What Happens When a Commercial Lease Expires?
Any commercial building, whether an office, shop or restaurant, requires a commercial lease between the landlord and tenant.
If your commercial lease agreement is nearing the end of its agreed term and your tenants wish to remain, it is advisable to be aware of the specific rights of the tenant regarding a renewal.
What legislation decides what happens when a commercial lease expires?
The Landlord and Tenant Act 1954 states that a lease can be automatically renewed by a tenant, on similar but updated terms. This Act provides security of tenure, meaning you can only regain possession of the property from your tenant if:
- You require the property to be vacated for personal possession
- You require the property to be vacated for development
- The commercial tenant has a history of non-payment of their rent
- The tenant has breached the terms of the lease
- The property has been divided into individual units which, if sublet, would accrue a higher rental figure than one lease
What is a protected lease?
A protected commercial lease entitles the tenant to a statutory right to request a new lease on similar terms to the existing lease. They are also not obliged to vacate the premises.
For a lease to be protected, certain criteria must be met:
- The tenant must occupy the premises solely for business use
- The tenant must have exclusive occupation of the premises
- The lease must be granted for a fixed term
If you have granted your commercial tenant a protected lease, you cannot change the agreed rental figure without the tenant’s agreement.
What is contracting out?
As a landlord, you can exclude a commercial lease from protection by ‘contracting out’. A strict procedure must be followed prior to contracting out a lease, but once this has been completed, the tenant is obliged to vacate the commercial premises at the end of the term specified in the lease. The tenant also has no automatic right to renew the lease.
If a lease is contracted out, once the end of the term is reached you can choose to renew the rental agreement based on renegotiated terms, such as a rental increase. It is then up to the tenant if they accept these terms and sign a new lease.
What to do when a commercial lease is due to expire
Whether the lease is secured or unsecured, you should consider the prospective renewal around 18 months before the date of expiry. A specialist commercial property solicitor can advise you on any specifics of the lease where necessary.
If your tenant has a secured tenure and they request to renew their lease, you have 2 months to dispute the request. If you choose to grant the request, you can then begin to negotiate new terms. An independent valuation will be required to determine a new rental fee, if applicable.
The tenant has the right to remain in the property under the terms of their existing lease while new terms are negotiated if they have a protected lease.
If your tenant has an unsecured tenure, once the end date of the existing lease has been reached, the tenant has no right of occupation and you can demand they vacate the property immediately.