Unopposed Lease Renewals in a Covid Market

Our team: Kirsty Smith

Landlord and Tenant Act 1954 (“the Act”)

A tenant under a business lease will have a statutory right to a lease renewal (provided that certain qualifying criteria are met and the lease has not been contracted out of the Act).

A tenant who wants to terminate its current lease and put forward proposals for a new lease must serve a section 26 request on the landlord. The tenant must send notice between 6 and 12 months before it wants the new tenancy to start and the new start date must be after the initial lease has expired. A landlord who wants to terminate the current lease and put forward proposals for a new lease must serve either a section 25 notice on the tenant, or a counter-notice within two months’ of service of a tenant’s section 26 request.

If the parties cannot then agree the terms of the renewal lease, either party may make an application to court, requesting that the court determines the terms of the lease.

The Court and Covid Considerations

One key issue for the court will be how to assess the rent payable under the new tenancy.

The starting point is for the court to determine the rent which the property might reasonably be expected to be let for in the market by a willing lessor and lessee, broadly 3 months from the date of the hearing. Valuers usually assess the rent based on comparable transactions for similar properties in the current market.

How then will the court approach this when the market is so uncertain and there aren’t any comparables available, particularly in retail and hospitality where businesses have been closed? How the court will determine the terms of the new lease in such an unprecedented, Covid market, remains to be seen, however we anticipate that the court may either:

  • Adjourn the claim – we don’t expect this to be an attractive option as there is no certainty that the adjournment will allow sufficient time for the market to recover and Judges are expected to do the best that they can with the evidence currently available.
  • Assess the rent on the basis of an initially low, discounted, rent, with a rent review provision to take effect in, for example, 1 year. The Court has the power to insert a rent review clause in the renewal lease.
  • A valuer may consider terms which are being reached in current negotiations. For example, retailers are increasingly seeking to negotiate turnover rents. The Court may rely on this evidence as the rent at which the property might reasonably be expected to be let in the open market.

Landlord and Tenant Covid ConsiderationsFAQs

I am a landlord and my tenant has served a Section 26 request. What are my tactical considerations?

From a landlord’s point of view, a tenant initiating renewal, rather than leaving at the end of the contractual term, may be a welcome alternative, even if the assessment of rent under the renewal lease is reduced to “covid levels”, reducing the income stream for the property.

A landlord will have to weigh up whether it is beneficial to seek to push out any possible renewal hearing date as far as possible, in the hope that rental levels will have recovered by the time the assessment of rent is carried out, or whether it wants to conclude the renewal as soon as possible, so that the tenant is tied in for a further term.

I am a tenant. Should I initiate renewal now?

From a tenant’s point of view, provided that the premises are still required, it may be beneficial to serve a Section 26 request initiating renewal and to then push ahead with the renewal proceedings quickly, so that the assessment of rent is during the pandemic, potentially leading to a reduction in the rent payable under the renewal lease.

If proceedings are issued then there is a chance that they may be transferred to the First Tier Tribunal (Property Chamber), under which the court timetable for business lease renewals is much shorter and may be dealt with much quicker.

I am a landlord and my tenant has not served a Section 26 request. Should I initiate the renewal?

In a rapidly falling market, landlords who were considering initiating the renewal themselves, but have not yet served a Section 25 notice, may want to hold off doing so, to extend the period during which the rent is payable under the existing lease.

I am a tenant and my premises have been closed due to COVID-19. Am I still entitled to a renewal lease?

A tenant is only entitled to the statutory protection of the Act (i.e. a renewal lease), if it occupies the premises for the purposes of a business. Crucially, a tenant must be in occupation of the premises (which is not defined in the Act but implies physical presence and control) for business purposes on the contractual expiry date of the lease. If it is not, the tenancy will come to an end on that date and the tenant will have no right to stay in the premises.

Provided that the tenant has been in occupation up to the time when COVID-19 became a concern, it is likely that the occupation requirement will be met.

I am a landlord. My tenant has not paid the last quarter’s rent. Can I oppose the renewal?

A landlord can oppose the tenant’s statutory right to a lease renewal on any of the grounds set out in Section 30(1) of the Act, one of which is that the tenant ought not to be granted a new tenancy in view of its persistent delay in paying rent that has become due.

However, under the new Coronavirus Act 2020, for the purpose of determining whether this ground is established, any failure to pay rent under the tenancy during the relevant period (26 March 2020 to 30 September 2020) is to be disregarded. A tenant’s failure to pay rent during the relevant period will therefore not be a sufficient ground to oppose renewal.

I am a tenant. I issued lease renewal proceedings prior to the pandemic but I have reviewed my portfolio and I no longer want a new lease. What can I do?  

The court proceedings can be discontinued at any point. However, unless the court orders otherwise or the parties agree to pay their own costs, the discontinuing party will be liable for the other party’s costs up to the date on which notice of discontinuance was served.

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