How to do a lease renewal – part 1

It ought to be straightforward to explain how to do a lease renewal, but there are so many permutations that it is not.

The title of this series implies that the existing lease would be renewed, but whether it has to or should be depends. It does not have to where (a) the occupancy is not a qualifying tenancy within the meaning of the Landlord and Tenant Act 1954 Part II (“LTA54”), or (b) the existing lease excludes LTA54 sections 24-28 – known as “outside the Act”. It would depend upon (c) whether the landlord wants to renew when the existing lease is outside the Act or (d) whether the landlord wants to oppose the renewal where the existing lease is inside the Act. 

Unlike a rent review, where, in my experience, it is rare for the client’s solicitor to be involved – unless the client has instructed the solicitor to begin with – a renewal requires a solicitor. Who should have conduct of the matter depends upon the client. I like to be in charge, to begin, including serving or giving notice. After that, the client’s solicitor will take over and liaise with and treat me as the client for matters arising so that the client does not have to be involved in everything. (Otherwise, the solicitor would ask the client for instructions; the client contacts me for advice and then instructs the solicitor.) The solicitor or someone in the same firm should be a litigation solicitor, failing which the client would have to instruct another firm to ‘go to court.’ Although the LTA54 requires a minimum of 6 months’ notice to end the existing lease on or after the contractual term expiry, six months, particularly in an unstable market, is often not long enough to reach an agreement and complete the renewal lease. At any time before the notice end date, the tenant or the landlord could issue proceedings. Although the tenant can request an extension to the notice end date, the landlord is not obliged to agree, so a refusal would require the tenant to issue a claim to protect renewal rights, which triggers the court case management proceedings.

Where the existing lease is outside LTA54, the tenant has no legal right to remain in occupation on the expiry of the contractual term. Where the tenant wants to renew, the landlord can dictate terms. If the tenant remains in occupation, it would be a tenancy at will only while the parties negotiate a new lease. If they do not, then after a year, the occupancy becomes a periodic tenancy, and the tenant can claim LTA 54 rights. 

There are three ways to renew a lease. 1) by agreement, 2) by restructuring the existing lease, and 3) by involving LTA54 procedures. An agreement requires the parties to cooperate because there is no means of resolving disputes. Restructuring, also by agreement, is generally a few years before expiry but can be done when a lease is granted. For example, in a rent review that I dealt with during the 1980s and subsequently, two leases, both containing rent reviews at five-yearly intervals, had been granted on the same date during the 1970s: the first one for 20 years with an option to renew, the second for 20 years from the expiry of the contractual term of the first lease. Restructuring is either the surrender of the existing lease and a simultaneous grant of a new lease or a reversionary lease supplementary to or by reference to the existing lease. The principal advantages of an agreement are to avoid the necessity to involve the court and litigation costs, to maintain an amicable landlord and tenant relationship, and to provide the tenant with certainty and the landlord security for a mortgageable or saleable asset.

Where the LTA54 procedure is involved, the statutory notices have a dual function: to end the existing tenancy and the landlord proposal or tenant request for the rent, terms, and conditions for the renewal lease or for the landlord to oppose renewal. The landlord’s notice, section 25, or the tenant’s notice, section 26, has to give a minimum of 6 months and a maximum of 12 months’ notice to end the existing tenancy. Only one notice is allowed; either the landlord or tenant can get in first. The end date does not have to be the expiration of the existing lease contractual term; it must not be before the expiration but may be at any time afterwards. Whether there would be a rent review between the term expiration and the start of the renewal lease depends upon the wording in the existing lease. Sometimes, leases have a rent review on the last day of the contractual term. 

In the past, the tenant would typically have waited for the landlord to make the first move. Nowadays, giving a s26 notice is more common, not an offer capable of acceptance, the tenant’s request at least a 50% reduction on the passing rent and a 3-6 month rent-free period.  Not always realised by landlords whose leases contain index-linked rent reviews is that the rent on renewal would be the market rent without an ‘upward-only’ cushion.

With a lease renewal, the tenant is often in a stronger position because it does not have to request an extension to the s25 or s26 notice end date but can issue a claim and delay up to 4 months before service.  Whether a ploy to pressurise landlords into conceding or a genuine attempt for the rent and the terms and conditions for the renewal lease – per sections 33, 34 and 35 LTA54 – because lawyers provide an estimate of costs for the litigation, the landlord-client can face the prospect of thousands of pounds for what the landlord considers should reasonably be resolved without the need for court proceedings.   

Michael Lever
The Rent Review Specialist