Dealing With An Upcoming Lease Expiry - A Guide For Landlords

DEALING WITH AN UPCOMING LEASE EXPIRY - A GUIDE FOR LANDLORDS

If you are the landlord of a tenant whose lease is protected by Part II of the Landlord and Tenant Act 1954 (see When does the Act apply to a tenancy?), you will need to review the position as the contractual expiry date of the lease approaches. (The effect of any break options contained in the lease is not considered here.)

What will happen if you do nothing?
If neither you nor the tenant take any action and the 1954 Act applies to the tenancy (see LTA1954 FAQ:When does the Act Apply to a tenancy?), the tenancy will not come to an end on the expiry date stated in the lease. Instead, it will continue at the same rent and on the same terms as before, except for the terms dealing with termination. In a rising rental market, this continuation is unlikely to be in your interest because the current rent may well be below the market rent.

What can the tenant do if you do nothing?
1. Your tenant could serve a request for a new tenancy under section 26 of the Act, to terminate the existing tenancy and ask for a new one. This request must be given in the prescribed form and must be served not less than 6 months nor more than 12 months before the date on which the new tenancy is to start. The start date specified in the request must not terminate the existing tenancy before the expiry date stated in the lease, but the request can terminate the tenancy on any date after that provided that the required period of notice is given.

2. Your tenant could serve notice under section 27 of the Act. The notice can either bring the tenancy to an end on the lease expiry date or on any other date after that, provided that not less than 3 months' notice is given.

3. Alternatively, section 27 also allows your tenant merely to vacate the premises without giving you any notice whatsoever, provided that vacation is effected by the lease expiry date.

How can you start the lease renewal process?
If your tenant has not served a section 26 request or notice under section 27 of the Act, you may serve notice under section 25 of the Act to terminate the existing tenancy. This notice must be given in the prescribed form and must be served not less than 6 months nor more than 12 months before the termination date specified in the notice. The termination date specified in the notice must not be earlier that the expiry date stated in the lease, but it can be any date after that provided that the required period of notice is given.

The notice must state whether or not you will oppose any application by the tenant for a new tenancy. If you wish to oppose such an application, the notice must specify the ground(s) on which you intend to rely. (See Grounds of Opposition).

What do you do if you want the tenant to leave the premises?
If you wish the tenant to leave the premises, you have two available courses of action under the 1954 Act - see below. Alternatively, you may wish to consider whether you can negotiate with the tenant for a surrender of the tenancy. (Surrender requires an agreement between you and the tenant to bring the tenancy to an end). Another option is to check whether the tenant is in breach of any of its lease covenants, which may allow you to forfeit its lease. (See Forfeiture - A Guide for Commercial Landlords).

The options under the 1954 Act procedure are:

1. Serve notice under section 25 of the Act and state that you will oppose any application by the tenant for a new tenancy. The notice must specify the ground(s) on which you intend to rely. (See Grounds of Opposition).

2. If the tenant has served a section 26 request, you must serve counter-notice within 2 months of the request to notify the tenant of your intention to oppose any application for a new tenancy. The counter-notice must specify the ground(s) on which you intend to rely. (See Grounds of Opposition).

What should you do if the tenant serves a section 26 request?
There is no need for you to serve a counter-notice if you are willing to grant a new lease to the tenant, although it maybe helpful to contact the tenant to start negotiations for the new lease.

However, if you are opposed to the grant of a new tenancy, you must serve counter-notice within 2 months of the tenants section 26 request to notify the tenant of your intention to oppose any application for a new tenancy. The counter-notice must specify the ground(s) on which you intend to rely. (See Grounds of Opposition).

Tactical considerations
In a rising market, the current rent may well be below the open market rent. The rent payable for the new tenancy should be determined by reference to the open market rate. In addition, you will be entitled to apply for an interim rent to be determined, which is the rent payable between the termination date of the existing tenancy and the start date of the new tenancy. (See Part II of the Landlord and Tenant Act 1954: Frequently Asked Questions for further information concerning interim rent.) Therefore, in a rising market, it is generally wise to serve notice on your tenant under section 25 of the 1954 Act to bring the existing tenancy to an end as early as possible, i.e. serve notice twelve months before the lease expiry date.

In a falling market where you do not wish to oppose the grant of a new lease to the tenant, there may be no advantage to you in serving notice to determine the existing tenancy - particularly since interim rent will be payable from the earliest termination/start date that could have been specified in the section 25 notice/section 26 request respectively, irrespective of the actual date specified. In any event, it is likely that a tenant in a falling market will be keen to serve notice under section 26 of the Act so that it can obtain a lower rent as soon as possible. However, serving notice to bring the existing tenancy to an end will at least start the lease renewal process if you are keen to achieve some certainty.

If you intend to oppose the grant of a new tenancy to the tenant, it is vital that you give very early consideration to your likely ground(s) of opposition and the evidence that you will need to support your case. Ideally, you should not serve notice opposing the grant of a new tenancy until you have obtained detailed advice on your position and the evidence that will be required by the Court.

For further information or advice please contact propertylitigation@charlesrussell.co.uk

These notes represent only an outline summary of relevant principles and detailed advice should always be sought in particular cases.