1. The landlord to serve a ‘Landlord's Notice Ending a Business Tenancy with Proposals for a New One’ under Section 25 of the Landlord and Tenant Act 1954. This must specify a ‘termination date’ for the current tenancy, which must be at least 6 months and not more than 12 months after the date of the notice, and not earlier than the contractual lease expiry date. It must also state whether the landlord would oppose an application to the court for the grant of a new lease and, if not, it must set out the landlord’s proposed terms for the new lease. If the landlord intends to oppose an application for a new lease, the notice must state which of the 7 grounds they are relying on, as are set out in Section 30 of the Act. Either the landlord or the tenant must then make an application to court for a new tenancy (Part 8 Claim) under Section 29 of the Act. This application must be made before the date specified in the landlord’s Section 25 notice, unless a further time period is agreed between the parties prior to that date. Failure to make an application to court or to agree to an extension of time prior to this date will result in the tenant losing their statutory rights to a new tenancy, thereby significantly weakening their negotiating position.
2. The tenant to serve on the landlord a ‘Tenant’s Request’ for a new tenancy under Section 26 of the Act specifying a start date for the new tenancy, which must be at least 6 months and not more than 12 months ahead, but not earlier than the contractual lease expiry date. The Section 26 request must specify the date on which the new tenancy is to commence and it must contain proposals for the terms of the new lease. The landlord then has 2 months in which to serve a counter-notice if they wish to oppose the renewal of the lease on Section 30 grounds. As with the Section 25 notice, either the landlord or the tenant must then make an application to the court for a new tenancy (Part 8 Claim) prior to the date specified in the tenant’s Section 26 request, unless a further time period is agreed between the parties prior to that date.

Should agreement and completion of the new lease not have taken place by the lease termination date specified in the landlord’s Section 25 notice, the tenant will effectively be ‘holding over’ beyond that date on the terms of the existing lease and at the same level of rent.

In the event that it is not possible to agree all or any of the terms of the new lease, these may be determined by the court or by arbitration, subject to the parties agreeing to such. However, these are expensive ways to resolve the matter and it is preferable and far more common for terms to be settled by way of negotiation.

If you receive a Section 25 notice from your landlord, you should forward a copy of the notice to your solicitor immediately, in order that they can then take the necessary steps in due course to ensure that your statutory rights to a new lease are protected, and you should also contact your Chartered Surveyor.

A ‘full repairing’ lease makes the tenant of an entire building responsible for all internal and external repairs and redecoration that become necessary during the term of the lease. This includes the roof, foundations, main walls and other structural parts, irrespective of whether or not they are in good condition at the start of the lease.

A full repairing lease for part of a building will usually require the tenant to maintain and decorate the inside of the premises and to pay a service charge towards the landlord’s costs of maintaining and repairing the common parts and structure and providing services such as lifts, central heating, etc. Such obligations might require the tenant to carry out or pay towards the cost of works to remedy an inherent construction defect which becomes apparent during the term of the lease.

Alternatives to full repairing terms might include limiting the tenant’s repairs to the maintenance of the property in its existing condition, excluding certain categories of repair, and the remediation of inherent defects. The scope or amount of any service charge can also be limited, or there can be a fixed rent which is inclusive of service costs.

If the lease refers to the existing condition of the property, it will be in both parties’ interests for a Schedule of Condition to be professionally prepared and kept with the lease documents. Professional advice should be sought when the tenant is required to carry out initial improvements and repairs, as there may be implications for tax and future rent reviews.

The government’s ‘Code of Practice for Commercial Leases’ recommends that the tenant’s repairing obligations and any repair costs included in service charges should be appropriate to the length of the term and the condition and age of the property at the start of the lease, and where appropriate, the landlord should consider appropriately priced alternatives to full repairing terms.

With regard to insurance, it is usual for the landlord to insure the building and to recover the premiums expended from the tenants. Where the landlord has arranged the insurance, the terms should be made known to the tenant and any interest of the tenant should be covered by the policy. In the case of multi-tenanted buildings, each tenant would be expected to contribute towards the total insurance premium; this may be included in the service charge, or may simply be charged separately.

