When negotiating heads of terms for a new lease, a tenant may be under pressure to come to an agreement with the landlord quickly due to the operational needs of its business. The risk, therefore, is that a tenant may not give much consideration as to what will happen once the term of the lease expires.
A lease of a commercial property can be granted with or without security of tenure. If a lease is granted without security of tenure then the tenant will have no statutory right to the grant of a renewal lease at the expiry of the lease term.
A landlord may be reluctant to grant a lease with security of tenure, particularly if it wants to retain an element of control over its investment. On the other hand to take a lease without security of tenure is unlikely to be attractive to a tenant, particularly where large sums of money are to be spent on fit-out works and relocation at the end of the term of the lease is not a suitable option.
So is there anything that a tenant can do if the landlord is refusing to grant the lease with security of tenure?
Instead of a statutory right to a renewal lease, the tenant could explore with the landlord whether it is willing to grant a contractual right to renew the lease. What this means is that the tenant will have an option to call upon the landlord to grant a new lease following the expiry of the current lease. A landlord may prefer this rather than the statutory right of renewal as it will allow the landlord to retain some control over the property.
If it is agreed that the landlord will grant an option to renew then there are points to be considered by both the landlord and the tenant. The landlord will need to ensure that the option is drafted carefully to avoid granting a perpetually renewable lease. The tenant must ensure that the benefit of the option is registered at the Land Registry. This is extremely important as failure to register could result in the option not binding any successors in title of the landlord.
Stamp Duty Land Tax (“SDLT”) is not payable in relation to the option to renew (unless a premium is payable for the option). So, if a tenant enters into a 10 year lease with an option to renew for a further 10 years, then SDLT will only be payable in relation to the first 10 year lease. If the tenant then exercises the option for the renewal lease then a further SDLT return will be required on the grant of that lease.
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