“It should be easy to explain what happens on a lease renewal, but it’s not.” In this final instalment, Michael Lever, The Rent Review Specialist, unpacks the complexities of lease renewals, from legal nuances and statutory terms to shifting tenant preferences and market trends. He explores the impact of opting out of the LTA 1954 and offers insights into the challenges faced by landlords and tenants alike. 

Introduction 

There are so many permutations that to avoid leaving anything out is challenging. The time it takes to explain is a good way to bore the listener or reader. And when that person is a client, how best to get a point across is a factor. For someone inexperienced to understand the difference between the contractual term and the statutory continuation of the tenancy takes a great deal of patience. 

Main Content 

To begin with, the thought of going to court is, except for the keenly litigious, a deterrent. Invariably, in my experience, landlords do not make the first move. Tenants, also, are reluctant unless fed up with the pace of negotiations and the number of requests for extensions to the s25 or s26 notice end dates pile on the pressure to get the landlord to concede. Where the tenant is, for example, a bank, a small investor does not stand a chance. In a renewal I dealt with recently, it took more than 5 years to reach agreement, with the interim rent refund wiping out almost the whole of the rent under the shorter-term renewal lease. 

By the time this final part of the series is published, hopefully another client will have completed the sale of a property that has belonged to the same family since the 1950s, occupied to begin with by the family business until 1973 when it was let to a bank. I have acted for the family since 1994 when I took the rent review to an independent expert. Since then, including a supplementary lease extension to the contractual term and one renewal, for the rent to have kept pace with inflation, it should be more than 3 times higher. It’s not; it’s about 50% more, having remained unchanged at each 5-yearly review over 15 years and with a 5% increase in 2023. 

The only saving grace is that, because the estimated market rent now is highly reversionary, the capital value of the freehold interest is enhanced. When a property is unmortgaged and its owners have no desire to sell, that the capital value might be unaffected is irrelevant in the context of wanting a higher rent.  

Once upon a time when tenants had more confidence in their business model and therefore wanted a longer lease, the 15 years that a court is empowered to order was attractive. Nowadays, tenant preference (except in the hospitality and leisure sectors) for a short-term lease and a break right, 15 years is almost a rarity.  It is perhaps understandable that tenants whose covenants improve the capital value of the investment should want something in return for their commitment, but the appeal is cancelled by the standard ploy to bluff not exercising the break right in exchange for nil increase at rent review and/or wanting a 3–6-month rent-free period. As for a rent-free period on renewal, that too, despite, case law, is met with aghast.  

Long ago, an under-lease would have been inside LTA54. Nowadays, under-leases generally are outside LTA54. This clever way of converting an occupancy with renewal rights into having no legal right to remain in occupation on expiry of the under-contractual term has encouraged legions of landlords to let outside the Act to begin with. So, while in the past, a rent review in a lease outside the Act could have justified a discount on the market rent, nowadays, depending upon the duration of the residue of the term, that is less likely. So enthusiastic have some investors become at the prospect of being in control that increasingly I am finding, when acting for tenants, the s25 notice seriously proposing the renewal lease be outside the Act. 

Concluding Remarks 

In the shop property market, the gap between prime trading positions and the lesser has widened. Not only the positions in the towns, but also the towns themselves. The number of towns, including smaller cities, whose ‘high streets’ have, in my opinion, gone ex-growth is increasing. The fault, if it is, is caused by improved communications and channels for business, of which the most obvious is a return of mail order in the guise of a transactional website. In the office market, the pandemic that gripped the nation has not let go of the feeling among many that working from home is better than rush-hour travel to and from an office building. Demand for prime A-grade office buildings highlights, in my view, a realisation that to rise above it all, one needs the best. 

As for the industrial sector, except perhaps an over-supply of trade counters, rents for impressive EPC-rated premises have, since pre covid-levels, hardened or risen since. 

In wishing you an enjoyable Christmas and Healthy and Happy New Year, I hope you have enjoyed reading about how to do a lease renewal.  For 2025, I shall be writing a monthly series about presenting your case for rent review to someone with no vested interest in the outcome, commonly known as dispute resolution.