What to do when your lease term comes to an end

Business owners take great care in selecting business premises, considering location, facilities and of course cost. In the current economic climate, one of the most important factors for any business is to ensure that once this selection has been made; there is a degree of certainty that this occupation can continue. Equally, for landlords, maintaining full occupancy is paramount in maintaining an income stream.

However, what is the position when business leases are nearing the end of their term?

Protected leases

Some leases are protected by the Landlord and Tenant Act 1954 “the 1954 Act” which states that a business lease will automatically continue past its end date until it is brought to an end by either the landlord or tenant serving a notice and following a set procedure “security of tenure”.

Excluded leases

However, where the 1954 Act has been specifically excluded and there is no security of tenure both the tenant’s and the landlord’s position is vulnerable if a tenant’s occupation has not been regularised before the end of the term. The tenant could face losing the property on little or no notice and face unbudgeted costs for relocation to temporary and sometimes unsuitable or more expensive accommodation.

For a landlord, there will be uncertainty to whether the rental income stream can be maintained. As with most complicated and uncertain situations, it is best to avoid getting into them in the first place.

Actions

The landlord and tenant should make contact six – eight months before a lease term expires to ascertain each party’s future plans. They can then put in hand any necessary legal documentation in good time, to formalise arrangements for after the end of the term. However, some tenants may be reluctant to commit to a further term where their business market is uncertain.

Where a tenant fails to cooperate and remains in occupation after the end of the lease term but the landlord wishes to continue its relationship with them and grant a new lease, it is still prudent for the landlord to take the following action:

• Send an published letter demanding possession. In some circumstances a landlord may be entitled to claim double the current rental value from a former tenant that remains in occupation after expiry of its lease.
• Send a separate without prejudice letter indicating that the landlord is not intending to issue proceedings for possession at court for a short period to allow negotiations for a new lease to take place.
• Require the completion of a tenancy at will (an informal agreement for occupation) in the interim.
• A rent stop should be put in place so that the rent is not inadvertently demanded or collected which can sometimes strengthen a tenant’s position during lease negotiations.

If negotiations for the new lease subsequently fail, the tenancy at will can be terminated immediately without notice on the tenant. If the landlord wants to recover possession of the premises, it will be able to write to the former tenant stating that it is occupying the property as a trespasser and that the landlord requires vacant possession immediately.

If the former tenant does not give vacant possession, the landlord should issue court proceedings for possession which should include a claim for loss of rent or damages against the tenant. If the landlord has inadvertently accepted rent after the expiry of the lease, it is probable that a periodic tenancy may have arisen (although this does depend on the facts). If a periodic tenancy has been created, there is nothing that the landlord can do “to un-create” the periodic tenancy. In such a situation, the landlord may:

• Seek to negotiate and complete a new lease with the tenant.
• Let the situation continue on the current arrangement (albeit it may be less favourable to a landlord if rents have increased or its ability to recover possession has been compromised).
• Alternatively, the landlord could seek to commence proceedings to recover the premises. But in these circumstances the likely success is limited.

Conclusion

Accordingly, in order to avoid uncertainty and unbudgeted cost in an already difficult economic climate it is important that landlords and tenants keep a note of when leases are due to end and published negotiations with the other party at least 6 months in advance of the end date to ensure there is sufficient time to establish each party’s position, reach an agreement where possible and complete legal documentation to regularise any agreement going forward.

This content is correct at time of publication