Lots to negotiate

LSH

1st March 2016

Property Portfolio

LSH

IN the 1980s, the institutional 25-year lease with five-yearly rent reviews was commonplace. Nowadays, these are as rare as hens' teeth and very many leases are no longer than five years.

Therefore, today, there are many more lease renewals to be negotiated than rent reviews. At lease renewal, the rent to be agreed (or decided at court or PACT, Professional Arbitration on Court Terms) is the market rent which can be either higher, the same level or lower than the current level of rent payable. This is unlike rent reviews where nearly all provide that the rent can increase but not decrease.

With the commercial and industrial property market improving, rental values are in many cases increasing. As a landlord, if formal notice to terminate the lease is not served in time, then the existing lease will simply continue beyond the lease expiry date, and the increased rent will not commence until at least six months after the notice is served. Therefore, not addressing the matter in time may lead to a landlord not benefiting from a rental increase at the earliest possible point in time.

In a marketplace where rents are rising, as a tenant, you may wish to take no action and continue in occupation at the current level of rent, assuming that the landlord does not serve notice bringing the lease to an end. If you have a protected lease, which gives you security of tenure, this is a course of action that you may choose. It may work to your advantage in extending the period of the existing rental but there are risks. If rents continue to rise, then a delay in serving notice to terminate the lease may lead to an even higher rent being agreed.

Whether you are a landlord or a tenant, it is advisable to obtain professional advice at least 12 months ahead of lease expiry. This will ensure that the statutory notices (to be served by either the landlord or the tenant) can be served on time and these notices must give a minimum of six months and a maximum of 12 months notice. The tenant must serve what is called a Section 26 notice requesting a new lease. The landlord must serve a Section 25 notice either offering a new lease or stating that a new lease will not be offered on certain grounds.

Most commercial leases are known as protected leases where tenants have security of tenure and a statutory right to a new lease, unless the landlord objects on one of seven grounds. However, the commercial letting markets have seen a lot of short-term leases in recent years and many of these have been contracted out of the security of tenure provisions of the Landlord & Tenant Act 1954. Also, many subleases are granted without giving sub tenants security of tenure.

In cases where tenants do not have security of tenure, the landlord decides whether he wishes to grant a new lease and does not have to give a reason for refusing. In these circumstances it is critical to check your lease and start to consider future occupational requirements well ahead of lease expiry. Even if the landlord is prepared to offer a new lease, if negotiations are not concluded well ahead of the expiry date, then the tenant may be placed in a very weak negotiating position. There is the potential threat of having to vacate at lease expiry if a new lease is not in place at that time and the landlord has a change of heart.

For further advice, please contact Will Holliday at Lambert Smith Hampton on 01604 664368 or email at wholliday@lsh.co.uk

LSH