UK: Important Issues For Tenants Of Commercial Premises To Consider Before The Expiry Of Their Lease

Last Updated: 25 June 2015
Article by Penelope-Jane Gibbs

If you are a tenant of commercial premises and your lease is nearing the end of its contractual term, or you are considering serving a tenant's notice to quit, or exercising a tenant's break option, there are a number of very important issues to carefully consider and planning ahead is crucial.

1. Contracted-out Tenancies

If your tenancy does not provide you with a statutory right to renew when the term comes to an end, it will be entirely at your landlord's discretion as to whether they are prepared to offer you a new lease. Engaging with your landlord at an early stage to ascertain whether they are prepared to grant a new lease and on what terms it is strongly advisable. This will help to provide adequate time to negotiate new terms before your existing tenancy comes to an end, or if your landlord is unwilling to grant you a new tenancy, to locate and move into your new premises by the expiry of your existing lease (thereby minimising the disruption to your business).

2. Protected Tenancies

If your tenancy does provide you with a statutory right to renew your lease, your landlord is only able to oppose the grant of a new lease on certain limited grounds.

You can serve your landlord with a request for a new tenancy pursuant to Section 26 of the Landlord and Tenant Act 1954. Alternatively your landlord can serve you with a notice pursuant to Section 25 of the 1954 Act to bring your tenancy to an end, and either propose terms on which it is prepared to grant a new tenancy or specify one or more of the limited grounds on which it intends to oppose the grant of a new tenancy.

If your landlord successfully opposes the grant of a new tenancy, you will have to move out of your premises but may be entitled to statutory compensation. However, this is unlikely to be sufficient to cover the costs and potential losses to your business of having to re-locate.

There are important timing issues as to when such requests or notices may be served and there are strict time limits which apply to the steps to be taken in the renewal process. Failure to comply could result in you losing your right to new tenancy and having to vacate the premises.

3. Notices to Quit

If you are considering serving a notice to quit to bring your tenancy to an end, you should carefully consider the timing of such notice to ensure that you allow yourself sufficient time to secure and then relocate to alternative premises.

You must be ready to vacate on or before the expiry of the notice to quit. If you serve notice but fail to give up possession in time your landlord could be entitled to recover double rent. Landlords can then use the new Commercial Rent Arrears Recovery Scheme (CRAR) to recover double rent.

It is important to work out the length of notice you are required to give, and to consider any special requirements relating to service. Depending on the type of tenancy you have, the form and length of notice you are required to give will vary.

4. Break Notices

If your lease contains a tenant break option, you will be well advised to diarise the break date, review whether or not you wish to exercise the break and take legal advice well in advance of the last date by which the break notice must be served. A tenant who is uncertain as to whether or not they wish to exercise a break should be aware that once a break notice has been served, it cannot be unilaterally withdrawn.

Break options are frequently subject to various conditions that must be strictly complied with so as not to invalidate the break (in the event the break notice is invalid, the lease and the tenant's liabilities pursuant to it will continue).

Some examples of conditions include:-

  • payment of rent, service charges, interest, VAT and any other sums due under the lease. This may include having to pay sums which relate to a period after the break date. In the absence of any express provisions in the lease, you will not be entitled to a refund of any rent paid that relates to the period after the break date and no such term will be implied into the tenancy - Marks & Spencer PLC v BNP Paribas [2014] EWCA Civ 603;
  • giving vacant possession or giving up occupation of the premises by the break date. NYK Logistics (UK) v Ibrend Estates BV [2011] EWCA Civ 683 (CA) provides a good example of how failure to strictly comply with break conditions can be fatal;
  • substantial or absolute compliance with tenant's covenants, including the covenants to repair and reinstate (see below);
  • payment of a premium or penalty by a specified date as a condition of exercising the break.

5. Dilapidations

Tenants need to understand the extent of any works which they are liable to carry out pursuant to the terms of their lease well in advance of the expiry of their tenancy, so that they have time to consider whether or not they should complete those works before the expiry of the term.

Once the lease has come to an end, a tenant will have no right to start or complete any dilapidations works required to the premises.

A review of the lease should be undertaken at an early stage in order to identify the physical extent of the property and to identify the relevant covenants (such covenants to repair, clean, decorate, comply with statute, reinstate alterations and yield up).

In addition to reviewing the lease any ancillary or supplemental documents (such as licenses for alterations) along with any side letters and Schedules of Condition should also be reviewed. Advice may also be required as to the legal interpretation of the covenants in the lease.

Once the extent of the tenant's liability has been ascertained it will be necessary to identify the physical elements of the property which are in disrepair. A chartered building surveyor who is experienced in dilapidations will be able to advise  what works are required to put the property in repair in accordance with the lease and the likely cost.

If the tenant does not complete the works required to comply with the lease by the end of the term, the landlord will be entitled to claim damages to compensate them for any losses suffered as a result of the tenant's breaches of covenant.

The law on dilapidations is complex, and there are numerous factors to be taken into consideration in calculating the level of damages to which a landlord may be entitled.

If a tenant does not carry out any works, it is very important to ensure evidence is obtained (such as in the form of a Schedule of Condition/photographic evidence) to show the condition of the premises as close as possible to the lease expiry date. A failure to do so is likely to result in difficulties defending any dilapidations claim.

Conclusion

Issues may vary given the particular circumstances of each case and given the nature of the premises, but the well organised and well advised tenant can minimise the problems they might face at the end of their tenancy by planning ahead and considering their requirements carefully. Getting it wrong can have a very serious adverse impact upon a tenant's business and the ability to continue to trade.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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