Property advice: Give lease a chance

By Michelle Perrett

- Last updated on GMT

Lease renewal: procedures should not be embarked on without the benefit of professional advice
Lease renewal: procedures should not be embarked on without the benefit of professional advice

Related tags: Renting, Leasehold estate, Landlord

Lease renewals are a vital part of a publican’s business development, but procedures under the Landlord and Tenant Act are fraught with potential problems and shouldn’t be embarked on without the benefit of professional advice.

For pub lessees, now is a good time to start thinking about the future and your pub lease renewal in particular.

Under the Landlord and Tenant Act 1954, a tenant has a right to renew a lease. But the whole process is a complicated one, enshrined in law. Licensees would be advised to take legal advice on the next steps, whether it is lease renewal or proposed non-renewal.

Christie & Co managing director of pubs and restaurants Neil Morgan describes the process as “very complicated” and advises that legal advice should always be sought.

This view is backed by Nigel Thirkell, founder of Porters, who says that professional advice must be taken from both solicitors and surveyors.

“We always advise any clients that they must get a solicitor on board straight away to oversee the process of serving notices or counter notices,” he advises.

Dan Mackernan, director at Savills, warns licensees they could face losing their pub if they fail to take the proper advice.

“[Licensees] can’t do it themselves. They must instruct a lawyer and that is where a lot of them fall down,” argues Mackernan. “If they don’t get a lawyer to protect their rights, they can lose their lease.”

A pubco can issue a Section 25 notice to agree a renewal or oppose a renewal. These are colloquially called ‘non-hostile’ or ‘hostile’ Section 25 notices. The notice must be served not more than 12 months before the end of the lease and not less than six months. 

Market influences

Alternatively, licensees can pre-empt the landlords by issuing their own Section 26 notices to request a new tenancy. The landlord must, within two months of a tenant request, give notice of opposition to an application to the court for the grant of a new tenancy. A licensee can also issue a Section 27 notice to end the lease.

“If a licensee gets notice served by the landlord then the first thing they should do is ring their commercial lawyer who deals with lease renewals. Get them to protect your position and act on your behalf. You also need to instruct a surveyor. You can’t just sit on this,” warns Mackernan.

However, he does warn licensees that the property market can have an impact on whether a licensee is issued with a notice.

“If it is a rising market, the landlord will want to serve the notice early to get a new higher rent or get the pub back for its own use,” he says. “If the market is falling, the landlord won’t serve notice as he will want to leave the rent nice and high.”

Once the notices have been served, there is then a minefield of legal work to agree depending on what is specified in the notice.

If the notice seeks a renewal of the lease then both parties can enter a period of negotiation over the rent. This is a trigger point when the licensee can ask for a market-rent-only (MRO) option in order to go free of tie.

However, an issue can arise if the landlord decides to issue a Section 25 to end the lease or challenges the licensees’ Section 26 request for renewal.

The pubco can only do this if it meets certain requirements to end the lease. This can include failure of the tenant to pay rent; lack of repairs; tenancy breaches; demolition; or the one that is becoming more frequent in the pub sector, that the pubco wants to occupy the premises for its own business.

However, if the licensee wants to stay in the business while the pubco has other plans, they can challenge this. It is a situation, however, that can end in court with a raft of legal fees.

“The main hostile Section 25s are re-developments and owner occupations,” Mackernan advises.

However, he also argues that licensees may find it hard to challenge such a notice if a pubco is taking the property back into its own management.

“The Landlord and Tenant Act was put in place to protect tenants. Five years ago, the pubcos would not have had much grounds for opposition, but now it has gone full circle and they have managed houses.“

It can get to the stage where it is the worst-case scenario and, despite the licensee wanting to remain in their pub, the pubco is taking the premises back.

It is not all bad news as the act recognises that the licensee has lost business and they can be entitled to compensation from the pubco.

As long as the lease has been on the property for 14 years, even if the tenant has changed, the licensee could be entitled to compensation for loss of the business.

The Landlord and Tenant Act 1954 states that the tenant is entitled to compensation if a new tenancy is refused because the landlord requires possession of the property for demolition or reconstruction, requires possession of the property for letting or disposing of the property as a whole or intends to occupy the premises for its own business.

This will be calculated on a multiple of rateable value of the premises.

However, the entire process is fraught with legal issues and licensees need to ensure that they are organised and take advice. Failure to engage lawyers could see licensees losing their pubs.

Related topics: Property law

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