The Landlord and Tenant Act 1954 (Part 2) normally gives business tenants the right to renew the tenancy of their business premises when it comes to an end. The Act governs renewal and termination procedures and, where the parties cannot agree, provides courts with powers to order the renewal or termination of the tenancy. In the case of a renewal, the court will decide the terms of the new tenancy if the parties themselves cannot agree.
This guide is for current and prospective business tenants and landlords. It explains which types of tenants have the right to end or renew their leases, and landlords’ rights to end tenancies or obligations to grant new ones. It explains what rent reviews are and gives further guidance about specialist organisations you can contact and what tenancy forms you might need.
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Which tenants have the right to renew their business lease?
Under the Landlord and Tenant Act 1954 (Part 2), business tenants normally have the right to remain in their premises and renew their leases when the tenancy ends. Examples of premises where these rights may apply include:
- shops, warehouses and factories
- offices containing businesses, professional people and volunteer societies
- doctors’ and dentists’ surgeries
- premises for clubs, trade unions, institutions and other bodies
- premises used partly for business, but where the tenant lives in the remaining areas
However, some types of business occupiers do not have the right to renew including:
- farm business tenants
- mining tenants
- ‘service tenants’ employed by the landlord
Also, renewal rights do not generally apply in the following cases:
- fixed-term tenancies of six months or less
- tenants who waive their right to renew at the start of their lease
- tenants using the premises for business without the landlord’s agreement
- where there is a licence rather than a lease
- tenants with long leases extended under the Leasehold Reform Act 1967 and, in certain cases, their sub-tenants
- tenants who have sub-let the premises and who are not occupying them personally
The landlord may also oppose renewal in certain defined cases – see the page in this guide on the landlord’s right to refuse to grant a new tenancy.
The tenant’s rights to end a tenancy
Tenants may sometimes be able to end their tenancy before the termination date set out in the lease. If they can, this will be because the landlord, or the lease, permits them to do so, as legislation itself does not give rights to early termination.
Ending a tenancy early
A tenant may be able to end their tenancy early if:
- The landlord agrees to accept a surrender of the lease.
- The lease includes a ‘break clause’ which allows the tenant to end it early.
- The tenant is able to assign the lease to someone else. The landlord is entitled to ask for a guarantee from the tenant, in which case there will be a potential continuing liability to the landlord.
- The tenant is able to sublet. Subletting involves remaining as a tenant but granting a sublease to another tenant. The original tenant remains liable for the rent even if they don’t trade from the premises.
Otherwise, the tenant must continue paying rent for the whole period of the tenancy.
Tenants wanting to end a tenancy early are advised to consult a solicitor with specialised knowledge of commercial property matters.
Ending a fixed-term tenancy
A fixed-term tenancy is one which is due to end on a specific date set out in the lease. If neither party has taken action to end a fixed-term tenancy, then the tenant may choose to stay or leave at the end of the fixed term. Tenants wishing to avoid paying rent continually must move out of the premises by the end of the fixed term. If they decide to stay, they will have to continue paying rent. They can only then end this continuing obligation to pay rent by giving three months’ notice, at the expiry of which the tenancy will end, and vacate the premises.
Early termination of a business lease
The tenant may normally remain in occupation until the expiry of the lease and sometimes beyond. However, in some cases a landlord might be able to take back the premises during the course of a tenancy:
- Where the tenant has failed to pay the rent or carry out some other lease obligation, as the lease will usually have a forfeiture clause enabling the landlord to end the lease. However, the court may reinstate the tenancy if the tenant successfully challenges the landlord’s action. See the page in this guide on paying rent and rent reviews.
- If the landlord has a right, set out in the lease, to exercise a ‘break clause’. The landlord will only have such a right if the tenant has agreed to waive renewal rights.
In either case, complex legal issues are involved, and it is advisable to take professional legal advice. Search for a commercial property solicitor on the Law Society website- Opens in a new window.
The landlord’s right to refuse to grant a new tenancy
Although business tenants generally have the right to renew the tenancy of their premises when it comes to an end, landlords can refuse to grant a new tenancy in some cases.
