Should I stay or should I go? deciding whether to renew commercial leases

As is always the case, lots of commercial leases will be coming to an end in the next 12 to 18 months and landlords are, unsurprisingly in light of the state of the commercial property market, rather concerned about whether their tenants are going to stay or go on expiry.

Whatever sector you are in, there is a glut of vacant space out there and plenty of landlords are prepared to offer very exciting incentives to persuade you to move. The termination of the lease term in a weak property market is therefore an ideal time for tenants to negotiate much better terms and tenants are very astute and can use tactics to make life much more difficult for landlords. With landlords now bound to pay empty property rates, there is every reason for them to incentivise their tenants to stay.

Most, but not all, business tenants have security of tenure under the Landlord and Tenant Act 1954. The Act provides that a business tenant’s tenancy will continue beyond the stated lease expiry date unless and until either the landlord or tenant actually serves a notice to bring it to an end. It also provides that a tenant is entitled to a new lease of the premises on substantially the same terms as the expired lease and at a market rent unless the landlord can (and wishes to) rely on a limited number of grounds for taking back possession, the most common being the landlord’s desire to redevelop.

We are getting a lot of requests from landlords to help them decide whether they should serve notice to bring their tenants’ current leases to an end so that they can commence negotiations for new leases. Unless the landlord has some specific plans for his property (he may wish to develop it or occupy it himself) a lot will depend on market factors. The property may have special features, rents may have gone up or down a lot in the area, there may be particularly high or low numbers of empty premises or similar types of tenant in the area. The area itself may be improving or it may be suffering from the construction of developments nearby which are attracting tenants away.

As lease terms near their end landlords often think they should be doing something proactive to secure their position, but more often than not the best advice we can give at the moment is “do absolutely nothing”. This may not feel very comfortable but it may well be the right thing to do. In a weak commercial property market stirring the pot by serving notice on your tenant under the Act towards the end of its lease might just encourage it to look at its options elsewhere. On the other hand if you do nothing there is always the chance that your tenant will sit tight.

The provisions of the Act are very complex. If you are a landlord or a tenant and are not sure whether the Act applies or you would like help in deciding whether to serve notice under the Act, please give me, Karen Chapman, Partner in Druces LLP’s Property team or Julian Johnstone, Partner in Druces LLP’s Litigation & Dispute Resolution team a call.

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