Frequently at the end of the contractual term of a commercial lease the tenant will remain in occupation and it is important for the landlord to be aware of the implications of this.
Where the lease is protected by the Landlord and Tenant Act 1954 (which is the case unless it has been specifically contracted out at the outset) then the tenant has the right to remain in occupation under the terms of the existing lease on the expiry of the contractual term. The landlord is entitled to collect the rent and other payments due and both parties continue to be bound by the terms of the lease.
Once the contractual term has ended then the tenant can terminate the lease at any time by giving no less than 3 months’ written notice to the landlord.
If the landlord wishes to terminate the lease and not grant a new one, then the landlord must serve a formal s25 notice on the tenant and the landlord must be able to prove at least one of the statutory grounds under s30 of the 1954 Act. These include, for example, redevelopment of the site or occupation by the landlord. It is important that the landlord takes professional advice before serving an s25 notice. If the tenant wishes to renew its lease but the landlord is successful in proving one of the grounds then the tenant will be entitled to compensation. If the landlord is unsuccessful then the tenant will be entitled to a new lease.
The landlord may choose to serve an s25 notice but saying it will not oppose a new lease. This will force the tenant to negotiate terms for the new lease with the landlord, but the basic starting point is that the terms will be as per the existing lease, save for rent, which would be market rent. If the rent passing under the lease is already at or above market rent then tactically landlords often choose not to serve an s25 notice and leave the tenant holding over on the old lease.
If the lease is excluded from the security of the 1954 Act, then at the end of the contractual term the tenant has no right to a new lease. The landlord must be careful that if the tenant is likely to remain in occupation then negotiations are commenced regarding a new lease well before the end of the contractual term. If the end of the term is approaching and the landlord doesn’t know whether the tenant intends to remain then the landlord should write to the tenant demanding possession of the property at the end of the lease. The landlord can also consider referring to s1 of the Landlord and Tenant Act 1730 (yes, really!) which entitles the landlord to claim twice the current rent from a tenant who remains in occupation after the lease has expired. That threat may well encourage a tenant to either reach agreement for a new lease or vacate.
If the landlord wishes to grant a new lease then a separate letter should be sent to the tenant indicating that the landlord is willing to delay possession proceedings for a short time whilst new lease terms are negotiated. It is best to specify a date.
If negotiations commence regarding the terms of a new lease and the tenant remains in occupation at the end of the lease then it is generally accepted that the tenant remains in occupation as a “tenant at will” which can be terminated at any time by the landlord.
However, if there are no negotiations then the landlord should demand possession of the property, otherwise there is a risk that the tenant will remain in occupation under a “periodic tenancy”. The longer the time the tenant remains in occupation after the end of the contractual term then the more risk there is of there being a periodic tenancy and acceptance of rent during that period by the landlord would also be an indication of a periodic tenancy. The risk of creating a periodic tenancy is that the tenant could become protected by the 1954 Act.
Landlords should be very careful in ensuring that they protect themselves from formerly unprotected tenants becoming protected tenants and whether the tenant is protected or not should always try to commence communication with tenants well in advance of the end of the contractual term as to the tenant’s intentions and start negotiations for a new lease ahead of the end of the contractual term. Seeking legal advice early can prevent expensive problems later.
For further advice or information please contact Ika Castka.