One of my favourite restaurants closed recently. The owners had operated successfully for several years but had serious doubts that the business would be viable under the Covid-19 restrictions.
Their lease was ending at the end of August, so they took the sad decision to shut their doors rather than risk being stuck with a new lease and outgoings. It's a big loss to the town, and to the landlord, who will find it difficult to find a tenant of similar quality.
This case reminds me of the conundrum faced by tenants whose leases are due to expire within the next year or so. Do they take on more long-term commitments and risk insolvency, if there is no early solution to the trading problems caused by the pandemic? What are a tenants options?
Time and time again I find that, to their detriment, many business tenants are not aware of their rights under landlord and tenant legislation. Tenants ignorance ranges from not knowing that they are entitled to a new lease if they have been in possession for five years, to assuming that the new lease they take-out, must be the same length as their existing lease.
A tenant's starting position should always be to enter into a dialogue with their landlord, long before their lease expires. In these extraordinary times, most landlords should take a practical view of the dilemma facing tenants and negotiate a new lease on terms which allow the tenant to keep trading, such as reduced rents or turnover rents, for the short term at least. After all, if trading conditions deteriorate to the extent that the tenant cannot survive, then the landlord is unlikely to be able to find a better tenant at a better rent.
Thus, a landlord and tenant might agree a new lease for a term of five years, which gives the tenant comfort and more options. If negotiations are unsuccessful, a tenant for more than five years is entitled to apply to the District Court for a "court lease" and I foresee this becoming more common. A risk factor is that the new rent will be set by the judge, who is not a property expert. Experienced valuers are already having problems trying to value premises whose open market rental value has halved in six months, and there could be erratic decisions.
Importantly, in the court process, the tenant can dictate the length of new lease that he wants; anything between five and twenty years. "Court leases" now also incorporate upwards and downwards rent reviews. Landlords don't like having "court leases" and in my view, it's worth discounting the rent by 15pc alone, to stay out of that process.
Many tenants, particularly in offices, have thoughtlessly signed Deeds of Renunciation, forsaking their renewal rights, and this weakens their negotiating position.
Always take advice, but my first advice is to act early. If your lease expires within the next year, you should serve Notice that you will be claiming a new lease now, and start the negotiations. You may well need the time, but, if things go badly, you may end up paying your existing rent for up to two years after your lease expires while you go through the legal system. If you get a reduced rent on renewal, you'll eventually get a refund but these are not the times to be carrying unnecessary overheads.