Lease renewals - How to avoid costly pitfalls

14 June 2011

The Licensing, Hospitality and Leisure industry has been one of the worst affected sectors during the recession. Whilst it has been predicted that only the wholesale and retail and the construction sectors are ahead of hotels and restaurants in being likely to be facing insolvency in 2011. For operators - who are usually tenants – rent can often be the largest single item of expenditure. The terms on which the premises are occupied are therefore crucial to running a profitable business. Consequently, the ability to be able to deal with the lease appropriately to match the needs of the operation is important - whether by way of renewal or by an exit strategy through assignment or the exercise of a break clause.

Lease terms have been getting shorter which has necessarily meant that the renewal of the lease becomes a more frequent occurrence. Where the lease has been a long lease of perhaps 20 years, as has been more commonplace in this sector,and it is now due for renewal, the maximum new lease term that can be awarded by the court is 15 years (although the parties can agree a longer term). Where, however, a tenant is seeking a shorter term than the expiring lease, there may be room for negotiation with a landlord who would prefer to retain an existing tenant than be forced to try and find a new one. Upwards and downwards rent reviews are also becoming more accepted and there is scope to introduce these into renewal leases where previously there had been an upwards only rent review clause. 
For leases protected by the Landlord and Tenant Act 1954, notice under the Act can be served by either party to determine the lease and/or request a new one up to a year before its contractual expiry date. From the landlord’s point of view, this can be an opportunity to bring matters to a head sooner rather than later if there is the possibility that the tenant may leave upon contractual expiry and the premises will need to be marketed for re-letting. From the tenant’s point of view, however, if it wishes to vacate upon the contractual expiry date, there is no obligation to warn the landlord of its intention to do so; it can simply move out and the lease will end. Even if court renewal proceedings have been commenced prior to the lease expiry, the tenant can cause these to be ineffective by moving out prior to the contractual expiry date albeit there may be costs consequences for the tenant by doing so. 
Landlords will be keener to retain tenants of good covenant and therefore applications by successful operators to assign the lease to someone of less good standing may meet with some resistance. There is an obligation on the landlord to act reasonably but grounds for refusal may be more closely scrutinised to see if there is room for a court challenge. Where the court found that a landlord had behaved cynically and unscrupulously in delaying the grant of a licence to assign with the intention of frustrating the tenant’s proposed assignment, the tenant was awarded exemplary damages of £25,000. If a suitable assignee can be found, however, it may allow the tenant to turn a profit on premises where it has incurred fitting out costs rather than having to remain until the end of the lease and bear the costs of stripping out and any claims for terminal dilapidations. 
For tenants who are midway through a lease which contains a break clause, the exercise of this may provide an obvious exit route from premises which it wishes to leave. The break clause needs to be considered well in advance of the date on which it is due to be exercised to ensure that any preconditions are satisfied. Failure to comply strictly with all or any of these may result in failure to exercise the break which could prove disastrous if the premises have been vacated and the business is operating and paying rent on new premises in the meantime.
Planning ahead, where possible, will enable operators to maximise the benefit of the terms on which they occupy premises and put them in a stronger position to improve on these as circumstances change and allow in the testing times which are predicted for the foreseeable future.

Share insightLinkedIn Twitter Facebook Email to a friend Print

Email this page to a friend

We welcome views and opinions about the issues raised in this blog. Should you require specific advice in relation to personal circumstances, please use the form on the contact page.

Leave a comment

You may also be interested in:

Skip to content Home About Us Insights Services Contact Accessibility