Business leases: Your legal rights as a tenant

As a London business, your relationship with your landlord is one of the most important in your professional life, whether they're a private individual or a corporate investor.

Whether you rarely speak directly to your landlord, or they occupy the same building as your business, constructive communication and clarity over the terms of your lease is the best way to drive success during your tenancy.

In this blog, we explain how the Landlord and Tenant Act 1954 sets the terms for this crucial relationship and protects your lease as a business tenant.

Is the lease inside or outside the Landlord and Tenant Act 1954?

As with any business contract, you should thoroughly review the terms of your commercial lease before you sign on the dotted line.

The key thing to look out for is whether your landlord can ask you to move out, or whether you have a legal right to remain. That's dictated by whether your lease falls inside or outside the Landlord and Tenant Act 1954 (from now on, referred to as "the Act").

Essentially, if your lease is outside the scope of the Act, your landlord is free to evict you when your contract comes to an end.

If the Act protects your lease, you have the right to renew your lease on the same or similar terms and, if you do have to give it up, you may be entitled to compensation. However, even if your lease is protected, the landlord does still have legal grounds to challenge your right to renew.

As you can see, it's complicated, and there are a few legal grey areas that could affect your lease. This blog is not a substitute for legal advice. If you're uncertain, seek advice from a legal professional.

Does the Act apply to my lease?

The Act applies to your lease if:

• There is a written or verbal tenancy agreement on the property: This doesn't include premises occupied for less than six months, a tenancy at will (where you occupy the premises indefinitely with the landlord's consent), or a property licence.

• A business tenant occupies the premises: This is a broad definition and can include premises used simply for storage. If sublet, the subtenant's lease is protected.

The Act does not apply to your lease if:

• Your tenancy comes with exceptions: Most importantly, if your lease is "contracted out" of the Act (more on this below).

Renewing a lease: When the landlord isn't opposing the grant of a new lease

If the Act applies to your lease, and the landlord does not oppose, you have the right to renew at the end of your contract.

Before renewing:

• your landlord must serve a section 25 notice, or

• you must serve a section 26 notice

This notice will have an expiry date, before which you must agree to an extension and sign a new written lease with your landlord. This agreement must be in writing, not simply verbal.

If you aren't able to sign a written lease, you must apply to the court for a new lease before the deadline. If you miss the deadline, you'll lose your rights and will officially be a trespasser. This might sound intimidating, but the good news is that most applications to court do result in a new lease being agreed.

If you and your landlord can't agree on terms, the court will dictate them – including the rent and length of the lease. It will use a special set of rules to establish the market rent. This means your rent could go either up or down.

In London, the First-Tier (Property) Tribunal deals with cases relating to leases on business premises. Typically, this process should take no more than three months.

Renewing a lease: When the landlord opposes the grant of a new lease

As mentioned above, your landlord can oppose a new lease being granted to your business on a number of very specific grounds, which can be "fault" or "no fault".

"Fault" grounds include:

• Ground A: Breaking your repairing obligations

• Ground B: Persistently paying your rent late

• Ground C: Breaking the terms of your lease in any way

"No fault" grounds include:

• Ground D: The landlord can provide you with other suitable premises

• Ground E: Your tenancy was created by a partial subletting and the landlord now wants to let or dispose of the whole property

• Ground F: The landlord intends to redevelop the property – this is the most common ground

• Ground G: The landlord intends to use the property themselves as a business or residence – this only applies if they've owned the property for at least five years

To oppose your new lease, the landlord must serve a section 25 notice saying that they oppose the renewal.

If you've served a section 26 notice, your landlord has two months to serve a "counter notice" specifying any of the grounds listed above. As above, if you don't apply to the court before the deadline, you'll lose your rights. The landlord can also start the court process themselves.

During the case, both you and the landlord will present your evidence to the court. The court will then decide whether you have the right to remain.

Possible scenarios and outcomes

• If your landlord loses, a later hearing will decide the terms of the new lease.

• If your landlord wins on a "fault" ground, they don't have to pay you any compensation.

• If the landlord wins on a "no fault" ground, they do have to pay you compensation. This should be equal to the rateable value of the property. If you've occupied the premises for more than 14 years, your compensation is doubled.

• Finally, if the landlord serves a "no fault" notice and you simply vacate the premises, you're entitled to immediate compensation without having to go through a court case. In this situation, it's best to get an agreement in writing first.

"Contracting out" of the Act

Contracting out is where, before you enter into a lease, you and your landlord agree to exclude the statutory rights that the Act would otherwise guarantee you. That means you would lose your automatic right to renew your lease at the end of your contract and will have to leave the premises, unless you agree a new lease in writing.

You must sign a statutory declaration agreeing to a lease outside the Act, usually in the presence of an independent solicitor. Be aware that the solicitor is only there to check that you're completing the forms correctly, not to offer your legal advice. You should seek independent legal advice before entering into such an agreement.

What it means if your lease is outside the Act or "contracted out"

If your commercial lease is outside the Act or "contracted out", your landlord can do as they please once the lease has expired. You'll officially become a trespasser and, if you don't agree a new lease, the landlord can simply change the locks.

Example

A tenant in south London enters into a three-year contracted-out lease but doesn't seek legal advice on what this will mean for them. They spend £100,000 fitting out the premises and, after three years, the landlord suddenly decides to increase the rent by 50%.

Because the lease is contracted out, the tenant has no legal grounds to challenge the rent increase or recover any costs from the fit-out if they choose to leave.

That is, of course, a worst-case scenario. As long as you take the time to understand the terms of your lease agreement and seek legal advice, you can have a relationship with your landlord that benefits you both.

Key takeaways

• Make sure you understand the implications and consequences of whether your lease is inside or outside the scope of the Act, so you know your rights when the lease expires.

• If you receive a section 25 notice, seek immediate legal advice and don't miss your deadline.

• Always seek legal advice on your tenancy agreement.

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Disclaimer: This information is meant as a starting point only. While we've made all reasonable efforts, we make no warranties that the information is accurate and up-to-date and we won't be responsible for any errors or omissions in the information or any consequences of any errors or omissions. You should seek professional advice where appropriate.