One of the many impacts of the COVID-19 crisis has been for businesses to examine their future space needs, and many are expecting those with office or retail space to downsize as more employees work from home and online orders and delivery have growing precedence.
But whilst the wider trend may be for downsizing, that is less likely to be the case within the industrial warehouse and logistics sector. There is currently a shortage of warehouse space in the United Kingdom, with the vacancy rate being around 6.5% (it was 25% in 2009). In addition, the benefits for continuance of operations make relocating an unattractive proposition. If the lease of your business premises is about to expire, or you want to extend the term of your existing lease to provide greater future certainty, it’s time to renew your lease.
Tenants could be forgiven for thinking that a lease renewal is a simple procedure. In fact, it can be much more complex than you think, and the consequences of getting it wrong can be serious.
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 the 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.
Market Trends on Lease Terms
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. How old the current lease is will affect what level of reasonable modernisation will be appropriate. In practice, landlords will often use this as an opportunity to include their “standard” provisions – which 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. For example, although paying rent in arrears rather than advance is uncommon, tenants can now following news stories on the topic earlier this year point to WH Smith taking this position to show that things are changing. Agreeing such a move could materially benefit your cash flow. The Covid-19 government lockdown has triggered a trend of prospective tenants wanting to include express provisions in their leases to deal with the rent being suspended if the premises can’t be accessed as a result of government legislation.
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.
Don’t leave it too late
Before embarking on a renewal, professional advisers should be appointed because they will be able to determine whether your lease is protected by the 1954 Act and 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. 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 to a competitor.
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 could be improved in current market conditions.
• Consider whether there is anything extra you would like to add to your lease.
Tristan Wark is a senior associate in the property team at London law firm Goodman Derrick LLP. www.gdlaw.co.uk