Keeping our clients informed is important to us so we regularly publish our thoughts on topics that will be of interest to anyone involved with commercial property. We call them ‘insights’ and we hope you find them of interest.
Why Would You Give a Tenant a Right of Renewal?
When considering this question, we need to be aware of the following:
1.A right of renewal is a tenant’s right – not a landlord’s – in other words if the tenant wants the extra time the landlord can’t refuse (subject to a few things which we will cover another time).
2.There is no benefit to a landlord in granting a right of renewal other than getting a tenant to commit to the initial term of the lease.
3.The law says that a new tenant must be given the right to stay in the premises for a minimum of five years (this doesn’t apply to existing tenants and to certain types of tenants such as Government departments, listed companies etc.).
4.There is no automatic market review at the point of renewal. If you as a landlord want a market review it must have been negotiated at the time of entering into the agreement and must be stated in the lease.
5.If there is to be market review at the point of renewal, the tenant can demand that they be advised of what the new rent will be before committing to the extra time. This often involves a valuer which costs time and money and leaves the landlord in limbo waiting on the tenant to make a decision.
6.A tenant has the right to transfer their lease to someone else at any time during the term.
Now having said all that, I fully appreciate that some tenants are unwilling to commit for a fixed period of say, five years, but my belief is that this is simply a mindset that has developed over time and as the law now gives the tenant the right to transfer their lease to someone else (subject to a landlord agreeing but with very limited reasons for refusing) we should review this mindset.
Maybe landlords and their agents should start to think more along the lines of only granting leases for fixed periods of five years minimum and not including a right of renewal. After all, if a tenant really needs to move on, they can always find someone to take over and transfer their lease to them.
Mind you, I’m not complaining as extensions of leases make up a large proportion of our work but as someone who constantly sees instructions to prepare leases for 1+1+1+1+1 or more commonly 2 + 2 + 1, I do wonder if this is really necessary. Do these tenants only stay in the same premises for 1 or 2 years? I doubt it.
Sometimes I think we sell ourselves short as landlords and give rights of renewal too freely without trying hard enough to negotiate a fixed term lease.
Food for thought.
RECEIVE INSIGHTS TO YOUR INBOX
- Changes to the Retail and Commercial Leases Act - July 2020
- Code of Conduct "Leasing Principles"
- Why would you give a tenant a Right of Renewal?
- Air Conditioners
- CPI% v 3% fixed increases
- Monthly Tenancies - BEWARE
- Default Interest on late Rent payments
- Registration - How we approach it
- A Business name as Lessee?
- What if a tenant stops paying rent?