With the current trend towards shorter leases, it is likely that occupiers of commercial premises will need to consider renewing their lease at some point during the lifecycle of their business.
Whilst changes in space and personnel requirements may mean that it is time to look for alternative premises at lease expiry, what happens when a tenant wants to stay and renew the lease?
This introduction to the lease renewal process will look at some of the issues.
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It is imperative to check all dates in the lease and be aware of their significance, this includes the lease expiry date.
It is not unusual to begin considering options 18-24 months prior to lease expiry, it will allow plenty of time to consider all the options. Consideration should be given as to whether the property is still suitable and as well as looking at alternative options for comparison.
If this process begins too late and the business does need to relocate, there must be an overlap of the old and new leases in order to avoid disruption. The overlap is required to allow for fit-out works to complete in the new premises and dilapidations/reinstatement works to complete at the old.
It is important to understand the implications of the terms of the lease and a tenant should always consider enlisting the help of a professional advisor.
Generally, if the lease is inside the Landlord and Tenant Act 1954, there is a right to renew the lease of the premises. If notice is not provided to the landlord of the tenant’s intention to vacate, it will be assumed that occupation of the space will continue. Naturally, it is more appropriate to begin the negotiation for a new lease well ahead of lease expiry and seek preferential terms through a tenant representative. However, the landlord may terminate the lease by giving notice, which might be as little as six months.
Alternatively, if the lease is outside the LtA 1954, there is no right to renew the lease, but there can still be an opportunity to open a discussion with the landlord. Unless there are underlying motives that the tenant is unaware of, such as development/refurbishment plans for the property, landlords will generally seek to retain the incumbent tenant. The landlord will want to minimise the risk of a vacancy void, where no tenant is leasing the property and where no income is being generated by the property.
Is there a better deal elsewhere? Even if the alternatives are prohibitive because of the upfront costs required, being aware of the market is integral to understanding what can be achieved in lease renewal negotiations.
It also may be advantageous if the current landlord believes that the tenant is serious about vacating the premises at the end of the lease and increase your negotiating strength.
In appointing a tenant representative early, it is possible to navigate the renewal process without putting too much pressure on other business activities and hopefully achieve some preferential terms and flexibility in the process.
Importantly, the quality and variety of landlord incentives are generally poorer when renewing a lease as compared to taking a new lease at a different property:
There are a few areas to consider when it comes to the costs involved in a lease renewal:
This may be comparably smaller than if the tenant was taking a new lease elsewhere, as the property search element is removed from the equation.
As with a new lease, there are legal fees incurred during the lease renewal process. However, it is worth assessing, with the tenant representative and solicitor, whether any of the original lease terms and clauses will be changing. If they are largely staying the same, it could lower the overall conveyancing fees compared to a new negotiation.
Even though a business does not have to install, and pay for, a new fit-out within the space, it could still seek to address the fact that it may have been in the property for over 5 years. Indeed, a refurbishment or replacement of furniture may be useful to refresh the space for your employees.
If you think you may wish to relocate instead of renewing, more information can be found here.
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