The pre action stages of the commercial lease renewal process

The commercial lease renewal process can be confusing if you are not familiar with it. And it can take a long time if it isn’t handled properly. Both issues can be avoided by taking a little time to understand what the process involves, and by planning ahead. Whether you’re a landlord of commercial premises, or a tenant, in this article we explain everything you need to know about the initial stages of the lease renewal process. Those stages broadly involve serving notice and negotiating terms prior to issuing proceedings at court, which can be avoided in most cases.

When the term of a commercial lease comes to an end, the landlord and tenant can agree terms for a new lease between themselves, and document that new lease via their solicitors. If they can’t agree new terms and the tenant benefits from “security of tenure” it can remain in occupation on the same terms without having to worry until the renewal process is formally triggered under the Landlord and Tenant Act 1954 (“the LTA 1954”). If it doesn’t benefit from “security of tenure”, the tenant’s rights of occupation will terminate on expiry of the current lease, and it will have to leave. If it doesn’t leave it will be trespassing and the landlord can apply to court to have it removed.

The LTA 1954 applies to leases of commercial premises that are occupied for business purposes. Part II of the LTA 1954 provides “security of tenure” to a business tenant, save in a few exceptional cases, or where the parties to the lease expressly excluded it when entering into the lease. If a tenant has security of tenure, as set out above, its tenancy will not come to an end on the contractual expiry date. Instead, provided that the tenant remains in occupation of the premises, carrying on business, its tenancy will continue until terminated under the LTA 1954. This period is called “holding over”. A tenant with security of tenure is also entitled to the grant of a new tenancy of the premises following expiry.

We call this the “right to renew” and the new tenancy is referred to as a “renewal lease”.

The terms of that new lease are often agreed consensually between the landlord and tenant before the expiry of the original tenancy, or at some point afterwards while the tenant is holding over.  The parties will often instruct specialist Lease Advisory Professionals to negotiate terms on their behalf. When the terms of the new lease can’t be agreed between the parties, or if one party refuses to negotiate, either party can serve notice under the LTA 1954 to terminate the existing lease, and to propose terms for the renewal lease.

Those terms will typically include:

• The rent to be paid under the renewal lease;
• The period that the lease should be granted for;
• Whether there should be any break options;
• Whether there should be any rent reviews; and
• Any other key terms that a party might want.

Service of notice under the LTA 1954 formally engages the lease renewal process, placing greater pressure on the parties to negotiate.

If a landlord wants to formally start the lease renewal process under the LTA 1954, it must serve a “section 25 notice” on the tenant. The section 25 notice can be served before contractual expiry of the existing tenancy, or afterwards if the tenant is holding over. A section 25 notice must specify a termination date for the existing tenancy, and it must be served not more than 12 months, nor less than six months before the termination date set out in it. The termination date in a section 25 notice must be a date that falls on or after the contractual expiry date of the existing tenancy. The notice must confirm that the landlord is prepared to offer the tenant a new tenancy, and it must set out the key terms that the landlord proposes for the new tenancy for the tenant to consider.

If a tenant wants to formally start the lease renewal process under the LTA 1954, it must serve a “section 26 request” upon the landlord, which is a request for a new tenancy to be granted. The section 26 Request can also be served before contractual expiry of the existing tenancy, or afterwards if the tenant is holding over. A section 26 request must specify a date for the new tenancy to commence on, and it must be served not more than 12 months, nor less than six months before the commencement date set out in it. The commencement date in a section 26 request must be a date that falls on or after the contractual expiry date of the existing tenancy. The request must also set out the key terms that the tenant proposes for the new tenancy for the landlord to consider.

Following service of notice from either the landlord or the tenant it is normally the case that the parties continue to negotiate the terms of the new lease between themselves. Quite often they appoint Lease Advisory Professionals to do that on their behalf. These professionals are experienced surveyors who have an in-depth knowledge of the local property market. They are often highly skilled negotiators whose involvement can result in the swift agreement of terms. It is likely that the Lease Advisory Professional will have been involved from the outset, advising the landlord or the tenant, as the case may be, on which terms to propose in a section 25 notice or section 26 request.

That professional might also have been trying to negotiate terms prior to service of the notice. It could well be that it was the professional who in fact suggested that notice be served to formally engage the lease renewal process under the 1954 Act if, for example, the other party has refused to negotiate or if a change in market conditions warrants it. A party faced with lease renewal negotiations would usually be well advised to appoint an experienced Lease Advisory Professional to provide specialist advice and to negotiate terms on its behalf.

Keeping a good record of the expiry dates in notices served under the LTA 1954 is vital. Generally, a new lease must be agreed and completed before the expiry date specified in a section 25 notice or section 26 request, unless a “statutory extension” is agreed or an application for a new tenancy is issued at court. The consequences of missing the deadline set out in a notice served under the LTA 1954 can be considerable. This is usually more of a risk for the tenant, but landlords need to be alive to these deadlines too.

If a new lease hasn’t completed by the expiry date in a section 25 notice or section 26 request, the existing lease will terminate pursuant that notice, and the tenant will have to vacate the premises unless either:

1. A “statutory extension” is agreed between the parties and documented in writing;
   or
2. An application is made to court for the grant of a new tenancy.

A statutory extension is made under section 29B of the LTA 1954 and extends the deadline by which a court application can be made. It essentially extends the deadline set out in a section 25 notice or section 26 request by the period agreed between the parties, meaning that the tenant’s security of tenure is preserved for that period. This is often done where the parties have agreed some of the terms of the renewal lease but need further time to finalise the others and to complete the new lease. There is no limit to the number of statutory extensions that can be agreed between the parties, or the time period that they can cover, as long as that they are each documented in writing before expiry of the previous one.

If the parties are unable to agree the terms of the renewal lease between themselves, whether by expiry of a section 25 notice or section 26 request, or by expiry of a statutory extension (or a series of them), then either party might choose to issue an application to court for the court to order the grant a new tenancy and to determine the terms of it.

You can read about the Post-Issue stages of the commercial lease renewal process under the 1954 Act, from issue of the claim to trial, in our article about it HERE.

The tenant’s rights to occupy the premises are preserved following the issue of an application at court. Issuing an application at court for the grant of a renewal lease is not a particularly adversarial thing, and in many cases it is purely procedural. Sometimes the parties agree the terms of the renewal lease shortly after a claim has been issued meaning that no further steps other than to discontinue the claim are needed. As you’ll see from our article on the Post-Issue stages of the commercial lease renewal process, issuing an application results in the parties having to comply with each of the steps of a formulaic timetable which is designed to narrow the issues in dispute between them, with the result that they hopefully agree terms and complete a new lease along the way.

If that is not possible, the court will determine the terms of the renewal lease, but it is very rare that matters reach that stage.

An application to court – for the grant of a new lease and determination of its terms – can be made at any time prior to the expiry of the “statutory deadline”, which will be the expiry date in a section 25 notice or section 26 request, or the expiry date in a statutory extension. 

Either party can apply to court, however in practice it is usually the tenant who makes the application to protect its rights of occupation pending further negotiations with the landlord. 

Once the application is issued by the court, the applicant has four months in which to serve it upon the other party (unless service is formally called for) and in many cases a new lease is agreed in that four month period without the claim having to be served.