When negotiating a lease of commercial property, a term will be agreed between the landlord and the tenant, but the actual term of occupancy may not be the term either party envisaged.
Under the Landlord and Tenant Act 1954 a tenant who takes a lease of premises for the purpose of operating a business is afforded the right to remain in occupation at the end of the agreed term (although there are exceptions). Should the tenant not be able to agree a new lease with the landlord at the end of the agreed term, they have the right to apply to the court for a grant of a new lease. During any period of negotiation, the tenant has the right to remain in the property on the same terms as the previously agreed lease (known informally as ‘holding over’). Unless the landlord has specific grounds to regain possession of the property, for example, to redevelop the property or take occupation themselves. In certain circumstances the tenant may also be due compensation.
In practice most parties are able to negotiate a renewal lease amicably, but any disagreement could lead to a time-consuming and costly dispute.
Should both parties agree that they do not want the statutory rights of the Landlord and Tenant Act 1954 to apply, they can agree to exclude the relevant provisions of the Act (known informally as ‘contracting out’) before the lease is entered into to ensure the statutory rights do not apply. As long as the process is carried out correctly and unless the parties can agree a new lease themselves, the tenant will be required to vacate the property at the end of the agreed term.
Therefore, it is vital that both the landlord and the tenant consider the impact that statutory protection under the Landlord and Tenant Act 1954 may have on them.
For example, as the landlord you should consider any future plans you have for the property before granting a protected lease. While redevelopment is a ground for removing a tenant upon expiry of the term, it is by no means a straightforward process. By contracting out, it would provide you with peace of mind that you will be able to proceed as planned once the tenant vacates. You still have the option to grant a new lease, but on your terms.
As a tenant, you should consider any goodwill that you would acquire through use of the premises and the impact it would have on your business should you be required to vacate upon the expiry of your lease. For example, a restaurant over a ten-year period would attract significant goodwill attached to the premises which would be lost should you vacate.