Insights

Jonathan Woodroffe

Published 26 October 2023
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Commercial Lease Extensions

Commercial lease extensions are governed by The Landlord and Tenant Act (LTA) 1954 and require careful consideration of both the legal and commercial implications by both landlord and tenant. In this post, we take a look at some of the factors that need to be taken into account and the procedure that has to be followed when ending or extending a commercial lease.

As a business, the commercial lease in respect of your business premises is often vital to your operations and an extension (or not) of the lease is likely to have serious implications. As a landlord, the decision whether to extend the term of that lease needs to be approached with diligence, because a mistake cannot easily be undone.

Either party can find out information about the lease before deciding whether to renew it or not by serving a section 40 notice. The information sought with such a notice could include information about the premises, any sub-tenancies, and any other person who owns an interest in the property, or any superior leases.

What are commercial lease extensions?

A commercial lease extension is a binding contract that extends a tenant’s use of a commercial property past the original lease period. A commercial tenant has the right to be offered a new tenancy at the end of the term (as provided by The Regulatory Reform (Business Tenancies) (England and Wales) Order 2003). This applies unless the landlord and tenant agreed to opt-out at the beginning of the tenancy (if the parties have opted out, then a section 25 notice is not appropriate, and the tenancy agreement should set out the procedure for bringing the tenancy to an end).

Serving a section 25 notice

As the tenancy approaches the end of its term, the landlord must serve a notice section 25 (LTA) setting out whether they wish to extend the tenancy or bring it to an end. This must be done within 6 to 12 months before the landlord wants the tenancy to end.

Once either the landlord has served notice, the tenant cannot then serve a notice and the matter will proceed based on the notice served by the landlord. Therefore if the landlord changes his mind about whether to extend the lease or not, this will be extremely difficult unless the tenant agrees. The notice always needs to be a minimum of 6 months.

Ending the tenancy

If the landlord wants to end the tenancy and get their property back, reasons for not extending the tenancy (as provided in section 30 of LTA) must be set out in the notice. Broadly, these are:  

  • Breach of the repairing obligation
  • Late payment of rent
  • Breach of other obligations
  • Suitable alternative property is available
  • Landlord needs to redevelop the property
  • Landlord wants to occupy the property themselves.

If the tenancy is ended as a result of one of the above reasons which is not the tenant’s fault, compensation may be payable.

Notice does not need to be served to coincide with the end of the fixed term, but once notice has been served it cannot be withdrawn (unless the landlord has transferred his ownership to a new landlord who wishes the tenancy to continue).

If the tenant wishes to request a new tenancy, they can serve a section 26 notice (again within 6 to 12 months of the end of the term). If the landlord opposes this request, they must respond within 2 months with a counter-notice, specifying the grounds on which it is opposed.

Extending the tenancy

Alternatively, the landlord may wish to suggest an extension of the lease either on the same or on different terms. Again, in this situation, a section 25 notice must be served.

The terms that will need consideration at this stage include the new term, the new rent, any appropriate break clause, rent reviews, etc. There may then be a period of negotiation as the parties agree new terms.

In a protracted case, the parties may also need to deal with the issue of interim rent, and if needs be an application can be made to the court to determine this. There may also be issues about whether the tenant has the right to acquire the freehold. In these circumstances, a different procedure should be followed.

If you would like further advice about commercial lease extensions, then please get in touch.

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