The transactional stages of the commercial lease renewal process

The existing articles in this series explain the pre-action and post-action stages of a commercial lease renewal under the Landlord and Tenant Act 1954 (“LTA 1954”), as well as the approach a court will take when the parties can’t agree the terms of a new tenancy.

This article looks at the process from the transactional side: how the commercial agreement becomes a renewal lease, what happens when the drafting reveals a dispute and how the document is completed once the outstanding terms have been resolved.

Eventually, somebody has to produce the lease.

That sounds simple enough. The main commercial terms may already have been agreed and everyone would quite like to get on with their respective businesses. What could possibly go wrong?

Usually, the answer first appears in tracked changes.

A landlord may instruct its solicitor to prepare the renewal lease, either by updating the existing document or producing a new one. On the tenant side, the first instruction often arrives when the tenant receives a draft from its landlord.

Tenants sometimes choose not to instruct solicitors during the initial discussions, particularly where the proposal appears to be a straightforward continuation of the existing arrangement. If the rent, term and other headline points look sensible, it can feel as though there’s little left to negotiate.

The commercial agreement might be buried in a chain of emails between the parties. In more formal negotiations, the parties or their agents will usually send across agreed terms ending with the apparently reassuring line:

“All other terms to reflect the existing lease.”

It’s a harmless-looking sentence doing quite a lot of work.

There’s often room for debate about what it means for the new lease to “reflect” the existing one. The line between sensible modernisation and a material change can vary depending on who’s holding the pen—at least until the transactional lawyers start comparing the documents.

The landlord or tenant—or both—may also have changed since the existing lease was granted. The freehold might have been sold, or the lease assigned. The new parties may have different commercial priorities or plans for the property, even though the lease being renewed remains the same.

The transactional lawyer has to establish what was actually agreed and then look beyond the rent, term and break rights. Repair, service charge, permitted use, alterations, assignment, insurance and rights over adjoining property can all make a substantial difference during the new term. They may not have received much attention during the commercial discussions, but they tend to become considerably more interesting when the first draft arrives.

If differences emerge, the first step is to try to resolve them through the drafting.

Some points can be dealt with by explaining how the existing lease works, suggesting alternative wording or establishing what the client actually needs to protect. Others aren’t so easily fixed.

The disagreement may have started as a tracked change, but it can raise wider questions. Is the landlord’s amendment reasonable modernisation or a material departure from the existing lease? Does the tenant’s wording reflect the commercial agreement, or alter it? If the point remains unresolved, how might a court approach it?

These are drafting questions, but the answers are often rooted in the LTA 1954. The existing lease remains an important reference point. Broadly speaking, if one party wants a material departure from the existing lease and the other objects, the party proposing the change will need to explain why that departure is fair and reasonable. Our guide to the court’s approach in commercial lease renewals considers this in more detail.

That is why the transactional and Property Disputes teams often need to work closely together at this stage. The transactional lawyer will usually identify the drafting issue, compare the proposed wording against the existing lease and explain the practical effect for the client. The Property Disputes team can then advise on the statutory position, the strength of the parties’ arguments and how the court might approach the point if it remains unresolved. A proposed clause is not just a drafting preference once it becomes something the other party objects to; it may be a term that needs to be justified under the 1954 Act.

It is also important to identify the real issue. If, for example, a landlord proposes a new operational covenant but the existing lease already contains adequate protection, the underlying concern may be a possible breach rather than a gap in the renewal drafting. Treating it as a drafting exercise could add cost without solving the actual problem.

Where the transactional negotiations have gone as far as they sensibly can, the remaining points need to be framed properly for the next stage. That may involve recording them in a schedule of unagreed terms, with each party setting out its proposed wording and reasons. The schedule of unagreed terms is a good example of why joined-up advice matters. It is not simply an administrative step in the court timetable. It is where the parties’ remaining disagreements are turned into defined positions, and where each side needs to present its client’s argument clearly and commercially. The lease wording needs to work in practice, reflect market standards where appropriate and support the client’s objectives, while also being framed in a way that advances the client’s position under the 1954 Act.

Having the transactional and Property Disputes teams working together avoids those points being looked at in isolation. The transactional lawyer understands how the clause will operate in the lease and what it means for the client day to day. The disputes lawyer understands how the point may need to be presented if it remains unresolved. The result is a more coherent position, both commercially and legally, and avoids the client being passed between teams who are looking at different parts of the same problem.

