an ideal scenario, a new lease document would be signed. It is common as part of a lease renewal for the lease to be updated to make sure that it complies with modern legislation, and for amendments to be made in relation to the amount of rent payable, for example.
Extending a lease might also be something that is done as part of a lease renewal, because the length of the lease would be extended as part of a lease renewal.
However, you could have a standalone situation where the lease is due to expire in, say, two years’ time, and the parties agree that they will simply extend the length of the lease, but on the same terms as the existing lease for another five years. In that situation, you would usually use a Deed of Variation to document the fact that the length of the lease is being extended rather than use a completely new document.
What are section 25 and section 26 notices?
A landlord would use a section 25 notice if they wanted to trigger a lease renewal and get a new lease put in place. A section 25 notice has to give the tenant a minimum of six and a maximum of 12 months’ notice. There are rules around when you can serve a section 25 notice for it to be valid.
A section 26 notice is the form of notice that a tenant would use for exactly the same purpose and to trigger a lease renewal with their landlord. A section 26 notice can only be served on a landlord if the tenant has the benefit of the protection of the Landlord and Tenant Act 1954 and has not been occupying on the basis of a periodic tenancy. The same rules apply, requiring notice of at least six months and no more than 12 months.
When should you start lease renewal discussions?
This all depends on the relationship between the landlord and the tenant. A competent commercial landlord will know when their tenant's lease is due to expire and will want some certainty around whether the tenant is going to renew their lease and stay in occupation. A landlord will also be keen to increase the market rent if that is appropriate. A landlord will likely serve a section 25 notice or at least start discussions with the tenant about the new lease terms in the year before the contractual lease expiry.
However, it depends on the circumstances. For instance, if a landlord plans to clear a parade of shops for demolition and build a new development, they might not want to renew the tenant’s lease. They may hold off serving any notice until they are ready to prove their grounds for opposition.
From a tenant’s perspective, a tenant operating a business from commercial premises is also likely to want certainty that they can continue to occupy, and they would therefore be well advised to start discussions with the landlord concerning the potential lease terms a year ahead of lease expiry. In some instances, it might be possible to agree those terms without the need for serving any section 25 or section 26 notice and get the new lease in place before the old lease expires.
What terms should you review before the renewal?
The main things that both the landlord and tenant are going to be looking at when renewing a lease are the length of the new lease, the rent, the repair obligations and potentially the right to terminate the lease early by including a break clause.
Depending on the circumstances, the tenant may also want to make changes to the alienation provisions (their ability to transfer the lease to another party or sublet) if they are thinking of moving elsewhere or winding down their own business. The starting point for discussions around the new lease terms is the existing lease terms. If one party wants to make any changes, they must justify why the change should be made. In the absence of any agreement by the parties, the court will step in and decide the outcome.
In relation to rent, the landlord and the tenant should take professional advice from a surveyor regarding the amount of market rent payable. Ultimately, if no agreement can be reached, the parties might each need an expert to give a report to the court on the amount of rent that should be paid.
What are the common issues when renewing a commercial lease?
The most heavily fought over issues are usually the amount of rent to be paid, how long the new lease will be and whether there will be a break clause to entitle either party to end the lease early.
The process usually starts with the parties' solicitors each reviewing the existing form of lease and making amendments to it. If there are still issues that are outstanding, it might be necessary for the parties to exchange witness statements setting out their position in relation to those outstanding items. For example, you might have a tenant giving a witness statement explaining why they now want to include a break clause within the lease, when they have not had one previously, and the landlord might also give a statement explaining why they are resistant to that.
Ultimately, if the parties still cannot reach an agreement, then the court will listen to any evidence from the parties and/or any expert evidence and make a decision.
Will a commercial property lease renew automatically?
The short answer to this is no. The lease usually contains a start and end date, which is what we call the contractual start and contractual expiry date. For example, a lease might commence on 24 June 2022 and expire contractually on 23 June 2025. If the lease is protected by the Landlord and Tenant Act 1954, then it contractually expires on 23 June 2025, but the tenant would be entitled to remain in occupation unless and until the landlord served a section 25 notice on them.
The tenant would remain in occupation on the same terms as the lease had just contractually expired until any new lease is documented.
What is the process of renewing a commercial lease?
To start the process, either the landlord has to serve a section 25 notice, or the tenant has to serve a section 26 request asking for a new lease. The parties would need to include within the notices the terms that they are proposing should be the basis for the new lease.
If the landlord serves a section 25 notice with an expiry date of 24 June 2025 for example, then once the tenant is in receipt of that notice the tenant either has to get a new lease signed before 24 June 2025, get an extension of time for applying to the court signed by the landlord before 24 June 2025 or lodge an application with the court for a new tenancy before 24 June 2025. The tenant must take one of those three steps, as failing to do so would mean they are not entitled to occupy after 24 June 2025, as illustrated in the example above.
The parties can agree to extensions of time for applying to the court on multiple occasions, if they are still negotiating the terms of the new lease.
However, if either party makes an application to the court, then the procedure thereafter is that the landlord usually would file an Acknowledgement of Service document with the court setting out its proposed terms for the lease renewal, and thereafter the court will expect the parties to try and agree the form of the new lease.
If they cannot agree on all of the terms, the parties may exchange witness statements setting out their position concerning the outstanding issues. If rent is an outstanding issue, then the parties would probably need to instruct a surveying expert to give their view on the amount of the market rent payable under the new lease.
Ultimately, if the parties cannot reach an agreement, the court will list the matter for a hearing and determine the new lease term. A fully contested lease renewal could easily cost each party £25,000 to £30,000. In this context, we are referring to a contested renewal in relation to the new lease terms. If, in another scenario, the landlord opposed the grant of a new lease entirely, perhaps because they wanted to redevelop the property or occupy themselves, and the tenant contested that application, then the costs could be much higher.
Who pays the costs to renew a commercial lease?
Both parties should be legally represented to negotiate the terms of the new lease, and a property dispute lawyer should be involved in the court renewal process.
Both parties will have to pay their own solicitors' fees for those services, and only in exceptional circumstances will the tenant have to pay the landlord's costs of the new lease document itself and/or any litigation costs.
What happens if you miss the renewal deadline?
As referenced in the text above, if a section 25 notice or section 26 request has been served and the tenant fails to vacate the property, make a protective court application, or agree to an extension of time by the deadline specified in the notice, they would be very vulnerable. The landlord would be entitled to lock them out of the property. It is therefore essential that the tenant ensures compliance with all relevant deadlines, protects their position, and obtains legal advice.
Can a landlord refuse to renew a commercial lease?
Yes, in certain circumstances. There are six grounds in section 30 of the Landlord and Tenant Act 1954 which allow a landlord to oppose the grant of a new lease. They include situations where a tenant has breached the terms of their lease, persistently delayed rent payments, left the property in disrepair, or where the landlord wishes to offer alternative accommodation, redevelop and demolish the existing premises (known as ground F), or occupy the property for their purposes (ground G).
This information is for guidance purposes only and does not constitute legal advice. We recommend you seek legal advice before acting on any information given.