The Code of Practice for Commercial Leases recommends that, where the landlord is responsible for insuring the property, the policy terms should be competitive. In appropriate cases, the tenant of an entire building should also be given the opportunity to influence the choice of insurer.

If the premises are damaged by an uninsured risk so as to prevent occupation, the tenant should be allowed to terminate their lease, unless the landlord agrees to rebuild the property at their own expense. If damage occurs but is covered by the insurance, there may be important questions as to how, why and by whom the insurance money is spent, so the parties should take professional advice as soon as the damage occurs. Tenants should also consider taking out their own insurance against loss or damage to contents and their business (i.e. loss of profits, etc) and any other risks not covered by the landlord’s insurance policy.

A property owner will sometimes find it convenient to grant a licence instead of a lease, partly because the occupier will not qualify for ‘security of tenure’. Licences are usually much shorter than leases and do not need the same level of financial commitment. However, licences need to be drawn up very carefully, as otherwise it might become a lease that falls within the remit of the Landlord and Tenant Act 1954, so it is vital to take advice from a solicitor and a Chartered Surveyor before signing a licence.

The terms of a licence will vary greatly, depending on your circumstances. The licence fee (the equivalent of rent) might be payable monthly in advance, or even weekly. The ‘licensor’ (the equivalent of the landlord) may want the occupier to leave after one month’s notice, and the occupier may be able to give one month’s notice to quit the premises. Various services may also be provided as part of the licence arrangement.

The advantages of a licence are that, if you do not have much financial backing, you may find it easier to obtain a licence than a lease. Usually, you will need to pay a deposit equivalent to one month’s licence fee, plus one month’s licence fee in advance. If you take a licence, you will also find it much simpler and cheaper to get out of it if your business plans do not work out and you need to vacate the premises.

The drawbacks of a licence are that, as an occupier, you will not have any security of tenure under the Landlord and Tenant Act 1954. This means that you might lose your premises at fairly short notice, so it can be risky to invest in decorating or refurbishing the space. You are also essentially at the mercy of the licensor, especially if they decide that you must sign a full lease to continue occupying the space. You may also find that the licensor has access to the premises you occupy at any time, as you will not have exclusive possession. Because a licence appears to be simpler than a lease, there may be a temptation to ignore the usual precautions, but you should not accept a licence without consulting your solicitor and Chartered Surveyor.

These days, under current market conditions, it is common to find that the rent can only be reviewed in an ‘upward-only’ direction, which essentially means that the rent cannot go down at review but will remain at its existing level, even if the market has fallen. However, the government’s Code of Practice for Commercial Leases recommends that rent reviews should generally be to the open market rental value of the premises and that, wherever possible, landlords should offer alternatives which are priced on a risk-adjusted basis, including alternatives to upward-only reviews (e.g. up-or-down reviews to open market rent, subject to a minimum of the initial rent, or linking the rent to a published index such as the Retail Price Index, or to the annual turnover of the tenant’s business).

From the tenant’s point of view, although it may appear to be beneficial to have up-or-down rent reviews, the additional risk for the landlord of downward rental movements is likely to be reflected by a higher level of rent. Therefore, the tenant should ensure that they fully analyse the additional rental charge for the benefit of up-or-down rent review flexibility. However, financers of property will often require landlords to ensure that the rental income will not fall below a particular level, which may restrict a landlord’s ability to agree an up-or-down rent review basis.

The Code of Practice for Commercial Leases also recommends that landlords and tenants should ensure that they fully understand the basis upon which the rent is to be reviewed and the procedure that is to be followed, including the existence of any strict time limits which could create pitfalls. You should obtain professional advice on such matters well before the rent review date, and immediately upon receiving (and before responding to) any notice or correspondence relating to the matter from your landlord or their agent.

For further information on any of the above matters, you may wish to refer to the Government’s Code of Practice for Commercial Leases (Second Edition, 2002). Alternatively, we would recommend that you take advice from your solicitor or from a Chartered Surveyor.

Flude Commercial
Pavilion View
19 New Road
Brighton
BN1 1UF
Tel: (01273) 727070
Fax: (01273) 728020