Renewal of business leases
TOUGH TIMES & LEASE RENEWALS?
Introduction
In difficult economic times, it is a driving factor to save costs wherever possible. Faced with a lease renewal from a landlord who appears reasonable, most tenants would probably wish to complete a lease renewal directly with a landlord, rather than involve any other professionals. The purpose of this article is to consider the advantages and disadvantages of doing so.
Statutory Lease Renewals
Renewals of business leases are governed by the Landlord and Tenant Act 1954, specifically Sections 24 to 28. These sections provide a framework for the giving and receiving of notices to either renew a business lease or, where it is appropriate, to bring that lease to an end. The Act allows either landlord or tenant to serve a notice to call for a renewal. Ultimately, the procedure allows one or other party (or both) to make an application to the Court to settle what is to happen.
Incidentally, if a tenant merely wishes to vacate premises at the end of the contractual term of the lease, then the usual requirement is that the tenant is to give reasonable notice of the intention to vacate. This is not a strict requirement where the tenant actually leaves the premises on the last day of the contractual term, so long as the tenant has not said or done anything to lead the landlord to think that the tenant is going to stay.
Notices given by landlords often fall in one of two categories either “hostile” (where the landlord is opposed to renewal of business lease), or “non hostile” (obviously, where a landlord is in agreement to a lease renewal).
Where there is a non-hostile notice a landlord must set out its proposals for the new lease either within the body of the notice itself or in a schedule attached to the notice.
It is important to bear in mind that the law does not require notices to be served and received to deal with questions of renewal, but merely provides a framework and procedure for where parties consider that an appropriate level of formality should be used. It is possible to renew a business lease simply through negotiation and, in those situations, the law deems that where a new lease is granted between parties to replace or to run after an existing lease, the new lease replaces the old lease.
It is important to note however that if neither party serve a notice and the lease term comes to an end, then neither will be able to apply to the Court to settle the terms of the lease, and therefore any deadlock brought about by negotiation could lead to further problems (and potentially costly litigation).
Friendly Non Hostile Landlord
So, for a business tenant that is faced with an amicable landlord who either proposes a lease renewal or serves a non hostile renewal notice, it would be reasonable for the business tenant to ask why any costs should be spent on employing experts merely to put in place what is generally agreed in any event.
However, there are actually a vast number of reasons why anyone in this situation should employ the services of a solicitor, and often a surveyor as well.
The interests of a landlord and tenant are at opposing ends of a broad spectrum. What may be an advantageous clause to a landlord is not necessarily going to be an advantageous clause to a tenant, and the other way around. When a landlord suggests a lease renewal, this will most likely be exactly the same as the lease which is due to come to an end, save for inserting new dates, and perhaps a new rent. However, the older this lease was, potentially the more out of date some of the terms in the lease could be.
For example, many older leases will not deal with the issue of uninsured risk and will merely contain provisions that the property is to be repaired if there is a damage or destruction by an insured risk. If the lease does not specifically deal with what is to happen with the property if the property is damaged or destroyed as a result of an uninsured risk, the parties are left with no option but to resolve the matter by resorting to Court proceedings and the high costs involved with them. Tenants ought to ask themselves whether they are happy with the idea that they must bear the cost of uninsured risk.
If a tenant did not receive independent legal advice at the start or inception of the current lease, then there could almost be described as a “double jeopardy” for the tenant who renews such a lease, as parts of the lease may have been incorrect, inappropriate or even have left out some fundamental terms.
Any business tenant who considers that a Court would read into a lease reasonable terms or delete terms considered unreasonable may well be surprised that a Court will not. A Court does not have a duty to “correct” commercial contracts, or allow them to be changed after the event. Unlike residential leases, commercial business leases are considered to be a matter of contract between the parties. While the law sets out a procedure for lease renewals, this is one of very few statutory provisions affecting commercial leases (as opposed to residential leases where there is a substantial amount of statute provisions). Indeed, when faced with having to resolve a dispute, a Court will expect a business person and commercial entity to have taken appropriate advice on matters, especially where such matters are outside of their expertise and knowledge.
Rent under the New Lease
While a modest increase in rent may appear reasonable, a landlord may not be entitled to any increase. Rental markets can go up as well as down and a rent renewal does not automatically entitle a landlord to charge and receive a higher rent. This in itself is obviously a good reason for instructing a surveyor to provide an opinion about the amount of rent which is appropriate under the renewed lease. The potential savings this could achieve over the new term are likely to far exceed the costs of obtaining such a valuation from a surveyor.
Revenue and Customs and Land Registry Considerations
In the event that a business tenant is holding over a lease which was granted in 2001 or before, even an exact renewal of the same terms could trigger compulsory registration at Land Registry, and in addition could generate a payment to tax, even if the initial lease did not.
The consequences of neither paying the appropriate tax on the lease, nor having it registered in whole or in part (depending on these and nature of the lease), could ultimately mean that a business tenant is unable to rely on the lease for legal purposes. This could have disastrous consequences for a tenant in those circumstances.
Conclusion
If you are a landlord or a tenant facing the end of a lease term, then we at Hadaway & Hadaway would be delighted to speak to you, and as members of the Law Society “Lawyers For Your Business” scheme, we will be happy to offer a free half hour appointment to talk things through with you.