Goodman Derrick LLP’s Tristan Wark and Rosie Davies offer advice on lease renewal.

 

WH Smith recently hit the headlines for seeking to pay rent in arrears rather than in advance in order to help with cashflow. While the high street continues to witness tough trading conditions, other retail businesses may be keen to follow the leading stationer’s example by seeking to negotiate similar deals with their own landlords when their leases come up for renewal.

Tenants could be forgiven for thinking that a lease renewal is a simple procedure. It can be much more complex than you think and the consequences of getting it wrong can be serious. Being forced to relocate, perhaps on short notice, is rarely desirable. Fitout costs may have been substantial; particularly for those who offer extra services on site such as cafes and play areas. A change of location can impact repeat footfall. Moving to new premises could also affect staffing. For these and other reasons, relocating is rarely a preferred option.

Retailers also run the risk of suffering interruption if a lease renewal doesn’t go to plan. For example, earlier this year Waterstones in Camden was forced to shut for a day when its landlord locked out staff whilst renewal negotiations were ongoing; a far from ideal situation that could send loyal customers online or to a competitor.

When your lease comes up for renewal, the first course of action is to check whether the lease is protected by the Landlord and Tenant Act 1954 (1954 Act).

The 1954 Act means that (subject to satisfying certain criteria) commercial tenants have an automatic right to request a new lease when the current term ends. The landlord may be able to oppose the request, but only in limited circumstances. If terms of the renewal lease can’t be agreed with the landlord, either the landlord or tenant can apply to court to settle the terms.

If the lease isn’t protected by the 1954 Act it is a matter for the landlord’s discretion as to whether it will renew the lease and on what terms. In the current market, the landlord may find it difficult to re-let the unit and will probably be keen to avoid taking on the business rates liability. However, it is a matter of negotiating strength.

Before embarking on a renewal, professional advisers should be appointed. They will be able to determine whether your lease is protected by the 1954 Act. They will also advise on formal procedures that will need to be followed; some of which have strict time limits which must be adhered to. By not following the correct procedures, you could lose your right to renew the tenancy if your lease is protected by the 1954 Act. If the lease isn’t protected, you could be treated as a trespasser if you remain in situ after the lease has expired, leaving you in a precarious position.

You should also engage a surveyor to negotiate the best commercial terms for the renewal lease. He or she will know the market and should have an understanding of your landlord’s position.

Does the renewal lease have to contain the same terms as the previous lease?

This depends on the negotiations that take place. If the lease is protected by the 1954 Act then the default position is that it should follow the form of the previous lease as far as possible; although reasonable updating is permitted. In practice, landlords will often use this as an opportunity to include their “standard” provisions. These may not be as tenant-friendly and it is for the parties to negotiate an acceptable compromise.

Tenants can also use a renewal as an opportunity to negotiate revised terms. Plus, if the lease isn’t protected by the 1954 Act, they will have more scope to change the terms. For example, although paying rent in arrears rather than advance is uncommon, tenants can now point to WH Smith taking this position to show that things are changing.

To do checklist

• Take an honest and objective view of your business and your site before you commit to another lease.
• Start tackling the issue of renewal and engaging with the landlord early on. You could potentially complete the new lease before the existing one expires.
• Appoint a solicitor and surveyor to support and advise you on the process.
• Determine whether your lease is protected by the 1954 Act.
• Ask your solicitor to advise if there are any terms that are unduly onerous. Or, if there are any terms that could be improved in current market conditions.
• Consider whether there is anything extra you would like to add to your lease. For example, you may want to diversify by offering in-store experiences or add-on services. Consider whether these uses are permitted under your current lease.

 

 

Tristan Wark and Rosie Davies are senior associates in the property team at London law firm Goodman Derrick LLP.

Housing, Communities & Local Government’s guide to renewing and ending business leases is available online here.