Anthony Goodfellow, a partner in the commercial property team at law firm HCR, discusses the important considerations when negotiating with a landlord at the end of a commercial lease.

 

Along with many other sectors, retail businesses are managing additional financial pressures that came into effect in April, which sees them faced with higher national insurance contributions and a national minimum wage rise. If you are a tenant of a commercial property in England or Wales and your lease is coming to an end, there may be an opportunity to negotiate with the landlord and secure a preferable deal. If this is the case, it is important to consider your options, so below are some key tips.

Be proactive

It is important to be proactive and start any negotiations with your landlord early. You should diarise the end date of your current lease and approach the landlord months before the end of the term. The earlier you engage, the better the chance of securing a good deal for a new lease.

Landlord and Tenant Act 1954

As part of any discussions to renew your lease, it is important to check whether or not your existing lease is inside or outside the Landlord and Tenant Act 1954 (the “1954 Act”). If a commercial lease is inside (or sometimes referred to as ‘protected’ by) the 1954 Act, a tenant has an automatic right to a new lease, which the landlord can only object to in certain circumstances (such as the landlord wanting to redevelop or occupy the premises itself). A tenant with a lease that is protected by the 1954 Act can trigger the renewal process by serving a Section 26 Notice. If, however, the existing lease is contracted outside of the 1954 Act, the tenant will not have a statutory right to a new lease, although a new lease can still be negotiated if both parties are willing. This is a complex area of law, so it may be prudent to seek professional advice to clarify matters.

Market intelligence

In seeking a renewal of your lease and negotiating new terms, it is important to get to know the local commercial market to check for any comparable properties and rents. This will give you an understanding of the rents and the length of lease terms for similar properties. It is often advantageous to engage with a surveyor or agent to assist with the negotiations. You may also look at other alternative sites, which may strengthen your hand when negotiating with your landlord.

Bargaining position

As part of any negotiation, the bargaining position of the parties will of course be key. As a tenant, it is important to remember that a good commercial tenant will always be of great value to a landlord. Landlords can suffer a loss in rent if a tenant vacates and they can’t find a new occupier. A landlord may also need to carry out costly works to a premises in order to be able to re-let the space, so this could put you in a strong position.

Improvements

As part of the negotiations, it may be worth considering if your current premises could benefit from any alterations or improvements, such as improved infrastructure or amenities for employees or customers. For example, retailers may want to expand or improve changing rooms or incorporate an additional offering such as a coffee bar to enhance customer experience. If you are a valued tenant, it may be that the landlord will cover the cost of carrying out improvements or allow you a rent-free period to cover any sums you incur in carrying out alterations that improve the premises.

Break option

You may also consider requesting the inclusion of a break clause in any new lease. This will again depend on the bargaining power of the parties, and, on occasions, the addition of a break clause can result in a landlord pushing for a higher rent.

Summary

As we have seen, assessing your options early and getting to know the local market could be key to increasing your bargaining power when negotiating with your landlord, which could lead to a preferential lease. Whether the existing lease is protected by the 1954 Act will also be key. We would always recommend that retailers seek professional advice to assist with the negotiations with the landlord, as this could well prove cost-effective in the long run.