So far in this series of notes, we have looked at when the Landlord and Tenant Act 1954 (“the Act”) applies, how to contract out of this protection and how to identify the relevant parties when renewing or terminating a protected lease. This note looks at the process to be followed when the parties wish to renew the lease.
Renewal initiated by the landlord (s25)
If the landlord is happy for the tenant to continue in occupation but would like this to be under the terms of a new tenancy, he must serve a section 25 notice on the tenant. This notice must be in the prescribed form and must state the date on which the landlord wants the existing lease to end. It must be served not more than 12 months nor less than 6 months before the end date specified in the notice.
The notice must set out the landlord’s proposals in respect of the property to be comprised in the new lease, the proposed rent and the other terms of the tenancy, though there is no requirement that the duration of the new tenancy be specified. Note that neither the landlord nor tenant is bound by the proposals given in this notice: they are simply intended to provide a starting point.
The tenant is not required to give any kind of a response to the notice. He may, in fact, be intending to move out at the end of the term, but if the contractual termination date has not yet been reached he is not required to give the landlord any notice of this. He is also free to just leave on the date specified in the notice. However, if the tenant does want a new lease he will need to negotiate this with the landlord. If negotiations have not been concluded by the specified termination date the parties will need to either agree an extension of time for negotiations or make an application to the court, otherwise the tenant loses his right to a new lease.
Note that it is possible for a single section 25 notice to relate to more than one tenancy. It is also possible for a landlord to serve section 25 notices on both a tenant and a subtenant simultaneously: where the landlord would only have been the competent landlord in respect of the subtenant if notice was served on the tenant first it will be presumed that the notices were served in the correct order to achieve this result.
Renewal initiated by the tenant (s26)
Where the tenant wishes to request a new tenancy he must serve a section 26 notice on the landlord. The section 26 notice must state the date upon which the tenant wants the new lease to start and it must be served not more than 12 months nor less than 6 months before the start date given in the notice. As with the landlord’s section 25 notice, the tenant must set out his proposals for the new lease, though again the parties are not bound by these. The tenant doesn’t even have to have a genuine intention to take a new lease for his notice to be valid, though he may suffer cost penalties if he proceeds with a claim and then decides he doesn’t want a lease.
If the landlord is happy to grant a new tenancy he does not need to do anything. However, if he opposes renewal on one of the statutory grounds he must serve a counter notice within two months of the section 26 notice. This counter notice must specify which of the grounds for termination the landlord is relying on (there will more on this in the next note).
If no counter-notice has been sent to the tenant within a two month period, the landlord cannot oppose the grant of a new lease. However, the terms remain open to negotiation. If the new lease is not agreed by the specified start date then the parties must either agree an extension of time or one of them must make an application to court for the grant of a new lease before this date. If a notice opposing the grant of a new tenancy is served on the tenant and the tenant is not willing to give up occupation he can still make an application to the court for the grant of a new lease.
Terms of the new lease
In an unopposed renewal the landlord and tenant should attempt to agree the heads of terms for the new lease as soon as possible. The sooner this is done, the more quickly a draft lease can be prepared and the lease terms can be agreed. The draft lease should ideally have been prepared and circulated prior to the date specified in the notice. When negotiating the new terms the parties should be aware of the powers of the court as there is little to be gained from taking a particular stance when the court would never order this.
If the landlord and tenant are able to agree all the terms without court proceedings the current tenancy will simply come to an end when the new lease is completed, provided that the new lease is of the entire holding or the holding and other land. If a new lease is entered into by agreement, the parties should enter into a written agreement that each will be liable for its own costs in respect of the discontinuance of any court proceedings that have been started and that no interim rent application will be made.
The tenant is only entitled to a new lease of the “holding”. Where the tenant is in occupation of the whole of the demised premises it is easy to agree this. However, where the tenant is in occupation of a part only there may be some dispute as to the tenant’s entitlement. Evidence may be required in order to establish exactly what is included and, if this can’t be agreed, the court will ultimately make the decision. Note that if the tenant regains possession of a part of the property between service of the notice and the date of the hearing (eg because a sub-tenancy has come to an end) he is entitled to a new tenancy that includes the regained part. Whilst the tenant is only entitled to a lease of the holding, the landlord can require that he takes a lease of the whole property demised in the original lease.
There is also one situation where it may be ordered that the tenant takes a lease of something less than the holding: if the landlord was objecting to a new lease on the redevelopment ground the tenant may offer or agree to take a lease of something less than the whole if that part is “economically separable” and is not required by the landlord for his redevelopment works.
All rights that are enjoyed by the tenant under the current tenancy “in connection with the holding” are included in the new tenancy, except as otherwise agreed or determined by the court. The court does have some discretion to vary the right, to accommodate changed circumstances (for example re-routing of services or rights of way), but not to take away rights the tenant needs. The court will only order the inclusion of rights that are still subsisting: so an option to acquire the freehold in the original lease that was exercisable by notice given a specified period before the end of the term will not be included in the new lease. The court also has a discretion to include additional rights where it considers this appropriate.
