The recently enacted Civil Law (Miscellaneous Provisions) Act 2008 (the "2008 Act") enables, amongst other things, any commercial tenant to opt out of the statutory entitlement to a further lease of between five and twenty years which automatically arises after leasing a commercial premises for five years or more. Section 57 of the 2008 Act, which brings this change into effect, was commenced on 20 July 2008.
Previously, the difficulty that commercial landlords faced was that whilst a tenant on taking a lease might have had no intention to exercise renewal rights it was not possible to agree this at law, so if the lease was subsequently assigned to another party or if control of the tenant was passed to someone else, that other party might seek to renew the lease.
This also caused difficulties for commercial tenants. In an attempt to get around the possibility of tenants acquiring renewal rights, landlords often granted short term leases, usually restricted to a period of four years and nine months only.
The intention of the new legislation is to ease the situation of the commercial tenant who might wish to take a lease and whose landlord might previously have been unwilling to grant a lease for a term which would trigger a right to renew the lease, for fear of committing itself to having to renew the tenancy in due course. What this means for commercial landlords and tenants is that the parties can now freely enter into leases for five years or more as the landlord will be satisfied that it can obtain vacant possession at the end of the Term, if required. All commercial tenants can now opt out, provided that the tenant receives independent legal advice in relation to the renunciation and signs a waiver to this effect before the beginning of the relevant tenancy. Previously, only commercial tenants who let office accommodation were entitled to opt out.
Commercial landlords have often imposed restrictions on tenants preventing them from granting sub leases of their premises for terms of greater than four years and nine months. In such cases, the original tenant would usually be required to indemnify the landlord against loss or damage suffered by the landlord as a result of any rights of renewal arising out of such sub lease. The 2008 Act should improve the position of tenants as any proposed sub tenant can now waive its rights of renewal. This is an important development in that it will allow existing tenants more flexibility in off loading unwanted space, which will undoubtedly be of particular importance in the current economic climate.
Continuing The Relationship
The 2008 Act will be of use in particular to existing tenants under short term leases who have built up goodwill and a strong customer base at a specific location. In such cases, provided that the formalities are properly followed, the landlord and tenant will be able to enter into a fresh lease at the expiry of the existing tenancy without the risk of rights of renewal being automatically acquired by the tenant.
Whether or not all commercial landlords will now require waivers to be put in place as a condition to the grant of a lease remains to be seen, and will be largely market driven. It should be noted that currently many office lettings occur without waivers being put in place, particularly for longer term leases in excess of 10 years in length.
It is important to note that the effect of the 2008 Act is not retrospective in that waivers must be signed after the tenant has received prior independent legal advice and before the commencement of the relevant tenancy.
It has long been the view of parties to commercial leases, and indeed The Law Reform Commission, that contracting out of these rights should be permitted and the change brought about by the 2008 Act will result in a liberalisation of the market in commercial leases generally. In the current economic climate, the change brought about by the 2008 Act is important in that it allow greater flexibility in the arrangements between commercial landlords and tenants while at the same time striking a balance between landlord and tenant’s rights by ensuring that the tenants cannot sign away the protections afforded to them by the Landlord and Tenant Acts without first having obtained independent legal advice in the matter.