Commercial Lease Expiry: Contracted out leases and key tenant considerations
Broadly speaking, commercial leases can be divided into two categories: those that benefit from “security of tenure” under the Landlord and Tenant Act 1954 and those that do not. This is also commonly referred to as leases that are either “protected” or “contracted out”.
For tenants, a protected tenancy is important as it provides two key rights: (1) a statutory right to request a new lease on similar terms to the existing lease (subject to certain limited exceptions where the landlord may refuse the grant of a new lease); and (2) a right to remain in the property on expiry of the existing term.
However, during negotiations a landlord may wish to exclude this protection by contracting out, meaning that the lease will end on its contractual expiry date and the tenant will be required to return the property to the landlord unless a new lease is negotiated. Failure to do so may have a number of implications for both landlord and tenant, including, but not limited to, the tenant becoming a trespasser.
The decision to contract out may be pre-determined by reference to a superior lease, or simply because a landlord is seeking to exercise greater control over their property with a view to having the flexibility to remarket or change the property at the end of the term.
This article is the first in a series of blogs considering the position for both landlords and tenants when a protected or contracted out lease is due to expire, with this blog focusing on tenant considerations for contracted out leases.
When a contract out lease is coming towards the end of its term, it is not necessary for either landlord or tenant to give the other any form of notice relating to the expiry or non-renewal of the lease, as this is deemed to be automatic. If there is an intention to want to stay and ask for a new lease then the tenant will need to enter into negotiations with the landlord at least 6 months prior to the expiry date. Otherwise, if this is left a lot nearer to the expiry date the landlord will have an advantage with regard to the negotiations as they will be aware that their tenant may find it difficult to find alternative premises in such a short period of time in order to go through the legal process that entering a new lease entails.
If no new tenancy can be negotiated, attention needs to be turned to the lease and the tenant’s obligations on exiting and returning the property to the landlord.
Set out below is a non-exhaustive overview of the common questions that may arise for tenants when exiting a property. That being said, we recommend obtaining legal advice as early as possible before your lease term ends, in order to allow time for a full review of the lease exit obligations and to avoid any pitfalls that may have costly consequences.
- What is the required standard of repair and does this extend to any service media/structural parts of the property?
- Is the requirement to repair, renew or improve the property?
- Are the repair obligations limited by a schedule of condition?
- Does the landlord need to provide notice of its decorating requirements (i.e. specific colours and designs)?
- Are there any timing requirements for when the decorating needs to be carried out?
- Is there a requirement to replace carpet and/or other floor coverings?
- During what period after the term expires do the remedial works need to be completed by?
- Is there a requirement to indemnify the landlord against any costs incurred in preparing a schedule of dilapidations?
- Are the repairs specified in the schedule of dilapidations part of the tenant’s responsibilities pursuant to the terms of the lease?
- Can repairs be undertaken to avoid a claim by the landlord for dilapidations, or for loss of rent for the period it will be carrying out the repairs following the expiry of the term?
- Does the lease require the property to be returned to the landlord with “vacant possession” or “free from occupation or occupational arrangements”?
Land Registry Filings
- Where the lease is registerable (i.e. for a term longer than 7 years), is there a requirement to make an application to HM Land Registry to remove all entries on the landlord’s title relating to the lease?
- If a deposit was paid as collateral for your compliance with the lease, what are the landlord’s timing obligations for releasing the deposit back to you?
- Are there any circumstances in which the landlord may deduct amounts from the deposit before returning it?
- Further information about rent deposits can be found in our series of video blogs
Contact our commercial property lawyers in Brighton & Hove, Uckfield, Sevenoaks and Ashford
If you have any queries or need advice on your commercial tenancy coming to an end, please contact David Ashton e. email@example.com t. 01825 745366 in Rix & Kay’s dedicated Commercial Property Team