In many modern commercial leases governed by the Landlord and Tenant Act 1954, tenants typically have the right to renew their lease at the end of its term, unless the landlord can validly object on specific grounds. This right is crucial for business continuity and provides the tenant with a valuable asset that can be assigned value.
To terminate a lease under the Landlord and Tenant Act 1954, the landlord must serve a Section 25 notice. If the lease’s fixed term expires without termination, it automatically continues under the existing terms.
Often, landlords may seek to negotiate new terms and rent, prompting them to terminate the lease by serving a Section 25 notice to the tenant, unless a break clause is applicable.
What is a Section 25 notice?
A Section 25 notice can be issued in two forms:
- A “friendly” notice terminates the existing lease but expresses the landlord’s willingness to enter into a new lease, outlining the terms the landlord is willing to accept.
- A “hostile” notice terminates the existing lease and opposes the grant of a new lease based on specific grounds permitted by law.
Regardless of the type, a Section 25 notice must provide a notice period of at least six months and up to a maximum of 12 months. When a lease is nearing its end, these timelines are crucial for determining when to serve the Section 25 notice to align with the lease’s expiration date.
How is a Section 25 notice served?
It’s crucial to review the lease terms, as they typically specify the correct method for serving notices. Failure to comply with these requirements could render the notice defective.
In cases where there is no lease or the lease does not specify the service method, Section 196 of the Law of Property Act 1925 usually applies. Notices can be served either by hand (personal delivery) or by recorded post.
How can a landlord object to a new lease?
A landlord can object to a new lease based on seven grounds, two of which are mandatory.
The mandatory grounds are:
- Demonstrating an intention to demolish or reconstruct the property.
- Intending to occupy the premises themselves.
The remaining five grounds are discretionary, meaning the court has the authority to decide whether to grant a new lease even if these grounds are proven. The discretionary grounds include:
- Breach of a repairing covenant.
- Persistent delay in paying rent.
- Breaches of other obligations.
- Availability of alternative accommodation.
- Demonstrating that, with a sub-tenant in place, the landlord could lease the entire premises for more than its divided parts.
In some cases where these grounds are proven, the tenant may also be entitled to compensation.
What happens after the Section 25 notice is served?
Upon receiving the Section 25 notice, negotiations typically commence between the landlord and the tenant. These negotiations focus on either agreeing on the terms of a new lease or addressing the grounds for the landlord’s objection to a new tenancy and assessing the validity of those grounds.
For the tenant, it is crucial to take note of the deadline specified in the Section 25 notice, as the consequences of missing this deadline can be significant.
By the deadline stated in the Section 25 notice, the tenant must:
- Reach an agreement with the landlord and finalise a new lease.
- Obtain written consent from the landlord to extend the notice deadline.
- Initiate court proceedings requesting a new lease and a decision on its terms.
Failure to take any of these steps will result in the tenant forfeiting the right to occupy the premises and losing the entitlement to a new lease.
Both the landlord and the tenant have the option to commence legal proceedings earlier than the standard six-month period (but not sooner than two months from the date of the section 25 notice) to seek a determination on whether a new lease will be granted and the terms thereof. While this option is not commonly used in practice, it can be valuable when time is of the essence and prompt decision-making is required.
Conclusion
Landlords should be mindful of their rights to terminate a lease upon its expiration and to engage in negotiations for a new rent or oppose its renewal.
In numerous instances, leases will continue indefinitely until a Section 25 notice is formally issued. It is imperative that the Section 25 notice is meticulously drafted and served correctly. Tenants should also take note of the deadlines specified in the notice and promptly take action to safeguard their interests.
