An Introduction to Commercial Property Lease Renewals

4 Dec,2016Lease Renewals

An Introduction to Commercial Property Lease Renewals

The average Commercial Property lease has reduced considerably in the last 20-30 years, due to a number of reasons and not least because of the uncertain economy environment that we still find ourselves in post-recession and pre-Brexit. The average Commercial Property lease is now believed to be between 5-6 years in length, although many restaurant leases remain on longer terms of 15+ years to safeguard the goodwill that they have developed.

The legislation that surrounds Commercial Property lease renewals, and in particular security of tenure, is the Landlord & Tenant Act 1954 (Part 2). Security of tenure allows a degree of protection to the tenant which means that under most circumstances they will be offered a new lease on their Commercial Premises at the end of their contractual term on similar terms to their original lease but on a rent at the then open market level. This prevents Landlords from holding tenants to ransom for a new lease on higher than market levels and also prevents them removing the tenant and realising the goodwill in the business for themselves, or from selling the goodwill on to a 3rd party.

Within the Landlord & Tenant Act 1954 (Part 2) there are only seven grounds that a Landlord can oppose a new lease. These are as follows:

Ground A: Breach of repairing covenant
Ground B: Persistent delay in paying rent
Ground C: Breaches of other obligations
Ground D: Availability of alternative accommodation
Ground E: Sub-tenant – possession required for letting or disposing of whole of property
Ground F: Landlord intends to demolish or reconstruct
Ground G: Landlord intends to occupy the premises himself

In very simplified terms some of these grounds will require compensation to be paid to the tenant, some will require proof and are open to interpretation, while others once established will require a tenant to vacate without compensation. The level of compensation depends on the continuous period that the tenant has occupied the premises. If the tenant has been in occupation for up to 14 years then they may be entitled to compensation equivalent to 1 x RV (Rateable Value), and for 14 years or more the tenant may be entitled to compensation equivalent to 2 x RV.

Contracting Out – Landlord & Tenant Act 1954 (Part 2)

One of the most important consideration when granting or agreeing to a Commercial Property Lease is therefore whether to ‘Contract Out’ of the provisions of sections 24-28 of the Landlord & Tenant Act 1954 (Part 2). A ‘Contracted Out’ lease does not provide security of tenure for the tenant, but does work well for both parties in some situations. Such a scenario may be that the landlord plans to re-develop the site in say 3 years’ time and a tenant may be open to taking a 3 year lease at a reduced rent in the knowledge that they will outgrow the premises in this period. It is however relatively uncommon to come across a Commercial Property lease that has been ‘contracted out’ of the provisions of Section 24-28 of the Landlord & Tenant Act 1954 (Part 2).

It is important to start planning your Commercial Property Lease Renewal strategy around 18 months before the end of your contractual term, as either the Landlord or tenant can serve notice to start lease renewal proceedings between 6-12 months before the end of the contractual term. It is advisable for both the landlord and tenant to each appoint a suitably qualified member of the RICS to establish the market rent and advise their client of the best strategy before acting on their behalf in negotiating the terms of the new lease.

Gifford Dixon Commercial Property have an excellent record of being able to exceed client’s expectations in Commercial Property Lease Renewals, by combining an in depth knowledge of the Commercial Property market with a pragmatic and hands on approach to negotiations.

Contact us now to take advantage of our free initial consultation to see if we can help you maximise your position at Lease Renewal.

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