As a commercial tenant or landlord, you may be aware that there are certain processes to renew or end a business tenancy. Most business tenants have an automatic right to renew their business lease and sometimes to end it in certain circumstances, unless they are specifically excluded from such rights at the commencement of the lease.
Our commercial property solicitors deal with everything from commercial sale, purchases and leases, to commercial conveyancing and commercial property disputes. Here we answer our clients’ most pressing questions on lease renewals and applications for new tenancy.
Click to jump to individual areas and questions about new tenancies and lease renewal:
- Lease renewal under the Landlord and Tenant Act 1954
- Who can apply to court for a new lease?
- Serving a Section 25 or Section 26 notice before going to court
- Section 25 notice or a Section 26 notice
- Responding to a Section 25 notice or Section 26 notice
- Which court should you apply to for a lease renewal?
- Court application timetable
- Settling the terms of the new lease via the court
- Rent payable in the event of any delay in settling the terms
- Discontinuing court proceedings for a commercial lease renewal
- Overview of timeline of commercial lease renewal applications
Lease renewal under the Landlord and Tenant Act 1954
If a business tenant satisfies certain criteria under the Landlord & Tenant Act 1954 (the ‘1954 Act’), then they have a statutory right to renew their lease at the end of their lease. Leases that are specifically excluded from this right are farm businesses, mining tenancies, service tenants employed by the landlord, fixed-term tenancies of less than 6 months, or tenants whose lease has been contracted out of security of tenure (ie, the lease is ‘outside the 1954 Act’).
At the end of the commercial tenant’s contractual lease term, the lease continues under those same terms, unless it is terminated specifically by either party in one of several ways specified in the 1954 Act. Renewal procedures for a lease under the 1954 Act are different depending on who initiates the renewal: the competent landlord can serve a Section 25 notice that proposes new terms for the lease (or opposing renewal of the lease) - known as a ‘hostile Section 25 notice’ or the tenant can serve a Section 26 notice requesting a renewal lease under the 1954 Act. There are prescribed forms, strict processes and timeframes around both of these notices.
After the notice has been served (either a Section 25 or a Section 26), the parties will then often negotiate the terms of a new lease. If there is disagreement about whether a new lease should be granted (for example, if the landlord opposes the tenant’s right to renew), or the terms of the new lease itself, then either party can apply to the courts for a decision on the terms of new lease.
Who can apply to court for a new lease?
Either the landlord or the tenant may apply to court for a new lease.
Serving a Section 25 or Section 26 notice before going to court
Neither the landlord nor the tenant can apply to the court until one of them has sent the other a notice:
- Section 25 notice – Served by the landlord to the tenant, ending the current lease. Where the landlord is willing to renew the lease, the notice will set out the terms of the new lease. These are merely the landlord’s suggestions for further discussion, which the tenant does not have to accept; or
- Section 26 notice – Served by the tenant to the landlord, requesting a new lease. Similarly to the landlord’s notice above, the Section 26 notice will set out the tenant’s proposals for the new lease.
If the landlord has served a Section 25 notice, the tenant cannot then serve a Section 26 notice.
Similarly, if the tenant has served a Section 26 notice, the landlord cannot then serve a Section 25 notice.
Section 25 notice or a Section 26 notice
The landlord can serve a Section 25 notice not more than 12 months and not less than 6 months before the date upon which the landlord wants the current lease to end. The landlord cannot bring the lease to an end before the lease expiry date.
The tenant can serve a Section 26 notice not more than 12 months and not less than 6 months before the date upon which the tenant wishes a new lease to begin. The tenant cannot begin a new lease until after the expiry date of the existing lease.
Responding to a Section 25 notice or Section 26 notice
The tenant does not have to respond to the landlord’s Section 25 notice, but it is sensible to get professional advice from our commercial property solicitors about the terms for the new lease and to try to negotiate an agreement to avoid going to court.
The landlord must respond to a tenant’s Section 26 notice within two months of receiving it if they wish to oppose the grant of a new lease.
Which court should you apply to for a lease renewal?
