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Landlord and Tenant Act 1954 - Renewal leases in light of the pandemic

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Broadly speaking, commercial tenants who occupy commercial premises for the purposes of carrying on their business benefit from ‘security of tenure’ under the Landlord and Tenant Act 1954. Provided the relevant provisions of the 1954 Act have not been excluded, such tenants are entitled to remain in occupation of the property at the end of the contractual fixed term and apply to court for the grant of a new lease of their premises. .

Either party can initiate the renewal process: a landlord can serve a section 25 notice proposing the terms of the new lease on the tenant; or a tenant can request a new lease by serving a section 26 notice on the landlord. The landlord and the tenant are free to negotiate and agree whatever terms they wish to be included in the new lease. If they can’t agree, the Court can decide the rent, length of new lease and other terms. The Court’s starting point will be that the new lease is to largely reflect the terms of the expiring lease, and the rent payable will be the market rent.

There are a range of statutory grounds on which a landlord can oppose a tenant’s request for a new lease. If a landlord wishes to oppose a tenant’s request, they must serve a counter-notice setting out the ground(s) which they rely on within two months of the tenant serving a section 26 notice. If the landlord successfully argues a ground opposing the renewal lease which is not the tenant’s fault e.g. the landlord wishes to redevelop the premises or occupy the premises themselves, compensation may be payable to the tenant based on the rateable value of the property

One of the statutory grounds is ‘Ground B’ – a landlord can oppose a lease renewal if they can establish that "the tenant ought not to be granted a new tenancy in view of his persistent delay in paying rent that has become due." Covid-19 and lockdown has led to many tenants falling into rent arrears and those tenants may initially be put off from requesting a renewal lease in current times, for fear of the landlord opposing their request on the basis of Ground B.

There are however tactical considerations for both parties to bear in mind before serving the relevant notice to kick-start the renewal procedure. Two factors of particular relevance in the current climate are market rent and pandemic arrears.

Market Rent

If the market conditions are such that the rental value of the premises has dipped so that the rent payable under a renewal lease may be assessed to be lower than that which the tenant is currently paying, it is in the tenant’s interest to serve a section 26 notice sooner rather than later, in order to fix the rent payable under a renewal lease as soon as possible. Conversely, a landlord would usually be well advised not to serve a section 25 notice proposing a new lease to a tenant unless they have received valuation advice that the market rent would be the same, or higher, than the current rent payable by the tenant.

Pandemic arrears

In Spring last year, emergency measures legislation including the Coronavirus Act 2020 came into force which imposes certain restrictions on landlords (for example restricting the landlord’s ability to forfeit a lease for non-payment of rent and also increasing the minimum net unpaid rent that must be outstanding before a landlord can pursue the Commercial Rent Arrears Recovery procedure). The legislation provides that, for the purposes of deciding whether a landlord can rely on Ground B to oppose a lease renewal, any failure of a tenant to pay rent during the “relevant period” is ignored. The “relevant period” began on 26 March 2020 and is, at the time of writing, set to expire on 30 June 2021. A landlord cannot use the fact that a tenant has failed to pay rent during this period to oppose a renewal lease; which provides protection for tenants who have only recently fallen into arrears, perhaps only because of the pandemic.

Following the widespread roll-out of vaccines and the glimpse of what we all hope is some light at the end of the pandemic tunnel, the Government is consulting on how the temporary restrictions on landlords will be lifted or phased out. The “relevant period” and protection for tenants have been extended on a couple of occasions over the past year but inevitably, they will at some point be brought to end.

If Government’s consultation results in the “relevant period” being extended past the end of June 2021, and a tenant believes Ground B would be the only ground upon which their landlord could oppose a renewal lease (if the temporary restrictions were not in force), it is likely to be a good opportunity to request a renewal lease, safe in the knowledge that a landlord cannot oppose a renewal lease on the basis of the tenant’s failure to pay rent during the then extended “relevant period”. It could well be a narrow opportunity for tenants to do so before the measures are fully lifted.

This blog does not constitute legal advice. If you would like advice on the issues mentioned, please contact a member of our team on 02476 991719.

Author: Bethan Blackburn

4 June 2021