Lease renewal

'The Act'. Part II of the Landlord and Tenant Act 1954 governs the renewal of business leases. We are calling it ‘the Act’ for short. It gives a general right for the tenant of business premises to renew his tenancy for a new term when the old term come to an end.

A new lease. The tenant has a right to go to court to require the landlord to grant a new lease of up to 15 years. The rent will be the current market rent for the property. The new lease will usually be based on the previous form of lease, but the court can make appropriate changes.

Continuation of the old lease. Either the landlord or the tenant can activate the procedure to bring the old lease to an end and argue about a new lease. Until this happens (in fact, until any resulting court proceedings are finished) the old lease continues – even though the end of the term as stated in the lease has passed.

Interim rent. The landlord can apply for an ‘interim rent’ – the current market rent – to apply while the process continues.

No new lease. There are circumstances in which the landlord can resist renewal of the tenant’s lease, and recover possession. He can do this if the tenant has been substantially in default, or if certain business reasons apply (e.g. the landlord intends to redevelop, or he wants to occupy himself, or he wants to let the premises and other premises as one unit.) If the landlord recovers possession for such business reasons, he has to pay compensation to the tenant.

Contracting out. The Act also contains a procedure for doing away with the Act’s protections. This has to be agreed by the parties in advance, and they have to go through a special procedure to make sure the tenant fully appreciates the risks. The tenancy or lease is then said to be ‘outside the Act’ and at the end of the term the landlord is automatically entitled to possession without having to pay compensation.

Term. The court has the power to decide how long the new lease term should be, but with the maximum of 15 years. The new lease starts from the termination date. The court may take into account the landlord’s intention to occupy the premises, or to redevelop them, in the future. Generally, the court has a discretion as to the length of term to grant.

Rent. The court fixes the rent to be paid under the new lease. It is to be the rent for which the premises might reasonably be expected to be let in the open market by a willing landlord at the start of the new tenancy. The court will usually rely on comparable evidence as to recent lettings in the area. However, the Act sets out a number of issues which the court is required to disregard when deciding on the open market rent. The court must ignore the effect on rent of factors personal to the tenant or former tenants, such as the fact that they have been in occupation of the premises, or have built up goodwill value from carrying on business there. The court must also disregard ‘improvements’ the tenant or any earlier tenant chose to carry out. It isn’t just improvements carried out during the current lease which are ignored; they can be ignored back to 21 years previously if the premises have continuously been subject to tenancies protected under the Act during that time. If the premises have a liquor license, the court must ignore any added value attributable to the license.

Other terms. The court has the power to settle the other provisions of the lease. The presumption is that the new lease will have the same covenants and conditions as the old lease, and if either party proposes a change from the old terms, the burden is on him to justify it. If the old lease contained no obligation on the tenant to contribute to the cost of structural repairs to the building or its common parts, the landlord would be unlikely to succeed in getting a service charge for that included in the new lease.