Why business tenants should consider the end of a lease before they sign on the dotted line
As a business Tenant negotiating terms for a new Lease you will think about how long you want to sign up for initially, but do you think about what will happen when that Lease comes to an end…
Finding the right premises for your business to grow can be challenging, time consuming, and expensive. Having found suitable premises, you need to make sure you can stay as long as you want to before you commit to the premises.
There are a couple of different ways to ensure your business can stay put if you want to once your initial Lease term comes to an end.
What is the Landlord & Tenant Act 1954?
The Landlord and Tenant Act 1954 (“the Act”) was put in place to allow business Tenants the right to request a new Lease from their Landlord at the end of their initial Lease term on substantially the same terms as the initial Lease (subject to market rent).
This was intended to avoid Landlords penalising Tenants by imposing far more onerous Lease terms on them in a new Lease where Tenants have established and built up their business in a particular property and location and want to stay in occupation at the end of their initial Lease term.
If the Landlord refuses to agree to grant the Tenant a new Lease, the Tenant can apply to Court and the Court can order the Landlord to grant the Tenant a new Lease, subject to the Landlord’s statutory grounds to object to a new Lease which are mentioned below.
Often, even if Court proceedings have to be issued by the Tenant to protect their legal rights, a new Lease is agreed and put in place before a final Court hearing is required.
What is an option to renew?
A Tenant’s ‘Option’ to renew its Lease is a contractual right within the Lease document itself which provides the Tenant with the ability to demand the Landlord grant the Tenant a second Lease at the end of the first instead of the Tenant having to rely on the provisions of the Act .
The advantages of an option to review
An Option to renew could potentially save Tenants Stamp Duty Land Tax (‘SDLT’) as you can enter into a shorter initial Lease which can significantly reduce your SDLT liability but you have the security of being guaranteed a new L ease at the end of the initial Lease if you want one. If you do not choose to exercise the Option and take a new Lease at the end of the initial Lease term no further SDLT is payable.
Whereas if you entered into a longer Lease at the outset, perhaps with a break option to allow you to walk away during the Lease term, substantial SDLT may be payable at the outset. Although you may be able to walk away early by exercising a break option you will be unable to get a reimbursement from HM Revenue and Customs of the SDLT that has already been paid.
An Option to renew gives you greater certainty compared to the statutory right to renew under the Act as there are certain circumstances (which are set out in the Act) in which the Landlord can oppose the grant of a new Lease.
For example ,the Landlord may intend to redevelop the premises or occupy them for its own purposes, which may defeat a tenant’s right to a new under the Act. A contractual Option to renew places a legal obligation on the Landlord to grant a new Lease and, once exercised, obliges the tenant to take the new Lease.
In addition, the maximum length of term for a new Lease that can be granted under the 1954 Act is 15 years if ordered by the Court and a tenant might want to be sure that a second Lease term would be as long as their initial Lease which may be longer than 15 years.
An Option to renew may produce a different level of rent for the renewal Lease compared with that which would be deterined under the renewal process under the Act . Usually, an Option to renew is based on an indexed rent whereas for a renewal Lease under the Act rent would be determined on an open market basis.
You can ‘have your cake and eat it’…
Having the choice of using either avenue to obtain a new Lease when the time comes will allow you greater certainty and flexibility which could bring significant financial savings too.
In a falling market, the tenant might choose to exercise its renewal rights under the Act in order to be granted a Lease at a lower market rent. However, if the market is rising the same tenant may prefer to exercise its contractual Option to renew in order to obtain a Lease at an index linked rent instead..
Landlords will try to insist that a Lease has either an Option to renew or is within the protection of Act and will be reluctant to agree to both due to the rent position explained above, but a Tenant is entitled to ask for an Option to renew when negotiating Lease terms even if the Lease is to be protected by the Act. If agreed, this should be clearly set out in the Heads of Terms agreed with the Landlord at the outset.
An Option to renew is particularly useful for business premises which would be difficult to relocate or recreate, such as data centres or cinemas, buildings that are trophy headquarters from which a tenant would be reluctant to relocate, or buildings that allow a tenant to trade in a particular area known for their business such as, the “Jewellery Quarter” in Birmingham.
If you require further assistance in relation to any matters relating to commercial property including Leases please contact Sarah Bradford or Natalie Nolan in Waldrons Commercial Property Team on 01384 811811 or by e-mail to email@example.com