There are various reasons why the parties to a lease may wish to 'extend' the term of the commercial lease, which is about to expire and does not have security of tenure (meaning the tenant has no statutory rights to remain in the premises at the end of the term).
The parties may be negotiating a new lease of the premises, which will not be ready before the end of the term, or, if the tenant is vacating, they may need additional time to move their belongings or to deal with terminal dilapidations.
Importance of Formally Documenting Lease Extensions
Any 'extension' should be formally documented to regularise the position and make it clear upon what terms the tenant continues to occupy the premises following the expiry of the lease term.
If this is not done and the tenant continues to occupy and pay rent, the tenant may acquire security of tenure, which will cause difficulties for the landlord in taking back possession of the premises.
Short-Term Licences to Occupy
One option is to enter into a short-term licence to occupy with the tenant, which will simply give the tenant permission to be on the premises as a licensee and will prevent them from becoming a trespasser.
Licences are attractive to tenants as they offer short-term flexible arrangements and do not attract Stamp Duty Land Tax (SDLT).
They are also attractive to landlords as they are personal arrangements which do not create an estate in land, bind successors in title or confer security of tenure rights.
However, licences to occupy carry some risk as they could, in fact, be construed as a lease, particularly where a tenant has been granted exclusive possession of the premises for a fixed term and rent.
In such a case, the tenant could possibly acquire security of tenure.
Tenancies at Will
Another option is to enter into a tenancy at will, which will create a tenancy that is terminable at any time by either party.
Like a licence to occupy, a tenancy at will does not confer security of tenure or attract SDLT.
These are short documents and are usually quick to negotiate, but they are somewhat precarious in that there is no guaranteed period of income for the landlord due to the uncertain term, and there is no certainty of term for the tenant, which could create operational issues.
Potential Pitfalls of Extending a Lease by Deed of Variation
It is also possible to 'extend' a lease by deed of variation of the existing lease (which is about to expire) to extend the term.
However, this can have various unintended legal consequences, and it is usually inadvisable to proceed down this route.
If the existing lease was excluded from security of tenure, that will not carry over into the regranted lease, and if the correct statutory procedure is not followed for the regranted lease, the tenant will acquire security of tenure.
Further, the tenant may have a potential liability for SDLT, and if the landlord's title is mortgaged, the regrant could put the landlord in breach of the terms of their mortgage.
Proactive Measures for Landlords Approaching Lease Expiry
To avoid any problems arising in the first place, the landlord should make a record of the tenant's lease expiry date and consider contacting the tenant six to eight months before the end of the term to ascertain the tenant's future plans for the premises.
If a few weeks before expiry, it is still not known whether the tenant is staying or leaving, or if the landlord knows it would like to take back possession of the premises, the landlord should instruct lawyers to advise on the next steps.
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.