There are three main ways in which a business can occupy a property:
- Tenancy protected by the Landlord and Tenant Act 1954 (“LTA 1954”)
- Tenancy contracted out of the LTA 1954
- Licence
This article concerns the first category – Tenancies protected by the LTA 1954 and the termination or renewal process of these tenancies.
For information concerning the other two categories (Tenancy contracted out of the LTA 1954 and Licence) please see the following article.
What is a LTA 1954 Protected Lease?
This type of lease has the protection of the security of tenure provisions set out in the Landlord and Tenant Act 1954 (“LTA 1954”). That means the Tenant has a right to remain a Tenant of the property – unless terminated by the procedures set out below.
What tenants qualify for a Protected Lease?
This applies to premises occupied for business purposes. Some charities and clubs can also be protected by the LTA 1954. For more information discussing when the LTA 1954 does not apply such as tenancies contracted out of the LTA 1954 or licences please see the following article here.
Renewal of a LTA 1954 Protected Lease
If the tenancy is protected by the LTA 1954 and neither the Landlord nor Tenant want to change the position, then the lease can continue under the LTA 1954 for years, sometimes even decades, without a new lease being signed. The position will not change until either the Landlord serves a s25 notice or the Tenant serves a section 26 or section 27 notice.
Landlords or Tenants might want the greater certainty of a new lease.
If the open market rent has risen since the lease was granted, Landlords might want a new lease at that higher rent.
If the rent has fallen, the Landlord may want to leave the existing lease in place. However, the Tenant might wish to terminate the existing lease so the Tenant can take a new lease at the lower rent payable on the open market.
Sometimes Landlords or Tenants might want to change other terms of the letting.
Landlord section 25 notice
There are two types of section 25 notice, (1) “hostile” and (2) standard or “friendly” section 25 notices, discussed below.
1. Landlord’s “friendly” s25 notice
If a Landlord is willing to grant a new lease but wants new terms in place, a Landlord can serve a standard or “friendly” section 25 notice, giving minimum notice of 6 months.
Once a “friendly” section 25 notice is served, the parties will often engage directly or through their surveyors or lawyers to negotiate the terms of a new lease.
If no agreement is forthcoming during negotiations then the LTA 1954 requires that the Tenant (or Landlord) apply to the Court before the notice period expires, seeking the grant of a new lease and the determination of the new terms – if not the Tenant loses the protection of the LTA 1954.
If the parties still cannot agree the terms of the new lease, eventually the Court will decide what the terms of a new lease will be.
2. Landlord’s “hostile” s25 notice – Opposing a new tenancy
If the Landlord wants to regain possession of the property the Landlord can serve a “hostile” section 25 notice.
There are limited grounds to deny a protected tenant the right to renew their lease. These include:
- Landlord’s intention to redevelop;
- Landlord’s intention to occupy the property for their own purposes;
- Breaches of the lease such as disrepair, persistent delay in paying rent or other substantial breaches of the lease.
The Landlord’s intention to redevelop or occupy the property for their own purposes are the most common grounds. These grounds are subject to certain conditions and might require payment of statutory compensation.
It is rare to regain possession of a property for breaches of a lease unless the Tenant refuses to remedy the issue or the breach is very serious and irremediable.
Tenant Notices: section 26 or section 27 notices
After the end of the lease, a Tenant may be happy to continue “holding over” – staying at the property paying the old rent. The tenancy can continue in this extended way for months or years, with the Tenant still enjoying the right to a new lease under the LTA 1954. The Tenant might be happy with the flexibility or prefer to remain on the old rent if that is less than the open market rent.
Section 27 notice
During the extension period, the Tenant has the option to give a section 27 notice, which terminates the tenancy three months later.
Section 26 notice
If the end of a contractual term of a lease is approaching or it has ended, a Tenant can bring a lease to an end with a section 26 notice to seek a new lease at market rent (sometimes amending other terms of the lease). A Tenant might do this if it believes it could pay a lower rent under a new lease because the open market rent has dropped. Or a Tenant might want the certainty of a lease for a number of years.
Sometimes a Tenant gets wind of a Landlord’s future development plans for the building and might want to see if they can obtain a new lease before the Landlord’s plans are matured sufficiently to oppose a new lease.
If the Tenant believes the Landlord might be looking to end the Lease, they might seek to beat the Landlord to it by serving a prior section 26 notice. In this way the Tenant might give the maximum 12 months’ notice period rather than the minimum 6 month period, potentially gaining up to a further 6 months on the current rent.
If the Tenant serves a s26 notice but the Landlord seeks to end the lease, the Landlord will need to serve a counternotice contesting the grant of the new lease within 2 months of receipt of that notice.
Application to the Court
If the new lease terms cannot be agreed the Tenant (or Landlord) must apply to the court for the grant of a new tenancy before the expiry of the section 25 or section 26 notice period to protect its position, otherwise the lease will come to an end on the expiry of the notice, and the Landlord can take back possession of the property.
If the 1954 Act proceedings are “friendly” – i.e. both Landlord and Tenant want a new lease in place, but cannot agree the terms, then negotiations will continue while the court process is underway. If the parties cannot agree then at Trial a Judge will decide the terms of the new lease including the rent to be paid.
If the 1954 Act proceedings are “hostile” – i.e. the Tenant wants a new lease but the Landlord wants the property back then more complex procedures apply upon which you should take legal advice. If the parties cannot agree terms, then at Trial a Judge will decide whether the Landlord has succeeded in establishing the limited grounds for possession. If the Landlord is successful, the Tenant usually has to leave the premises three months later and the Landlord has to pay the Tenant statutory compensation set out in the LTA 1954 if the Court orders possession under redevelopment or Landlord own use grounds.
If the Landlord cannot make out one of the grounds for possession, the Judge will grant an order that the Tenant can have a new lease and decide the terms of the new lease including the rent to be paid.
If neither party applies to the court by the expiry of the notice, then the lease will have terminated, and the Tenant will no longer have a right to occupy the property.
Once a valid section 25 or 26 notice has been served, it cannot be unilaterally withdrawn or amended.
A Landlord can withdraw opposition to granting a renewal lease, but if the Tenant refuses to accept the withdrawal and does not take a new lease, the Landlord will remain liable to pay any compensation that would have been due under the original section 25 notice.
Conclusion
Terminating or renewing a lease can lead to legal complications. Our specialist lawyers can advise you on the best approach to take that avoids the pitfalls of the LTA 1954 and other legislation so as to achieve your objectives quickly and efficiently.
When negotiating a new lease / regaining possession, you might wish to consider other matters such as the condition of the building and its repair, maintenance, reinstatement and decoration (dilapidations).
For more information about different types of commercial lettings please see our article: Leases, Contracted-Out Tenancies and Licences, please see our article here.
For more information about occupation after lease expiry – rights, risks and practical steps for Landlords and Tenants please see our article here.
For more information generally on the contents of this article or advice on the issues raised, please contact us to speak to a member of our Property Dispute Resolution Team.
Landlords and Tenants are free to agree a new lease or licence at any time. Our Real Estate department would be pleased to assist Landlords or Tenants in creating a new lease or licence if terms have been agreed.
For advice or more information please contact us.
Edward Jones – Specialist real estate dispute resolution lawyer with 25 years’ experience of property disputes.
Jed Temple – Qualified Solicitor with 17 years prior experience as a surveyor.
