How to end a commercial property tenancy

This article looks at a landlord's options when they want to terminate a commercial lease and regain possession of their property.

In this context, we are concerned with situations where a landlord does not wish to renew a lease with their tenant.

When can a landlord end a commercial tenancy?

A landlord cannot simply ask a tenant to leave when a lease expires if that tenant has the protection of the Landlord and Tenant Act 1954. If the tenant has been occupying the premises for business purposes for a specified period (usually six months or more), they have what we call security of tenure.

This means that even when the lease contractually expires, the tenant is entitled to remain in occupation and the landlord must follow a formal legal process to regain possession.

Using an example, if a lease was granted from 24 December 2020 and contractually expires on 28 September 2025, we would refer to the contractual expiry date as 28 September 2025. The tenant does not automatically have to vacate on that date.

The landlord cannot simply insist that the tenant move out or change the locks. Instead, the landlord must serve a hostile section 25 notice if they want to oppose the grant of a new lease and bring the tenancy to an end.

What is a hostile section 25 notice?

This is a formal notice that a landlord serves on a tenant to oppose the grant of a new tenancy and terminate the existing lease. The notice must state that the landlord is opposing the grant of a new lease and specify which statutory grounds under Section 30 of the Landlord and Tenant Act 1954 the landlord is relying upon.

A landlord must give a tenant a minimum of six months' notice and a maximum of 12 months' notice. The notice must be in the prescribed form and served correctly; otherwise, it will be invalid, and the landlord will have to restart the process.

What are the grounds for opposing a new lease?

There are seven statutory grounds set out in section 30 of the Landlord and Tenant Act 1954, which a landlord can rely on to oppose the grant of a new lease. It is essential to recognise that not all of these grounds are readily provable, and some may require substantial evidence and potentially incur significant costs.

The grounds are:

Ground A – Failure to repair the property

The landlord can oppose a new lease if the tenant has failed to comply with their repairing obligations under the existing lease. This ground is often difficult to prove because the landlord must demonstrate that the state of repair of the property is the tenant's fault. If the tenant has only recently been in breach, or if the landlord has not previously complained about the state of repair, then this ground might not succeed.

Ground B – Persistent delay in paying rent

The landlord can rely on this ground if the tenant has persistently delayed paying rent. The word "persistent" is important here. A single late payment, or even a few late payments, may not be sufficient. The landlord would need to demonstrate a pattern of behaviour showing that the tenant regularly pays rent late, and this would usually be evidenced by keeping detailed records of when rent was due and when it was actually paid.

Ground C – Other breaches of the lease

This ground allows a landlord to oppose a new lease on the basis of other substantial breaches of the tenant's obligations under the lease. This might include breaches of the user clause, unauthorised alterations, or breaches of covenants prohibiting nuisance. The breach must be serious enough to justify refusing a new lease, and again, the landlord should have evidence of the breaches and ideally should have notified the tenant about them during the term of the existing lease.

Ground D – Alternative accommodation is available

A landlord can oppose a new lease if they can provide suitable alternative accommodation for the tenant. The alternative accommodation must be suitable for the tenant's business needs, and this is judged on various facto,rs including location, size, and the terms on which it is offered. This ground is rarely used in practice because it is difficult to satisfy all of the requirements, and most landlords who want possession will rely on one of the other grounds instead.

Ground E – The landlord wishes to grant a lease of an economically separable part 

This ground applies where the current tenancy is of part of a property, and the current tenancy was created by the sub-letting of part only of the property comprised in a superior lease. The landlord must show that the aggregate of the rents reasonably obtainable on separate lettings of the holding and the remainder would be substantially less than the rent reasonably obtainable on a letting of the property as a whole. This is a complex ground that is rarely used in practice.

Ground F – The landlord wants to demolish or substantially redevelop the premises 

This is one of the most commonly used grounds for opposing a new lease. The landlord must demonstrate that they intend to demolish or reconstruct the premises, or carry out substantial works of construction on the holding or part of it, and that they could not reasonably do so without obtaining possession of the holding.

