The commercial property market is volatile due to the pandemic, and this can put tenants in a position of strength to achieve satisfactory lease renewal terms, or alternatively find locations more suited to its business needs on better terms.
Gary Jones, director at WHN, examines some of the issues and what can be done to make sure that tenants can achieve the best outcome.
How can I renew my lease?
Most lease renewals are governed by the Landlord and Tenant Act 1954. Where the business tenant has automatic rights to renew their lease under the provisions of the act, then strict timetables need to be understood and adhered to.
A lease ‘protected’ under the act can only be brought to an end by notice if the tenant remains in occupation and is intending on renewing a lease.
Either party can serve a statutory notice after the expiry of the contractual term during the holding over period. The timing of service of the notice will often be dictated by the market rent.
Business tenants with leases protected by the act have the right to renew their lease and can do so by serving the relevant statutory notice on their landlord.
Alternatively, the landlord may choose to serve notice on the tenant when the lease term is coming to an end. Regardless of who serves the notice, the tenant must be aware of the time limits to ensure they do not lose their right to renewal or incur unnecessary costs.
After notice has been served, the tenant can negotiate the terms of the lease with the landlord.
What are the main terms that can be negotiated?
- Rent/ Service charge
The tenant should first consider the current property market as rental levels are likely to have changed since the current lease started.
This could be quite favourable to them and enable the renewal rent to either be reduced from the current rent paid or much lower than the landlord’s anticipated increase.
The coronavirus pandemic has affected businesses nationwide, leaving numerous properties vacant, which has placed tenants in a strong position. Similarly, you should be able to negotiate a reduction in service charge payments.
If the tenant considers their rent to be too high, a surveyor can assist in determining the market value of the property. Depending on what the surveyor considers to be the true market value, this can be used to negotiate cheaper rent and possibly lower service charges.
On renewal of a lease, the term is frequently much shorter, and due to the business climate in recent years, tenants have been able to negotiate shorter lengths of term with most pushing for greater flexibility. This is particularly true of the retail sector.
If the tenant has a good relationship with their landlord, they may be more flexible in agreeing to a lease term that better suits the tenant’s needs.
If a different lease term suits the landlord and the tenant is happy with this, the tenant should use this as leverage to change other lease terms such as the rent or including a break clause.
- Break clause
Including a break clause in a new lease allowing either party to end the lease before the end of the full term can be fundamental for a business facing uncertain market conditions. There will be specific conditions which must be met in order to exercise a break clause.
It may not be easy for a tenant to have a break option included in a renewal lease if the existing lease does not contain one – however, in the current market we are seeing plenty who are having success with this.
Gary Jones is a director based at WHN’s Bury office. Gary helps advise clients on a range of commercial property issues ranging from land acquisitions to negotiating and completing leases for both landlords and tenants. To contact Gary, call him on 0161 761 8093 or email firstname.lastname@example.org