The amount of rent payable is likely to be the greatest source of disagreement between the parties and specialist valuation advice will usually be essential.
If the parties cannot agree the rent and it falls to be determined by the court, it will be determined based on an open market rent, having regard to all the other terms of the tenancy. However, in assessing the rent the court is obliged to disregard certain factors which would be likely to inflate it, including the fact that the tenant is already in occupation, any goodwill attached to the premises due to the tenant’s business and any improvements made voluntarily by the tenant (within the previous 21 years).
In appropriate circumstances the court may fix the rent by reference to a percentage of turnover. In cases where there is a split reversion the court may include terms apportioning the rent. The court additionally has the power to require that guarantors are provided.
The court can insert a rent review clause into the new lease, regardless of whether the original lease contained one. The frequency and type of review is at the discretion of the court, which may be persuaded to make it a true market review (with downwards as well as upwards revisions), particularly where the current lease has no rent review. When negotiating the terms of the rent review a tenant should ensure that improvements carried out under a previous lease are identified and included in the disregards otherwise the grant of the renewal lease will crystallise the demised premises in their current form and these improvements will be rentalised (even though they are expressly not taken into account when fixing the initial rent under the new lease).
The length of term
The parties can usually agree on the term of the lease: unless the term required by the tenant is abnormally short or abnormally long a landlord will often be happy with a tenant's proposal.
However, where the parties are unable to agree the court has the discretion to grant any reasonable term up to a maximum of 15 years. The court will take into account the length of the original lease, the length requested by the tenant, any hardship that would be caused to either party, current open market practices and the landlord’s future proposals for the property. The court will usually grant a short term lease if this is what the tenant wants, as the purpose of the Act is to protect the tenant’s security, not the landlord’s investment; however, it will ensure that the landlord has sufficient time to look for a replacement tenant.
The court has the power to order to the inclusion of a break clause and may well do so where the landlord has redevelopment plans but is currently unable to make out ground (f) (see our next note in the series for more on this). The purpose of the Act is to protect the tenant’s interest but not to prevent the landlord’s genuine plans for redevelopment.
Starting point: As a general guide the tenant is entitled to a lease on the existing terms, though it is open to either party to contend for a departure from those terms. The burden of persuading the court to impose a change against the will of either party rests with the party proposing the change and any change must be fair and reasonable and take into account the relatively weak negotiating position of a sitting tenant. The court will also take into account any changes required to reflect the fact that the new tenancy is much shorter than the current tenancy (for example, liability for structural repairs). There is no reason why the court cannot take into account changes in the market norm, regardless of which party these act in the favour of; often updating will be in the interests of both parties and an opportunity to improve the lease shouldn't be missed just to retain identical terms. For example, it is becoming more common to include provisions that deal with what will happen if the property is damaged by an uninsured risk or to include an obligation on the landlord to procure (and on the tenant to pay for) insurance against terrorist risks. If the current lease lacks these provisions they could be included.
Changes in the law: Any changes will generally be permissible (if not agreed) to the extent that they reflect changes in the law. For example, where the original lease was granted before the Landlord and Tenant (Covenants) Act 1995, meaning that the original tenant would remain bound throughout the term through privity of contract, the court will usually accept that the alienation covenant should be updated to balance the effect of this. The exact wording will depend on how strict the obligations were in the original lease.
Service charge: Landlords, particularly those with a lot of properties, will often want to modernise service charge provisions and bring them into line with the provisions in their other leases. Tenants will generally resist any attempt to change the service charge provisions as they will often make the tenant liable for more than he is currently. This is a matter for negotiation between the parties and may result in some give and take in respect of other terms.
Reinstatement and yield up: Many landlords forget to deal with reinstatement of pre-existing alterations, meaning that the alterations simply form a part of the demise and the tenant cannot be required to reinstate them. A landlord who wants these alterations to be reinstated at the end of the lease needs to ensure that this is set out in the lease. However, a tenant shouldn’t just accept a blanket obligation to reinstate all alterations carried out since the original lease was granted, as licences may have been drafted so that reinstatement of specified alterations wasn’t required.
Title obligations: A tenant will want to argue that the tenant's obligation to comply with title matters be limited to those matters on the title when the original lease was granted. The reality is that the tenant will be bound by all title matters, regardless of what the lease says; however, the tenant does not want an additional obligation under which the landlord can sue for breach of such matters. Depending on the significance of any new title matters it may be that no further wording is required. However if there are any matters which may have an adverse effect on the tenant’s business the tenant may ask that the landlord provides an indemnity in respect of any claims that may be brought (for example where the client's business includes the sale of DVDs and a restrictive covenant has been entered into in the meantime that prevents the landlord from granting any new leases which permit the sale of DVDs).
Subtenancies: Where current lease is relatively long, it may permit the grant of protected sub-tenancies. However, if the new lease will be granted for a much shorter term the landlord will probably insist that all subtenancies are contacted out. If the tenant has already granted a protected sub-tenancy the lease will need to contain an express carve out for this otherwise there will be a breach as soon as the new lease is granted.