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When you enter a commercial lease, you will negotiate lease terms. Agreeing on the lease terms is essential before you, as a commercial landlord or tenant, sign the lease agreement. If your lease is a protected lease, you may wish to reconsider the lease terms when it reaches the point of renewal. At this point, you can negotiate with the other party what you want to see in the lease terms of the lease renewal. This article will explain negotiating new terms during a protected commercial lease renewal.
What is a Protected Lease?
If your commercial lease has security of tenure, it is what we call a protected lease. This means it enjoys protection in law found in the Landlord and Tenant Act 1954. The Act’s protection is the legal right to automatic lease renewal once the commercial lease reaches its lease end term.
Therefore, instead of looking for a new tenant or new commercial premises, the parties to the lease can continue as they are. You will know if you have a protected lease because where you do not, the lease agreement will state this and that both parties are aware and have agreed to this.
Sometimes, a commercial landlord can refuse their tenant their automatic legal right to lease renewal. However, there are only seven legal grounds for this.
Where the commercial lease automatically renews, it must continue on the same or better lease terms by law. Therefore, before the lease renewal, a tenant and landlord should consider whether they wish to change the lease terms and negotiate accordingly.
Negotiations
When a protected commercial lease reaches the point of lease renewal, it is crucial to be aware of the process so you can negotiate new terms where you wish to.
What?
When parties to a lease negotiate the lease terms, they need to consider what they can improve. If you are a tenant and have behaved well in the commercial property, you will be in an excellent position to negotiate your new lease terms.
For example, you may want to consider:
- a rent reduction, which, if you ask a surveyor to value the commercial premises at the market value, you have a strong chance of success;
- inserting a break clause as this provides you with some comfort if you are not sure you can commit to the lease renewal;
- a variance of the lease term so that your lease renewal means a longer lease term than the current shorter one.
Informal
Ideally, when your lease is about to renew, you negotiate new lease terms informally with the other party. This is often the quickest and easiest way to agree to new lease terms.
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Chatting or writing to the other party to request and discuss this gives you room to negotiate, express your wishes and explain these.
Formal
Negotiating new lease terms informally is only sometimes possible, and if so, you must go through the statutory procedure. This procedure varies depending on which party to the lease is proposing new lease terms.
If you are the tenant wishing to propose new lease terms before lease renewal, you use a Section 26 notice. You must serve this on your landlord similarly to a Section 25 notice, so any time from 12 months before the lease term end date to 6 months from it. You can suggest the new lease terms on this. If, however, your landlord wishes to raise one of the seven legal grounds to refuse lease renewal, they must respond to you within two months of receipt of the notice.
Court Action
If you cannot agree to new lease terms that suit you both, you may need to resort to the courts for a decision. They can determine points of the lease terms, such as rent and length of the lease.
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Key Takeaways
If you are party to a protected commercial lease, it will automatically renew on the same terms once it reaches the lease term end date. This is as long as neither the commercial landlord nor the tenant wants to refuse a renewal. A landlord has only seven legal grounds to use to do so.
At the point of lease renewal, both parties have a chance to negotiate the lease terms. For example, a commercial tenant may want to agree to a lower rent rate. Ideally, you will agree on new lease terms informally. However, where you cannot, you may need to use a Section 25 or Section 26 notice. Ultimately, a court must decide new lease terms where parties to a commercial lease cannot agree.
If you need help negotiating new terms during a protected commercial lease renewal, LegalVision’s experienced leasing lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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