Usually to the local county court, although the High Court may deal with important or complex issues surrounding the lease.
Court application timetable
Either party may apply to the court as soon as the landlord has served the Section 25 notice but before the date proposed in the Section 25 notice for ending the old lease.
Where the tenant serves a Section 26 request, the tenant must wait until the landlord has either responded or two months has elapsed. The landlord can apply to court as soon as they receive the Section 26 request but before the date in the Section 26 for the request for the new lease. If there is no application by the date in the Section 26 notice the tenant loses the right to the new lease.
It would obviously be sensible, however, for both parties to see if they can reach agreement first, without having to go to court.
If the parties are unable to agree the terms of the new lease and/or the parties are unable or unwilling to agree an extension of time to negotiate the terms of the new lease, then either party can apply to court to extend the deadline but they must do so in writing before the original deadline expires. The parties can then agree to further extensions as long as they do so before the current agreed extension expires.
The court application procedure for a new lease is set out in Civil Procedure Rule 56 (CPR 56).
Where the grant of a new lease is not opposed, the claimant must start the claim.
The defendant in the proceedings needs to complete an acknowledgment of service within 14 days of service of the claim form. There is no requirement to serve a formal defence.
Once proceedings have been issued the parties will either agree directions for the future steps to be taken in the claim, such as disclosure and exchange of evidence, or have the directions determined by the court at a case management conference (CMC).
Settling the terms of the new lease between the parties
The landlord and tenant can agree new terms of the lease in writing. If not, the court will settle any new terms of the lease the parties have been unable to agree.
Settling the terms of the new lease via the court
If the parties are unable to agree the terms of the lease then the court will apply the following:
- Term (length of the lease) – if the lease is for a fixed term, the court can order the new lease to last up to 15 years. Typically, the Courts will order a term which fits the genuine requirements of the tenant.
- Rent – the rent for the new lease will reflect the current market value of the property, bearing in mind the terms of the lease. When setting the rent, the court must ignore certain points: the fact that there is a sitting tenant; the tenant’s business goodwill; and improvements by the tenant or predecessors either during the current lease or during the last 21 years, other than those required by the lease.
- Other terms – the court will use its judgement to decide the other terms of the lease but it must take into account the terms of the current tenancy and all the relevant circumstances.
The court may also decide that the lease should provide for rent reviews.
The tenant must accept the terms of the new lease the court orders unless:
- either the landlord and tenant agree other terms; or
- within 14 days, the tenant asks the court to ‘revoke’ (withdraw) the order. The court would then revoke it but could extend the current lease long enough to give the landlord a reasonable chance of re-leasing the premises. Once the order is revoked, the tenant must leave the premises.
The new lease will normally commence upon expiry of the existing lease, or on the date the landlord or tenant proposes in the Section 25 notice or Section 26 notice. Where there is an application to the court, the date will be three to four months after the court decides on the application.
Rent payable in the event of any delay in settling the terms
Either the landlord or the tenant can apply for what is called ‘interim rent’. Usually, the court will order this when granting a new lease, backdating it to the beginning of the lease. The rules on interim rent are designed to be fair to both tenant and landlord.
Discontinuing court proceedings for a commercial lease renewal
A tenant that has applied to court for a new lease can discontinue its application without the landlord's consent, and without requiring the court's permission. Since permission of the court is not needed, the discontinuance takes effect on the date when notice of discontinuance is served on the landlord.
Overview of timeline of commercial lease renewal applications
- Section 25 notice served - not more than 12 months, not less than 6 months before expiry of existing lease.
- Agree terms and enter into new lease before expiry of existing lease.
- If new lease not entered into before expiry date, then seek to agree an extension in order to agree terms and enter into new lease – the parties can continue to agree extensions until the new lease is completed.
- No extension agreed? Apply to court by deadline and issue proceedings – the date that court issues will depend upon how busy the court is.
- Court application made – Case Management Conference to agree next steps – date will be set by court.
- Agree terms and enter into new lease.
- No agreement? Proceed to court hearing to fix terms.
- Agree and enter into lease.