The landlord must prove that they have a firm and settled intention to carry out the works, and this usually requires evidence of planning permission, detailed plans, funding arrangements, and potentially building contracts or at least evidence of discussions with contractors.

The landlord cannot rely on this ground if the work could reasonably be carried out without the tenant giving up possession, or if the tenant agrees to include terms in the new lease allowing the landlord access to do the work.

It should be noted that if a landlord successfully opposes a new lease on ground F, they must pay compensation to the tenant, as set out below.

Ground G – The landlord wants to occupy the premises themselves

This ground allows a landlord to oppose a new lease if they intend to occupy the holding for the purposes of a business to be carried on by them, or as their residence. The landlord must demonstrate a genuine intention to occupy, and not merely a desire to prevent the tenant from continuing in occupation. The landlord must have owned their interest in the property for at least five years before the termination date specified in the section 25 notice, otherwise this ground cannot be relied upon.

Again, if a landlord successfully opposes a new lease on ground G, they must pay compensation to the tenant.

What is compensation, and when is it payable?

Grounds E, F and G are what we call compensatable grounds. This means that if a landlord serves a hostile section 25 notice relying on one of those grounds and successfully opposes the grant of a new lease, the landlord is liable to pay compensation to the tenant once they vacate the property.

The amount of compensation is calculated by reference to the rateable value of the premises.

Please note that the rateable value is different to any rates that the tenant might be paying. The tenant may be entitled to one or two times the rateable value of the property, depending on their occupation duration.

If the tenant or their predecessors in the same business have been in occupation for less than 14 years, the compensation is one times the rateable value.

However, if they have been in occupation for 14 years or more, the entitlement increases to twice the rateable value. Strict rules apply regarding what the tenant must prove to claim double-rate compensation, and this can sometimes be a contested issue between the parties.

The purpose of this compensation is to compensate the tenant for being forced to leave premises through no fault of their own, and to reflect the goodwill and disruption caused by having to relocate their business.

How do you serve a hostile section 25 notice?

Ideally, you should instruct a solicitor to prepare and serve the notice for you. The notice must be served in the prescribed form, and it must clearly state that the landlord is opposing the grant of a new tenancy and specify which ground or grounds under section 30 are being relied upon.

A competent landlord must serve a Section 25 notice on the tenant. A competent landlord may not necessarily be the party to whom the tenant has been paying rent at the time that the section 25 notice is served. For example, if there are joint landlords or if the reversion has been sold, care must be taken to ensure that the notice is served by the correct person.

The Section 25 notice should be sent by first-class post and recorded delivery so that the landlord can prove service on the tenant. The date of service is important because it determines when the notice period starts running.

The termination date specified in the section 25 notice is very important. This is the date on which the existing lease will come to an end, and the tenant must either vacate by that date or make an application to the Court to contest the landlord's opposition.

If the tenant does neither of those things, then the tenant is not permitted to remain in occupation of the premises after the termination date, and the landlord will be entitled to change the locks and treat them as a trespasser.

What happens after a hostile section 25 notice is served?

Once a hostile section 25 notice has been served, the tenant has several options. The tenant might accept that the landlord has valid grounds for opposition and agree to vacate the property. In that scenario, the parties would usually negotiate the termination date and potentially any compensation payable, and would document the surrender of the lease in a formal deed.

Alternatively, the tenant might dispute that the landlord has valid grounds for opposition. If the tenant wants to contest the landlord's opposition, they must make an application to the Court before the termination date specified in the section 25 notice. If the tenant fails to make a Court application by that deadline, they lose their right to contest the opposition and must vacate.

If the tenant does make a Court application, then the matter will proceed through the Court system. The landlord will need to file evidence proving their grounds for opposition, and the tenant will file evidence in response. Depending on the ground being relied upon, the landlord may need to obtain expert reports, for example, from a surveyor or a construction expert in the case of ground F, or from a business valuer in certain circumstances.

