How to terminate a 'protected' commercial lease - a guide for Landlords

Whether you are a landlord or tenant, it is sensible to seek specialist legal advice from the offset.  The procedures, rules and fixed time limits surrounding this area of law can be complex.

Regaining possession of a commercial premises that has a ‘Protected Lease’

Regaining possession of commercial premises can be a complicated process, particularly if the current lease falls within the remit of the Landlord and Tenant Act 1954 (the Act), and is therefore ‘protected’ giving the tenant security of tenure. This essentially means that when the lease ends, if the tenant does not leave of their own accord they can continue in their tenancy, past the expiration date, on the same terms.  This is known as ‘holding over’ and will continue until the lease is terminated in a way which is satisfactory under the Act.

Serving a Section 25 Notice

The notice must be served in the prescribed form and must be given not less than six months, nor more than 12 months, prior to the date of termination specified in it.  The notice must state whether the landlord will oppose an application by the tenant to the court for a new tenancy, and, if so, on which of the statutory grounds the landlord will rely.  The tenant has the right to apply for a new lease, but the landlord can oppose that application on one of the seven grounds set out in section 30 of the Act.  Landlords are only able to rely on the grounds of opposition which they state in the section 25 notice, no later amendment is possible, and evidence of the grounds relied upon will be required.

If the landlord is willing grant a new lease they must indicate his proposals as to the terms of the new lease in the section 25 notice.  If they indicate in the notice they will not oppose the grant of a new tenancy, then negotiations for the grant of a new lease would begin.  It is uncommon for applications to proceed to a final hearing, however it is worth noting that unless the tenant applies to the County Court before the expiry of the date in the section 25 notice, the tenant will lose their rights under the Act.  It is also possible for the landlord to make the application to the court for a new lease to be granted and set out the proposals for it (e.g. new rent, contractual term).

Grounds for opposing a new lease

If the landlord indicates in the section 25 notice they will oppose the grant of a new tenancy, the tenant’s only chance of obtaining a new lease is to apply to the court within the time limits stated above.

As an alternative, the landlord can pre-empt this by applying for an order to terminate the lease on the grounds stated in the section 25 notice (but not if an application has already been made by the tenant asking for the lease to be renewed).

The potential grounds for opposing the grant of a new lease are:

1. Tenant’s failure to repair
2. Persistent delay in paying rent
3. Substantial breaches of other obligations
4. Alternative accommodation offered, which must suit Tenants needs and be on reasonable terms
5. Sub-letting of part where higher rent can be obtained by single letting of the whole building
6. The landlord intends to demolish or reconstruct and could not reasonably do so without obtaining possession
7. The landlord intends to occupy the holding for their own business or as a residence

‘Fault’ and ‘no-fault’ grounds

Grounds (a), (b) and (c) are discretionary grounds, it is not sufficient for the landlord just to establish the ground, he must show that the tenant ought not to be granted a new tenancy in view of the facts giving rise to the ground.  These are known as ‘fault grounds’.

Ground (d) is not a discretionary ground, the alternative accommodation offered by the landlord must be suitable to the tenant, and be on reasonable terms.

Ground (e) is a discretionary ground, and is not often used, as the necessary requirements are rarely satisfied.  The tenancy must have been created by the sub-letting of part of a premises that is incorporated in a superior tenancy, and the head-landlord wishes to acquire possession, in order to let the premises as a whole rather than in parts, for a larger financial gain. 

Ground (f) is the most commonly used ground, and is known as a ‘no-fault ground’ however, the landlord must show that on termination of the tenancy:

1. The landlord has a firm and settled intention to carry out the relevant works, this is a question of fact in each case, but the landlord’s position will be significantly strengthened if he can show, they have obtained the necessary planning permission and that financial arrangement are in position;
2. The landlord intends to demolish/reconstruct the premises, or to carry out substantial works of construction on the holding or a part of it; and cannot reasonably carry out the work without obtaining possession, again this is a question of fact, but the landlord will not succeed if the tenant will agree to terms which allow the landlord access to carry out the work, which can then be reasonably carried out with obtaining possession and without substantially interfering with the tenants use.

Finally, ground (g) which is another ‘no-fault ground’, and a frequently used one.  If a landlord were to use this ground, they must have a firm and settled intention and demonstrate at the date of the hearing they have considered and taken practical steps to occupy the premises. The landlord must also have a reasonable prospect of achieving the intention, although they do not have to show the business will be a success in that location.

‘No-fault’ Compensation for the Tenant

Importantly, if a landlord were to rely only on a ‘no-fault’ ground, upon vacating the premises, either by court order or indeed by agreement, then statutory compensation will be available to the tenant. The amount of compensation payable is based on the length of time the tenant has been in the premises, potentially a tenant may be entitled to:

• An amount equal 1x the rateable value of the property if they have been in occupation of the premises for less than 14 years; or
• An amount equal 2x the rateable value of the property if they have been in occupation of the premises for more than 14 years.

If there are any ‘fault’ grounds available it is beneficial for the landlord to specify these in addition to any ‘no-fault’ grounds as compensation would not be available to the tenant in the event of the tenancy being terminated due to a ‘fault’ ground.