An overview of the commercial lease renewal process

When a commercial lease is nearing the end of its term it is quite common for the parties to discuss the grant of a new lease from the landlord to the tenant.

That doesn’t always happen, however.

In other cases, it does, but the parties might be miles apart on the terms that they’d each like in the new lease. If the existing lease is protected by Part II of the Landlord and Tenant Act 1954 (“LTA 1954”) the tenant can remain in occupation of the premises after the contractual expiry date.

If Part II of the LTA 1954 applies, either party can serve notice on the other to trigger the formal lease renewal process. That will usually force the parties to engage in negotiations to try to agree terms. If they don’t, an application might need to be made for the court to order the grant of a new tenancy, and to determine its terms. With proper planning and the correct advice, that can usually be avoided.

In this article we set out an overview of the commercial lease renewal process, which should serve as a good point of reference for commercial landlords, tenants, and Lease Advisory professionals.

For a deeper insight into the various stages of the commercial lease renewal process, including the pre-action stages, the post action stages, interim rent applications, the court’s approach to commercial lease renewals, and how landlords can oppose renewal, please see our detailed guides at the end of this article.

Most commercial leases provide tenants with something called “security of tenure”. Where a commercial tenant has security of tenure, it can remain in occupation of the property after the expiry date of the existing lease. It will also be entitled to a new lease. If security of tenure has been excluded, the tenant must leave by the expiry date in the lease. If it doesn’t it will be trespassing.

Where security of tenure has not been excluded, and the tenant remains in occupation carrying on business, the existing lease will simply continue after its expiry date. It will continue on the same terms, with the tenant paying the same rent and the parties having to comply with the same obligations. That will remain the case until a notice is served by either the landlord or the tenant to formally start the lease renewal process under the LTA 1954.

Either the landlord or the tenant can start the lease renewal process. The landlord can do that by serving a “section 25 notice” on the tenant. And the tenant can do it by serving a “section 26 request” on the landlord. The landlord’s notice will specify a date to terminate the current lease and set out its proposals for the terms of the new one.

The tenant’s notice will specify a date for a new tenancy to commence, and setting outs its proposed terms for that new lease. There are strict notice periods under the LTA 1954 that must be complied with in order for either notice to be valid. We cover all of this in further detail in our detailed guide on the initial stages commercial lease renewal process HERE.

There are many factors that can influence whether a party serves notice, and when, such as current market rental levels, and whether alternative premises are being considered. An experienced Lease Advisory Professional will be able to assist with the decision-making process.

In most cases, after notice has been served, the landlord and tenant, or a Lease Advisory professional acting for them, will negotiate the terms of the new lease. Once the parties reach agreement in principle, “heads of terms” might be drawn up to record what has been agreed. The heads of terms will then be passed to the transactional lawyers acting for both sides to draft and complete a new lease.

For the tenant to retain its security of tenure the new lease must complete before the expiry date in the section 25 notice or section 26 request.

Where there is a risk that the new lease will not complete in time, a tenant should either apply to court for a new tenancy to protect its rights of occupation, or agree and document a “statutory extension” with the landlord to extend the deadline by which an application to court must be made.

If the parties are unable to agree terms for the new lease, or if one of the parties does not want to agree a statutory extension, an application to court will need to be made for the court to determine the terms.

If a tenant fails to make an application to court before the expiry date in the section 25 notice or section 26 request, or by the deadline in a statutory extension, it will lose its rights of occupation and will have to leave.

After a claim is issued it must be served on the other party within four months and that party will then have two weeks to file and serve an initial response. The court will then set a timetable directing the parties to comply with various obligations. That timetable will include deadlines to prepare and negotiate a draft lease, to speak to narrow the terms that are in dispute, and to produce witness statements and expert evidence in support of the terms that each party is seeking. This is all covered in further detail in our Post-Action guide HERE.

Even after a court application has been made we would expect the parties to agree terms for the renewal lease as the negotiations between the landlord and tenant usually continue. It is very rare for an issued claim to proceed all the way to trial, and we can usually avoid the cost of having to comply with everything set out in the court’s timetable. If the parties are making good progress in their negotiations they might agree to “stay” the court process, pausing it for a month or two, to allow further time to finalise terms. They might also choose to stay the proceedings while they wait for some relevant comparable evidence to become available.

If the parties can’t agree on terms, they might consider some form of alternative dispute resolution (ADR) to help to conclude matters, rather than proceed to a trial.

One of the most common forms of ADR used in a situation such as this is PACT, which stands for Professional Arbitration on Court Terms. We encourage our clients to pursue this course of action wherever appropriate as it can save them a lot of time and money, as well as helping to preserve the landlord/tenant relationship.

The process involves the parties agreeing to refer determination of the terms of the new lease that they cannot agree upon to an arbitrator or an independent expert, who is an experienced commercial property specialist.  The arbitrator’s decision is binding, and the whole process takes place on paper, meaning that there’s no need for a hearing.  We work with our clients and their Lease Advisory Professionals throughout this process to help ensure that they present their case to the arbitrator in the best way possible.

You can find out more about the PACT Arbitration process in our guide on it HERE.

Interim Rent is the level of rent that the tenant might have to pay for the period, or some of the period, that it remains in occupation of the property after the expiry date of the existing lease. That period will depend upon when a notice under the LTA 1954 was served. The level of Interim Rent payable is usually agreed between the parties, however the court can be asked to determine it in the absence of agreement.

You can find out more about Interim Rent in our guide on it HERE.

Landlords, tenants, and Lease Advisory Professionals are all busy people. Consequently, it’s not always possible for them to get together to thrash out the terms of a renewal lease regularly. One way to narrow the issues in dispute between them is to make an offer in writing which can often lead to a quick settlement. There can be costs advantages to doing this and it can often be enough to get the matter to the top of someone’s to-do list. We advise our clients tactically on when and how to best make an offer. We also advise in relation to any settlement offers that they receive from the other party.

It should hopefully be clear from this article that the overwhelming majority of commercial lease renewal cases settle without getting anywhere near a trial at court. In many cases a notice doesn’t even need to be served as the parties simply agree terms between themselves.

If a new lease is agreed and that lease completes after a notice has been served, but before any court proceedings have been issued, there will be nothing for the parties to do as the new lease will simply replace the old one.

If a new lease is agreed and that lease completes after court proceedings have been issued, we’ll arrange for those to be discontinued as soon as possible. In either case we’ll take care of everything so that our clients can focus on their business.

We are experts at helping landlords and tenants to renew leases of commercial premises. We work to ensure that our client’s rights are protected, and we help them to agree the best terms that they can for the new tenancy. In most cases the parties agree terms for the without issue, and our commercial Real Estate colleagues will document the new lease.

But where terms can’t be agreed, or where the other party refuses to engage, we serve notice requiring them to do so. Our team of experienced Property Disputes solicitors help to plan strategy and to break down complex issues into plain English for our clients. We try to avoid having to apply to court for the terms of the lease terms to be determined, but if that is necessary, we help our clients, and their Lease Advisory Professionals, to navigate the process.

We see ourselves as an extended part of our client’s team, and we’re always on the end of the phone when needed.