You’ve got your lease. You’ve got the lease term you wanted. So what if you don’t have a right to extend it?
In the normal course of events, if you take a business lease you have a legal right to have it extended when it comes to an end.
This right is provided by a piece of legislation in 1954, called the Landlord and Tenant Act 1954. What this says, in very general terms, is that if you are a tenant in occupation of premises for the purpose of your business at the end of the term granted by the original lease, you can require the landlord to extend it, by giving you a new lease.
When you want to cash in and retire, you need to sell the business onto someone else and get a decent sale price for the business.
The way the arrangement operates is that even when your lease has a precise date for the end of its life, it doesn’t in fact end until either the landlord or the tenant serves a notice bringing it to an end a few months hence. Then procedures set out in the 1954 Act come into play; new terms are negotiated and a new lease granted. If the parties can’t agree, the court imposes the terms. (This is a short generalisation. Not all leases are entitled to be renewed in every situation.)
When a lease has these protections, it’s said to be “inside the act”. These protections can be excluded if the landlord and tenant agree to that in negotiations when the original lease is granted. The tenant has to sign specific documents acknowledging this, and it has to be recorded by an agreement in the lease. The lease is then said to be “outside the act”. Now, when the end date stated in the lease arrives, the tenant must leave.
There are good reasons why a landlord might want this. Landlords of serviced offices granting short terms need the flexibility of being able to let and re-let without having to go through a court procedure. If a short lease is granted on concessionary terms, the landlord may want to negotiate the next lease on open market terms, without having the worry that a court may get in the middle of things. Sometimes, a landlord has development plans for a building, and is only letting it while it gets its plans and finances in place, in which case it doesn’t want any argument about it when it wants the premises back.
And there may be situations where it doesn’t matter to you. If you are taking office premises where you know that you can move to other office premises in the locality quite easily because there is a strong office market, and you are anticipating expanding anyway, it may not bother you too much that you can’t necessarily extend the lease term where you are. But, generally, even in that situation, there is no point in giving up the rights unless you really have to in order to secure the premises. In certain circumstances, if you stay long enough, you become entitled to compensation if the landlord terminates your lease – but only if your lease is inside the act.
If you are taking a shop or a bar or restaurant, or similar business premises, then you definitely do not want to agree to take the lease outside the act. You will be negotiating a long lease term, because you want to establish your business and then reap future profits from it. These kinds of businesses can’t just move to other premises.
Even if you decide that the term you negotiate – 15 years or 20 years, for example – is good enough for you, bear in mind this. When you want to cash in and retire, you need to sell the business onto someone else and get a decent sale price for the business. But if at that stage, they see that they only have a relatively short guaranteed period of occupation left, they won’t pay much for the business – they might not even want to take it over. So that is a situation in which you definitely do not want to agree for your new lease to be outside the act.