Renewable Commercial Leases: Are They All Actually Renewable?
Opening a private practice is an exciting transition for many clinicians. The process can present both opportunities and challenges alike; and for many, this will be the first encounter of entering into a commercial lease.
So, what do you need to know when thinking long term for your business and can you be sure that your renewable commercial lease will actually be renewable?
Many healthcare business owners are under the impression that their commercial lease is repeatable or renewable under the Landlord and Tenant Act 1954 (LTA 1954).
The reality, however, is more complex. The legislation basically allows for a commercial lease to be either ‘inside’ or ‘outside’ the LTA 1954.
What Are the Differences being Outside or Inside the LTA 1954?
Where outside the LTA 1954, the lease comes to an end at the end of the term of the lease and any further lease or licence is totally at the discretion of the Landlord.
To do this the Tenant normally enters into a statutory declaration (or simply a notice if the parties are not in a hurry) effectively removing their rights of renewal under the LTA 1954. Landlords and their advisers choose this route where for instance there may be development potential for the site and potentially in the short to medium term. This makes life simple and avoids the need to pay any compensation to the Tenant if they have a commercial lease inside the LTA 1954.
Inside the LTA 1954
Even renewable leases inside the LTA 1954 can be prevented from renewing by the Landlord putting forward one of the ‘No fault grounds for opposition’ under the 1954 Act as set out in section 30(1) e, f and g as follows:
- the tenant was granted a sublease of part, and the landlord is the superior landlord of the whole and intends to re-let the whole for substantially more rent than the aggregate of the rent obtainable on re-lettings of the parts
- the landlord intends to demolish or reconstruct the property
- the landlord intends to occupy the property for business purposes or as a residence
A tenant with security of tenure under the LTA 1954 and inside the LTA 1954 is entitled to compensation if they do not obtain a new lease solely because the landlord establishes one of the no fault grounds, as shown above.
So, what happens if you are in the unenviable position that your commercial lease is not renewable? Are you entitled to compensation?
How is Compensation Calculated? What Could I Expect to Receive?
Compensation is calculated by applying a multiplier to the rateable value of the property. The compensation will be doubled if the tenant and any predecessor have been in occupation of the property for the purpose of the same business for 14 years or more.
Therefore, as per section 37(2) of the LTA 1954, calculations for the compensation are as follows:
- For less than 14 years occupation: the rateable value of the property x the appropriate multiplier x 1.so where the rates are £10000 per annum then the compensation will be this amount
- For 14 years or more: the rateable value of the property x the appropriate multiplier x 2.
The current appropriate mulitiplier is one as per the Landlord and Tenant Act 1954 (Appropriate Multiplier) Order 1990 (SI 1990/363).
The rateable value of the property is established by reference to the valuation list that is in force on the date of service of the notice under section 25 of the LTA 1954, or the request under section 26 of the LTA 1954.
Surveyors will assist the landlord and tenant in establishing the rateable value.
Where the holding includes domestic property, as defined in section 66 of the Local Government Finance Act 1988, that part of the holding is disregarded for the purpose of determining the rateable value. If the tenant occupied the whole or part of the domestic property on the date the landlord served its section 25 notice or counter-notice to the tenant’s section 26 request, the tenant is entitled to additional compensation of a sum equal to the reasonable expenses in vacating the domestic premises. If the sum cannot be agreed, it can be determined by the court which could take many months.
Higher rate compensation
If the tenant has been in occupation of the property for the purpose of its business for 14 years or more, the tenant will be entitled to double the rate of compensation (section 37(2) and (3), LTA 1954). The 14-year period is calculated backwards from the date of termination that was specified in the notice under section 25 of the LTA 1954, or request under section 26 of the LTA 1954.
If there has been a change in occupier during the 14-year period, the current occupier must not simply carry on with the same type of business but must be a successor to the actual business. It is not clear what successor to the business means, but it is thought that there must be some transfer of the goodwill of the business.
Compensation for misrepresentation
The court can order the landlord to pay the tenant compensation if it subsequently appears that misrepresentation or concealment of material facts led to any of the following:
- The landlord obtaining an order for the termination of a tenancy without the court ordering the grant of a new one.
- The court being induced to refuse an order for the grant of a new tenancy.
- The tenant quitting the property after not making, or withdrawing, its application for the grant of a new tenancy.
The court can order the landlord to pay such sum as appears sufficient to compensate for the loss or damage sustained by the tenant as the result of the order, refusal or the fact that the tenant has quit.
Contracting out of the right to compensation
Any agreement to exclude or reduce the payment of compensation is void, unless one of the following exceptions is satisfied:
- The property has been occupied by the tenant (or a predecessor to the tenant’s business) for the purpose of its business for less than 5 years before the tenancy is terminated.
- The agreement is made after the right to compensation has accrued.
If the parties intend to document their respective liabilities and neither of these exceptions applies, reference to any compensation payment must be drafted with care or the agreement may be void. It should be made clear that the landlord agrees to pay the full amount of any compensation, without exclusion or reduction, and the tenant agrees to pay the full amount of their liabilities.
As a Landlord avoid concealing any facts regarding development or you not developing if you are using Ground F “demolishing or reconstructing the premises” (section 30(1), LTA 1954) as a no-fault ground for opposition.
As a Tenant who for example is a dentist acquiring a renewable lease from a retiring dentist who is the freeholder then beware that they can take back the premises for themselves! There is a solution which can be negotiated i.e., an option for a lease which starts a similar lease the day after the current lease ends.
As a healthcare business owner and a tenant, the goodwill can only normally be effectively sold where a lease is sold at the same time. In fact, many NHS contracts for primary care attach to the premises.
As a tenant the rules for compensation are relatively complicated.
The compensation does not equate to your actual loss of profit and/or goodwill if the lease ends it is simply a ‘rule of thumb ‘level of compensation! Therefore, on acquiring a healthcare business this may have an impact on the initial purchase price and the affordability of any lending particularly where the lease arrangements end earlier than expected for you!
This article is not advice, and you need to obtain specific advice for your circumstances.