Renewing a commercial lease - what can be negotiated?

If your commercial lease is up for renewal, you want to ensure you get the most favourable terms for your business. In this article, we look at the key things to negotiate when renewing a commercial lease to help you understand what terms you might be able to change. Many leases, especially older ones, have renewal rights governed by the Landlord and Tenant Act 1954 (“LTA 1954”) and the rules can be complicated and confusing.  In recent years, leases are increasingly for shorter terms and often the renewal protection of the (“LTA 1954”) has been excluded.

How do I renew a commercial lease?

If you would like to renew the lease on your commercial property, you should first check with your solicitor whether your renewal rights are protected or not. This will have a very significant effect on your ability to negotiate new terms. Commercial tenants with leases protected by the 1954 Act have the right to renew their lease and can do so by serving the relevant statutory notice to their landlord. Alternatively, when the rental term is coming to a close, your landlord may choose to serve you with notice. Either way, you must be mindful of time limits to ensure you do not lose your rights to renewal or incur unnecessary costs.

After notice has been served, you can enter into negotiations with your landlord. During the negotiation period, you may need to pay interim rent while the new lease terms are finalised.

If your renewal rights are not protected by the LTA 1954, then you will have no right to remain in the premises after the end of the term, but you may still have a liability for repairs, called “dilapidations”. 

What can I negotiate when renewing a commercial lease?

If you have had no problems during your tenancy, you may be in a strong position to negotiate more favourable lease terms.

• If your lease is protected, the landlord cannot force significant changes on you, but you cannot demand material changes either.  
• If your lease is not protected and you want to stay on in the property, both you and the landlord are free to negotiate any terms you want. 

The points below apply to either case.  You should be aware that making the general terms of the new lease more favourable (for example limits on service charge and/or repair obligations, tenant breaks) may push up the market rent. There are many possibilities available when renewing a commercial lease, including:

Reduction of rent/service charge reduction

If you are looking to renew your commercial lease, your first consideration should be to look at the current property market. There is a good chance that prices have changed since you signed your initial lease, and this could play in your favour when trying to negotiate a lower rent charge. With COVID-19 affecting businesses across the country and leaving numerous properties empty, tenants are currently negotiating their lease from a position of strength. If you feel that the rent you are paying is too high, you may wish to instruct a surveyor to determine the market value of the property. You can use this information to determine the true market value, as well as negotiate cheaper rent. Similarly, you may be able to negotiate a reduction or limitation on repair obligations and/or service charges.

Break clause

Break clauses can be a vital tool for businesses facing difficulty or uncertainty. You may choose to include a break clause in your new lease as a provision which allows either just the tenant or sometimes both parties to end the lease before the end of the full term. There will be specific conditions which must be met in order to exercise a break clause, but a solicitor can help with ensuring a break clause is exercisable when you need it most.

Duration

Typically, commercial leases last for five to 10 years, but depending on your circumstances, you may wish to negotiate a more favourable lease length. If you are on good terms with your landlord, they may be happy to agree a longer period or to be flexible around the duration of the lease.

Stamp Duty Land Tax (“SDLT”) is potentially payable on the grant of a new lease.  Whether or not it is payable and how much depends upon a combination of the annual rent and the term.  A longer term, even with a Break clause, may mean that you will be liable to pay SDLT or increase the amount you will have to pay.

If you are looking to renew a commercial lease, instructing an experienced and skilful commercial property solicitor can help you get the results you need. To contact a member of our commercial property team, call 01689 887887 or complete the enquiry form opposite and will will come back to you.