The Court will list the matter for a hearing and determine whether the landlord has proven their grounds for opposition. If the landlord succeeds, the Court will make an order for possession and will specify the date by which the tenant must vacate. If the landlord fails to prove their ground, the Court will order that a new lease should be granted and will go on to determine the terms of that new lease.

How do you prove your grounds for opposition?

The burden of proof lies with the landlord to demonstrate their grounds for opposition. The standard of proof required varies depending on which ground is being relied upon.

For grounds A, B and C (relating to tenant breaches), the landlord must prove that the tenant has, in fact, been in breach of their obligations. This usually requires producing copies of rent payment records, correspondence about breaches, photographs of the property, or other evidence demonstrating the breach.

For ground F (redevelopment), the landlord must prove that they have a firm and settled intention to carry out the works, that the works constitute demolition or reconstruction or substantial construction, and that they could not reasonably carry out the works without obtaining possession.

This usually requires detailed evidence, including planning permissions, architectural drawings, schedules of work, evidence of funding, and potentially evidence from quantity surveyors or construction experts. The tenant might challenge the landlord's intention by arguing that the works could be done with the tenant remaining in occupation, or that the landlord does not have genuine funding in place, or that the landlord does not really intend to proceed with the works.

For ground G (own occupation), the landlord must prove that they genuinely intend to occupy the property for their own business or residence. This might require evidence of the landlord's current business operations, their need for the premises, and potentially expert evidence about whether the premises are suitable for the landlord's intended use.

The tenant might challenge this by arguing that the landlord does not have a genuine intention, or that the landlord is merely seeking to prevent the tenant from remaining in occupation.

What are the risks of opposing a lease renewal?

Opposing a lease renewal carries risk for a landlord. If the landlord serves a hostile section 25 notice but then fails to prove their grounds at Court, the tenant will be granted a new lease and the landlord will usually be ordered to pay the tenant's legal costs. Depending on the complexity of the case, these costs could easily be £25,000 to £50,000 or more.

Additionally, if the landlord relies on ground F or ground G and successfully opposes the new lease, the landlord must pay compensation to the tenant as set out above. Depending on the property's rateable value and the length of the tenant's occupation, this compensation could be substantial.

There is also a risk that if the landlord relies on ground F (redevelopment) or ground G (own occupation) and successfully obtains possession, but then fails to carry out the works or occupy the property as stated, the tenant may be able to bring a claim against the landlord. In the case of ground F, if the landlord does not proceed with the stated works within a reasonable time, the tenant can apply to the Court for an order requiring the landlord to pay compensation. Similarly, if the landlord relies on ground G but does not actually occupy, remedies may be available to the tenant.

Can you negotiate a surrender instead?

In many cases, it may be more cost-effective and quicker for a landlord to negotiate a surrender of the lease with the tenant rather than serving a Section 25 notice and going through the Court process.

A negotiated surrender avoids the cost and uncertainty of litigation. The landlord and tenant can agree on a termination date that suits both parties, and can agree on any compensation or other payments to be made. For example, the landlord might agree to pay the tenant's reasonable relocation costs, or might agree to release the tenant from any dilapidations liability, in return for the tenant agreeing to vacate by a specified date.

Any agreement for surrender should be properly documented in a deed of surrender, which both parties sign. The deed should set out the termination date, any payments to be made, and should deal with any other outstanding matters between the parties such as the return of any rent deposit or the settlement of any service charge disputes.

When should you take legal advice?

A landlord should always take legal advice before serving a hostile section 25 notice. This area of law is complex, and the consequences of getting it wrong can be significant. A solicitor can advise on whether the landlord has valid grounds for opposition, what evidence will be needed to prove those grounds, and what the likely costs and timescales will be.

Legal advice should be sought at the earliest opportunity, ideally well before the intended termination date. This is because there are strict timescales that apply to section 25 notices, and because gathering the evidence needed to prove grounds for opposition can take time.

If a tenant makes a Court application to contest the opposition, then the landlord should immediately instruct solicitors to represent them in those proceedings. The Court process has strict deadlines and procedural requirements, and failure to comply with these can have serious consequences.