The landlord can refuse to renew:
- If the tenant does not have the right to renew, see the page in this guide on which tenants have the right to renew their business lease?
- If the tenant is in breach of their obligations. See the page in this guide on paying rent and rent reviews.
- If the landlord is offering to provide other suitable accommodation for the tenant.
- Where a sub-tenant occupying part of the premises applies for a new lease, but the landlord wants to let or sell the premises as a whole.
- Where the landlord wishes to demolish or reconstruct the premises. However, the tenant could remain in occupation if they allow the landlord access to carry out reconstruction work or accept a new tenancy for part of the premises.
- Where the landlord wishes to use the premises themselves, for their business, or to live there.
Landlords wishing to oppose renewal on these grounds will need to serve a ‘section 25 notice’ setting out their grounds for refusing a new tenancy. This will bring the tenancy to an end on the date specified in the notice, unless the tenant applies to the court to challenge the landlord’s grounds of opposition. If the court upholds the landlord’s grounds for refusing a new tenancy, the tenant will need to leave the premises, normally within three months. If the court agrees with the tenant’s challenge, it will order the grant of a new tenancy and settle its terms.
If the landlord and tenant have not agreed on the terms of a new tenancy, and neither party has applied to court and the parties have not entered into a written agreement to extend the deadline for applying to court, the tenancy will end on the date specified in the landlord’s notice of termination or the tenant’s request for a new tenancy. The landlord would then have no obligation to offer a new tenancy, even if the notice of termination said that he or she was not opposed to granting one.
Paying rent and rent reviews
At the outset, the amount of rent a tenant pays will be agreed with the landlord. Normally, this has to be paid in advance and is due on a quarterly basis. Rent will be payable regardless of how the tenant’s business is performing. If the tenant fails to pay, the landlord will normally take action to recoup the debt, either sending in bailiffs to seize goods to the value of the unpaid debt or repossessing the property and terminating the tenancy.
Many leases make provision for rent reviews, often at three-yearly or five-yearly intervals. If a tenant cannot reach an agreement with the landlord, most leases will include dispute resolution arrangements, usually involving the appointment of an arbitrator or independent expert who will settle the matter.
There are a number of different approaches to rent reviews. These include fixed rental increases which give the tenant certainty by stating how much the rent will increase by.
An alternative is to choose indexed rents. This means that the rent changes in line with a measurement outside the tenant’s or the landlord’s control, such as the Retail Price Index. Upward-only rent review clauses are common but tenants should be wary of these as the rent of the property will never fall, even when rents in the same area drop.
Agreeing break clauses with the landlord at certain intervals allows the tenant to assess whether they want to continue renting, without having to wait until the agreement expires. See the page in this guide on the tenant’s rights to end a tenancy.
Further business tenancy information and advice
There are a number of sources of further information on leasing business premises and on business tenancy.
Legal advice
The legal area of tenancy is complex, and you may wish to consult a solicitor specialising in commercial property. Search for a solicitor on the Law Society website- Opens in a new window.
Advice from a chartered surveyor
The Royal Institution of Chartered Surveyors (RICs) is the professional body for chartered surveyors. They publish a range of books covering all aspects of business premises. Search for a chartered surveyor on the RICs website- Opens in a new window.
Information on policy and legislation
The Department for Communities and Local Government is responsible for government policy and legislation on business leases. They produce guidance and information that may help your business.
To read about how to renew or end a business tenancy you can download a guide to renewing and ending business leases for tenants and landlords [opens in a new window].
Code for Leasing Business Premises
Although this code applies primarily to first-time leases, it provides useful guidance on current best practice. Download the Code for Leasing Business Premises [opens in a new window].
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Every effort has been made by the author(s) to ensure this article’s accuracy but it does not constitute legal advice tailored to your circumstances. If you act on it, you acknowledge that you do so at your own risk. We cannot assume responsibility and do not accept liability for any damage or loss which may arise as a result of your reliance upon it.
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