Ending a Commercial Lease
Contrary to some peoples belief a Commercial lease (i.e. one used for business purposes) does not automatically come to an end simply because the original term of the lease has expired. Instead it continues as of right, with the Tenant being described as ‘holding over’.
In many instances the landlord and tenants can negotiate successfully to terminate the Lease, often without the need for formal procedures. However the parties must be aware of their legal obligations, particularly where the annual rent is very high and even a day’s extra rent can be costly. This page briefly describes the law behind termination, and some the procedures laid down in the Landlord and Tenant Act 1954.
Below are some examples of how ending a commercial lease can cause an issue:-
1) Where the Tenants wishes to leave at the end, or after the end the last day of the Lease
Firstly the Tenant may leave at the end date of the Term of the Lease. If the Property is entirely vacant at this point then the lease will end. The Tenant much however ensure that everything, including stock and chattel is removed and the property put back into a state of repair as defined in the lease.
Secondly if the Tenants wants to leave once they have stayed beyond the end date of the lease, they must serve what is known as a section 27 notice. This gives the Landlord at least 3 months notice of their intention to leave the property. There was a time when the notice had to expire on a quarter day (which meant that in some cases almost 6 months notice had to be give) though this was changed by the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003 which came into force on 1st June 2004 – this provided that the 3 months notice can expire at any time (but not before expiry of the fixed term)
2) Where the Tenant wishes to stay at the end of a Contractual term but the Landlord wishes to take his property back.
Either the tenant can serve a notice on the landlord specifying a date for the commencement of a new tenancy (known as a section 26 notice “26”), or the Landlord can serve a notice specifying a refusal of a new tenancy (known as a section 25 notice “25”). Each notice much expire not more than 12 months nor less than 6 months after the date of service of. In the 26 notice the tenant will request the landlord grant it a new lease – the notice must set out the terms that the tenant proposes for the new lease.
If the landlord wishes to oppose the grant of a new lease then it must serve on the tenant a counter notice within two months of the 26 notice. The counter notice must state upon which grounds the landlord would object to the grant of a new tenancy. (a 25 notice served by the Landlord must also state these grounds) There are only certain specific grounds upon which the landlord can object to a new lease. The exact wording of these grounds are set out in Section 30(1) of Landlord and Tenant Act 1954 and are reproduced in full in the body of the Section 26 request. In summary they are –
| (a) | The tenant has failed to comply with his repairing obligations under the present lease. |
| (b) | The tenant has been persistently late in paying rent, which has become due. |
| (c) | There is some other substantial breach by the tenant of the terms of the existing lease |
| (d) | That the landlord is willing to provide suitable alterative premises |
| (e) | The current lease is a sublease of part and the landlord would be able to obtain a better rent for the letting the whole building as one rather than the sum of the parts |
| (f) | The landlord intends to demolish or reconstruct the premises in such a way that it could not be done with the tenant in occupation. |
| (g) | The landlord intends to occupy the premises for his own business, or as his residence. |
If the landlord relies on grounds (e) (f) or (g) then he will have to pay the tenant compensation if he is successful in opposing the grant of a new lease. There is no particular form of counter-notice prescribed by legislation – though it is essential that it specifies those grounds that the landlord intends to rely on – the landlord cannot later rely on grounds that are not specified.
This is a brief discussion on the law of terminating Commercial tenancies. If you have any questions or require our assistance with your Commercial Lease please give our commercial property lawyer, Matthew Jones a call on 01772 424999
