Tenant considerations on expiry of a commercial lease
If your commercial lease is coming to the end of its term, you should start to think about what happens when the lease ends, as it is not as simple as just moving out and handing back the keys, writes Andrea Bailiss, Solicitor, Birketts LLP.
The following are some considerations you should think about in the lead up to the expiry of your lease.
Do you want to stay?
If your lease is contracted out of the security of tenure provisions of the Landlord and Tenant Act 1954 (the 1954 Act) then you will not be automatically entitled to a new lease of the property if you decide you want to stay.
Whether you will be entitled to stay will be down to agreement with your landlord. If you are looking to stay, you should discuss and agree this with your landlord well in advance of expiry of your current lease term.
The new term can then run straight on from expiry of the old term, providing much needed continuity for your business. If your lease is contracted out and you remain in the property following expiry of your lease term without agreeing a new lease, your occupying status will be unclear and could result in you being considered a trespasser.
If your lease does benefit from security of tenure, then you are entitled to remain in the property following expiry of the fixed lease term unless the landlord has followed the correct procedure to end the lease.
If you remain in the property following expiry of the lease, all of the terms of your expired lease will continue to apply and you must continue to pay rent. You may also choose to initiate proceedings for the grant of a new lease by following the procedure set out in the 1954 Act.
You should seek legal advice at an early stage regarding the appropriate mechanism for your circumstances.
If you are planning to enter into a new lease, consider if the lease terms are still fit for purpose and suitable for your current business needs. In light of the events of the last 16 months, it is likely that your business’s needs will be different from when you first entered your current lease and increased flexibility may benefit you given the potential for volatile and uncertain times ahead.
The types of things you might want to consider renegotiating with your landlord include:-
- The level of rent (we would recommend seeking a surveyor’s advice as to what is the current ‘market’ rent)
- The length of the term
- A Break Clause allowing you to terminate the lease earlier than the term of the lease. This can either allow you to terminate the lease on fixed break dates or, if it is a rolling break, at any point after a certain date.
- The ability to assign or underlet the property if it is no longer needed or you encounter financial difficulties.
Repair and Dilapidations
Most commercial leases will include an obligation on the tenant to return the property in a state of repair commensurate with their repair obligations under the lease (whether by reference to a schedule of condition of the property at the start of the term or to a full repairing standard).
There will also usually be an obligation to re-decorate the property in the last year of the term. If you are leaving the property and there are any wants of repair, you must ensure that these are rectified prior to returning the property to the landlord.
If they are not, then the landlord may prepare a schedule of dilapidations and you will be required to either do those works identified in the schedule yourself or compensate the landlord in respect of the costs associated with carrying out the repairs. These can often be costly and time consuming, so having early discussions on this prior to lease expiry is important.
If you carried out any alterations to the property during the term your lease may include an obligation on you to reinstate these prior to the end of the term. However, some leases give the landlord the option to specify that reinstatement is not required.
If so, discuss with the landlord whether reinstatement will be required and if not, get their written agreement that they do not require this. If you are required to reinstate the property, ensure that this is done in good time as a failure to comply with the reinstatement provisions could result in the property not being deemed to be handed back in compliance with the terms of the lease and could lead to claims such as those described above for dilapidations.
Keep a note of when your lease expires and regularly consider what you want to do on lease expiry.
Ensure you seek legal advice well in advance of the expiry of the term of the lease, especially around dilapidations.
Leave enough time to reinstate any alterations and to put the property into the standard of repair required by your lease.
You can call Andrea Bailiss on 01603 542 671 or email her at: andrea-bailiss [at] birketts.co.uk