Bill Chandler and David Ratcliffe highlight the key issues to consider when negotiating a renewal lease.
Most discussion around business lease renewals inevitably concentrates on the procedural aspects of the Landlord and Tenant Act 1954, focusing on issues such as the service of section 25/26 notices, applications to court and interim rent. The tricky issues that often arise in settling the terms of the renewal lease itself are often overlooked.
The O’May principles
■ The court has “an almost complete discretion” when determining the terms of the new lease
■ The burden of persuading the court to deviate from the existing lease rests on the party proposing the change
■ The proposed change must be “fair and reasonable”
O’May v City of London Real Property Co Ltd [1983] 2 AC 726
Lease format
If the existing lease is available in electronic form, the simplest solution may be to re-use it. If it isn’t, then a short-form lease that incorporates the terms of the previous lease by reference will avoid having to manually type out the lease. There is no right or wrong answer. Either way, the renewal lease should incorporate any subsequent variations to the previous lease.
While a lease by reference can be much shorter (and hopefully quicker to agree), consideration must be given to the amount of variations needed to update the previous lease. The more variations being made within the lease by reference, the harder the document as a whole will be for the parties to read during its lifetime.
Landlords and their solicitors should avoid the temptation to use their current precedent lease without good reason. This is guaranteed to irritate the tenant’s solicitor and is likely to result in delay and increased costs all round.
Necessary changes
Even on the most straightforward lease renewal, where only the term and rent are changing and the parties have agreed that all other terms will remain “as per the existing lease”, it is rarely as simple as changing the starting rent and the term.
Land registration
The Land Registration Act 2002 requires all leases for more than seven years granted since 13 October 2003 to be registered, and all leases where the term commences more than three months after completion.
This can result in a renewal lease being registrable, despite being for a shorter term than a previous unregistered lease. If registrable, the renewal lease will need to include the mandatory “prescribed clauses”. It may also be necessary to obtain a new lease plan that meets the Land Registry’s criteria, which can involve delay and cost.
Dates
Whether the previous lease is repeated in full or incorporated by reference, it is important to review the previous lease for any dates and time periods that may need to be updated.
A requirement to decorate “in every third year of the term” may still work, but may require adjustment to synchronise the decorating years across the old and new leases. Wherever specific dates are quoted, perhaps for rent reviews, then these will need to be updated with the equivalent dates during the new term.
Repair
The repairing position should always be considered on lease renewal. A full repairing obligation in the renewal lease should keep the tenant on the hook for any deterioration during the previous lease, effectively postponing the tenant’s dilapidations liability until the end of the renewal lease.
If specific items of disrepair are of particular concern, the landlord may seek an obligation to remedy them within a certain time following renewal.
Alterations
Any alterations made by the tenant also need to be considered. Such alterations will usually benefit from a rent review disregard during the term of the previous lease, but be subject to an obligation to reinstate at the end of the term.
If the renewal lease is silent, the alterations will effectively become part of the premises being demised. Accordingly, the tenant will probably not be required to reinstate them on expiry of the renewal lease, but they are likely to be rentalised on future rent reviews. If the parties wish a different outcome, this will need to be expressly provided for in the renewal lease.
Changes in ownership
The previous lease may have made reference to other land that the landlord owned, perhaps within the service charge provisions, or the rights and reservations. However, if the landlord has bought or sold land, or the landlord is now a tenant itself pursuant to an intervening headlease, then the renewal lease will need to reflect the new situation.
Reasonable modernisation
Things get even more interesting when one party wants the renewal lease to say something different. Although section 35 of the 1954 Act sets the terms of the current tenancy as the starting point, that doesn’t mean that the renewal lease must slavishly follow the previous lease.
The ability to depart from the existing lease terms is often referred to as “reasonable updating” or “reasonable modernisation”. There doesn’t necessarily need to have been a change in law or practice, but the party seeking the variation must satisfy the O’May principles (see box, right).
Changes in the law
It will usually be reasonable (and indeed desirable to both parties) for the renewal lease to reflect changes in the law since the previous lease was granted. This may be as simple as updating statutory references to refer to replacement Acts and Regulations, but sometimes will require more substantial changes.
A renewal lease is a “new” tenancy for the purposes of the Landlord and Tenant (Covenants) Act 1995, even if the previous lease was an “old” tenancy with original tenant liability. Most leases being renewed now are themselves new tenancies, but when old tenancies are still occasionally encountered it is necessary to replace the alienation clause to reflect that the tenant is released on assignment, including provision for the tenant to enter into an authorised guarantee agreement.
Changes in market practice
Even if the law hasn’t changed, it may be reasonable to propose terms that reflect market practice at the date of renewal.
By way of example, tenants are increasingly seeking to include “uninsured risks” clauses that allow them to terminate the lease in the event of destruction by an uninsured risk unless the landlord agrees to rebuild the premises. Such clauses have become far more commonplace in new leases and are recommended by the Code for Leasing Business Premises. However, since they reverse the risk of damage by uninsured risks, it is by no means certain that a court would consider it a fair and reasonable amendment under the O’May principles.
Energy efficiency
Energy efficiency is an area of growing significance on lease renewal. Even where the Minimum Energy Efficiency Standards (MEES) does not render the particular lease renewal unlawful, landlords are increasingly keen to include energy efficiency clauses in renewal leases.
We cannot be sure what approach a court would take, but it can probably be assumed that a landlord would stand a greater chance arguing for a restriction on energy-inefficient alterations than for an obligation on the tenant to pay for the cost of works necessary to comply with MEES.
Since this is an article on the terms of the renewal lease, we’ll overlook the conflicting government guidance on whether an energy performance certificate is required on lease renewal.
Final word
Surprisingly few lease renewals end up in court, or even a PACT arbitration. Those that do are rarely about the general terms of the renewal lease. This results in a dearth of case law as to what the courts would deem reasonable amendment.
Assuming the rent and duration can be agreed, the parties will generally find a way to settle the remaining terms, with the precise terms often depending on the relative bargaining positions of the parties.
Other terms of a new tenancy
Section 35(1) of the Landlord and Tenant Act 1954 states: “The terms of a tenancy granted by order of the court under this Part of this Act (other than terms as to the duration thereof and as to the rent payable thereunder) … shall be such as may be agreed between the landlord and the tenant or as, in default of such agreement, may be determined by the court; and in determining those terms the court shall have regard to the terms of the current tenancy and to all relevant circumstances.”
Bill Chandler is a professional support lawyer and David Ratcliffe is a senior associate at Hill Dickinson LLP