Once the disputed point is agreed, arbitrated or ordered, the matter returns to the transactional lawyer so that the wording can be properly incorporated into the renewal lease and the lease can be completed and registered where required. The court can resolve the dispute, but it does not complete the lease.

Good lawyers identify every possible issue. Experienced lawyers also help clients decide which issues are worth pursuing.

Lawyers are naturally inclined to pursue perfection, and there’s a place for that. For the client, though, perfection isn’t necessarily a beautifully ordered 60-page document in which every drafting point has been won.

For a landlord or investor, the priority may be protecting the income stream, preserving an exit strategy, maintaining the value and marketability of the asset or ensuring that the dilapidations position hasn’t been weakened.

For a tenant, it may be retaining the ability to operate, alter, assign or exit when the business needs to.

A drafting victory that costs more than the point is worth, delays completion or cuts across the client’s wider plans isn’t necessarily a victory at all. The aim is to protect the things that matter—not to win every comma.

That doesn’t mean giving points away. When a term matters, the response may need to be firm. It means knowing the difference between a point that needs to be fought and one that simply needs to be fixed.

The lease drafting doesn’t sit separately from the statutory renewal process.

A section 25 notice or section 26 request will usually propose the main terms of the new tenancy. The parties may continue negotiating while the notice runs, but the deadline still matters. The pre-action guide to commercial lease renewals explains those notices and deadlines in more detail.

If the outstanding points are agreed, the matter can return to the transactional lawyer so that the wording is incorporated and the lease completed. Where the statutory deadline is approaching, an extension may still be needed to give the parties enough time to finish the document.

A statutory extension has to be agreed in writing before the current deadline expires. In the heat of negotiations, a party may resist, particularly if it thinks completion is close or doesn’t want to surrender any perceived leverage. Sometimes that resistance lasts until rather later in the day than anyone would prefer.

Having the Property Disputes team already involved means the risks can be explained quickly and the extension dealt with without introducing an unknown lawyer at the last moment. The same colleague may have served the initial notice and remained involved while the lease was negotiated.

If the parties still can’t agree the outstanding terms—or a further extension can’t be secured—an application may need to be made to court to protect the tenant’s position.

That doesn’t necessarily mean the matter will reach trial. Many commercial lease renewal cases settle during the proceedings. If agreement remains impossible, though, the court can determine the outstanding terms of the new tenancy.

The Property Disputes team deals with the proceedings and the arguments about what the court should order. The post-action guide to commercial lease renewals explains that process in more detail.

Once the points have been agreed or determined, the matter comes back to the transactional lawyer.

The court can settle the dispute. It doesn’t complete the lease.

The draft still needs to be updated, the agreed or ordered terms fitted into the rest of the document, and the renewal lease completed and registered where necessary.

Commercial property matters rarely remain within tidy departmental boundaries.

A lease renewal may involve transactional drafting, statutory notices, valuation advice, dilapidations, breaches of covenant and court proceedings.

There are good reasons for specialist boundaries within a law firm. They ensure the right person gives the right advice. Those boundaries matter internally. The client isn’t especially interested in them—and quite right too.

The client wants the issue understood, the right advice given and the problem solved. It’s for the firm to involve the right specialists without asking the client to work out who should deal with what.

There should be no ceremonial passing of the baton and no artificial restart. From the client’s perspective, the initial notice, lease drafting, statutory extensions, any court proceedings and final completion form one continuous matter.

“Full service” is an easy phrase for a law firm to use. In practice, it should mean that the client gets the right help at the right time without being sent on a tour of the firm.

Early involvement from the right specialists can also keep costs down. A short conversation about a proposed clause, statutory deadline or potential breach may avoid repeated drafting, entrenched correspondence or formal proceedings later.

RWK Goodman advises landlords and tenants throughout the commercial lease renewal process, from the initial strategy and service of section 25 notices or section 26 requests through to statutory extensions, court applications, negotiation, drafting and completion.

The best renewals aren’t necessarily those without difficult points. They’re the ones where the right people deal with those points early, commercially and without losing sight of what the client is actually trying to achieve.

The lease gets completed, the client’s commercial position is protected, and the client can get back to running its business. That’s what joined-up advice should look like in practice.