In the current economic climate, landlords and tenants of commercial properties can be fearful of addressing matters at lease renewal. However, timely and open dialogue between the parties can often result in an amicable and cost effective solution for both sides.

The majority of commercial leases in England give tenants the automatic right to renew on substantially the same terms, except for rent, under the provisions of the Landlord & Tenant Act 1954. There is a strict set of circumstances under which the landlord can refuse renewal. It is also increasingly common for commercial leases to be drawn outside the ‘54 Act and it is vital that the status of the lease is clarified and understood at the earliest opportunity.

Either party is able to instigate the lease renewal process but both need to be aware of the market value of the property and understand that rents may go down as well as up. This can be difficult to reconcile with some geographic areas experiencing rental growth despite the economic downturn, while others are experiencing severe slumps, which many landlords do not reasonably account for. It pays to be well informed and it is advisable to engage a chartered surveyor around 12 months before the end of the lease.

Opening negotiations early allows each side to gain a better understanding of the other’s objectives. It is often anticipated that both parties will be at loggerheads over the terms of the lease, particularly on the issue of rent. However, Kevin White, a chartered surveyor specialising in landlord and tenant advice at Aitchison Raffety notes that “the prolonged economic downturn has had something of a polarising effect on lease renewal negotiations. In certain circumstances the process is getting more complicated and litigious as landlords’ and tenants’ budgets are stretched. But there is a much more widespread shift to the other end of the spectrum. The squeeze on finances is a problem for landlords just as much as tenants.”

Increasingly the aspirations of both landlords and tenants are aligning. For example, few landlords want to have an empty property on their hands with the risk of re-letting in a distressed market and may be willing to reduce rents below market levels in return for a commitment from the incumbent tenant. In addition, tenants seeking flexibility in their leases through break clauses may find landlords amenable in return for the tenant forgoing their rights to renew on the new lease, a process called “contracting out”.

There are a substantial number of options available to each side at lease renewal and usually it suits both sides to be flexible in reaching a solution. “It is an opportunity for landlords and tenants to ensure their property is really working for them, and it is important to address lease renewal in a timely and knowledgeable fashion” says Kevin White.

For professional and impartial advice on lease renewal or any commercial property matter, contact your local Aitchison Raffety Office or via the web at www.argroup.co.uk

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