What Are Commercial Tenants’ Rights?

Commercial tenants have certain rights. These rights are more limited than those of residential tenants, but the rights they do have offer a good degree of protection. Commercial landlords must consider these rights when leasing out premises.

Commercial tenants’ rights come under the Landlord and Tenant Act 1954.

This legislation is important for commercial leases, because it provides security of tenure and regulates how landlords can terminate commercial leases. It protects commercial tenants, ensuring that they can trade and operate in confidence.

What Protection Does the Landlord and Tenant Act Provide?

The protection given to commercial tenants under the act has two main facets:

• The commercial tenancy does not cease when a fixed term or periodic tenancy expires, but automatically continues until the landlord terminates the lease under one of the specified methods the 1954 Act requires
• When the lease does expire, the commercial tenant has the right in law to apply to the court for renewal of the lease.

Therefore, the 1954 Act offers security of tenure to commercial tenants.

However, the Act also includes certain limitations and exceptions:

•  The protection of the 1954 Act only applies to commercial tenancies

And the Act states that a commercial tenancy has to include these elements:

• There must be a tenancy
• The tenant must occupy the premises
• The purpose of this occupation must be for business carried out by the tenant

Where a premises has a business as its main purpose but this is not the sole purpose, if there is a flat above it for example, it is still comes under the Act as a commercial tenancy.

There are certain tenancies that the act excludes:

• Agricultural, mining, service and farm business leases
• Railway property, military establishments and dockyards
• Tenancies that can be terminated by either landlord or tenant at any time
• Fixed term tenancies that do not exceed six months – unless they contain provisions for extending this term, or if a tenant has been in occupation for over 12 months

The Landlord and Tenant Act 1954 gives commercial tenants security when they occupy business premises.

The landlord cannot refuse a new grant of tenancy when a fixed term expires, unless they establish a good, substantial reason for doing so.

How Does a Landlord Terminate a Commercial Lease?

The Act sets out how a landlord can terminate a commercial lease when the lease term expires.

They must issue a section 25 notice.

This is named after the relevant section in the Act. It sets out the information a landlord needs to give a tenant to end a commercial tenancy.

The landlord will need to serve a section 25 notice to the tenant when opposing a new tenancy, or if they want to grant a new tenancy but under new terms.

In situations where the landlord opposes the renewal of a commercial lease, they must serve the section 25 notice between six and 12 months before they want the present tenancy to end.

The notice must include grounds for preventing the tenancy from going past its expiration date. In other words, the landlord must have a good reason for serving the section 25 notice on the tenant.

The 1954 Act lists various statutory grounds for this, including:

• The tenant’s failure to repair the premises
• Persistent delays in paying rent
• Substantial breaches of other tenant obligations

The Act also allows grounds for serving a section 25 notice based on what the landlord wants to do to the premises, including:

• Requiring possession of it for letting or disposition purposes
• Demolition or reconstruction of the property
• The landlord intending to occupy it for their own commercial purposes
• Providing suitable alternative accommodation to the tenant

However, the landlord cannot serve a section 25 notice on a tenant if the tenant has already issued a section 26 notice first.

What is a Section 26 Notice?

Under the Landlord and Tenant Act 1954, the commercial tenant has an automatic right to renew their lease on similar terms to the old one.

The Act gives the tenant legal protection.

Therefore, if their lease agreement is coming to an end soon, the tenant can serve a section 26 notice on the landlord.

Essentially, the tenant can use this to pre-empt a landlord’s section 25 notice, requesting a new tenancy and proposing terms for renewal.

They must serve this notice not more than 12 months, and not less than six months, before the tenancy is due to end.

The tenant cannot serve a section 26 notice if the landlord has already served their own section 25 notice to the tenant.

If both parties are willing to renew the lease on the terms that the tenant has proposed, then this may begin on the date specified on the section 26 notice.

The landlord must respond to a tenant’s section 26 notice within two months of receiving it, if they want to oppose the granting of a new lease. They must issue a counter-notice.

What Happens After a Landlord Serves Notice?

Once a landlord has served a section 25 notice, they cannot withdraw it unless they have transferred ownership of the premises to a new landlord, who indicates that they wish the tenancy to continue on the present terms.

If the tenant does not respond to the section 25 notice, then, the tenancy will end on the date specified in the notice.

If, however, the tenant does respond, then they may be in a better position to negotiate better terms with the landlord without having to go to court.

If the tenant contests the notice, or has pre-empted the landlord with a section 26 notice, then to evict the tenant the landlord will have to apply to the court.

The landlord will then have to convince the court of the grounds for ending the commercial lease. They will need to justify terminating the lease under the Landlord and Tenant Act 1954.

Where the landlord argues successfully that one or more of the statutory grounds for ending the lease apply, then the court will not order a new tenancy.

On the other hand, if the landlord is unsuccessful in opposing renewal of the lease, the court will order them to grant a new tenancy, and will settle its terms.

What Must Happen to Renew a Commercial Lease?

If the tenant has proposed new terms under a section 26 notice, or in response to the landlord’s section 25 notice, and both parties agree to them, then the lease can renew.

This may come about from both parties negotiating terms.

When Does Interim Rent Apply?

Interim rent describes the rent a commercial tenant will pay to a landlord when the tenancy of a property continues beyond the expiry term.

This situation is known as holding over, but interim rent only applies in certain circumstances:

• If the landlord has served a section 25 notice, or
• The tenant has served a section 26 notice

Applications for interim rent are usually made during lease renewal proceedings.

Generally, the interim rent will be the same as rent paid under a new lease, unless market conditions have changed significantly between the end of the old tenancy and the start of a new tenancy, or the terms of the leases are different.

The court may then decide that the tenant should pay an interim rent that is a reasonable sum under the circumstances.

Can Commercial Tenants Claim Compensation?

If the tenant is unable to obtain a new lease from the landlord, there are certain situations where they can be entitled to claim compensation.

For example, if the section 25 notice from the landlord opposes solely on no fault grounds and neither party has applied to court.

No fault grounds apply under section 25 where:

• The landlord is the landlord for a whole property, the tenant has a sublease for part of it, and the landlord intends to re-let the entire property for substantially more rent than the current aggregate from re-letting parts of it
• The landlord intends to demolish or reconstruct the property
• The landlord intends to occupy the property for their own business or residential purposes

Resolving Commercial Lease Disputes

Commercial lease disputes can centre around various issues, such as:

• Lease renewals
• Rent reviews
• Service charges
• Repairs
• Rent arrears

Because commercial leases are often complex, disputes will often require expert legal support to untangle the complexities and reach a resolution.

Disputes that end up in court can be costly for both landlords and tenants.

This is why getting an experienced solicitor on board can make a huge difference, and, ultimately, save on a lot of expense and stress.

For more details, please call 0808 088 6004, or complete our online contact form, and we will be in touch as soon as possible.