What is Security of Tenure? A commercial landlord’s guide

If you are a commercial landlord, you may know that having a lease come to an end doesn’t necessarily mean that your commercial tenant will need to leave the premises. If you are an investor or property developer, you’ll need to make yourself aware of the concept of security of tenure within a commercial lease. 

If you don’t take the time to understand how this mechanism operates, you may severely disrupt your asset management plans and stay stuck in tenant relationships you were intending to end. Here, we’ll go through the ins and outs of what security of tenure is when it comes to commercial leases, how the law protects business occupants and how you can navigate the system as a landlord when the lease expires. 

What is Security of Tenure?

Security of tenure for commercial leases is a statutory right that business tenants have that allows them to automatically remain in their commercial lease. It also allows them to request a new tenancy when their contractual lease terms come to an end. 

This right comes from Part II of the Landlord and Tenant Act 1954, which was originally introduced to protect businesses from being evicted for no reason by commercial landlords. This right protects business owners as they naturally invest a lot of time and effort into building up their business, creating jobs for locals and building up a good rapport with the community. This way, with security of tenure for commercial leases, landlords are unable to exploit the success of their commercial tenants. (Gov.UK)

Also, it is important to note that, unless you and your commercial tenant have undergone the legal process of ‘contracting out’ of the Act before the lease was signed, your tenant will automatically inherit these protective statutory rights. 

What Does Statutory Continuation Mean?

So, when a commercial lease reaches the end of its contractual date, the tenancy will not terminate but will instead enter a legal state that is known as statutory continuation. This is also referred to as ‘holding over’. 

During this holding-over period:

• Your commercial tenant has a lawful right to continue occupying the building.
• The terms, conditions, and tenant obligations of the expired lease remain fully active.
• The tenant must continue to pay the rent at the historically agreed rate.

Due to statutory continuation, the lease will continue to roll forward until either the tenant or the landlord triggers the statutory notice procedures that have been laid out in the 1954 Act, which allows them to either renew or terminate the commercial tenancy agreement. (Gov.UK)

Answering Landlord Questions on Security of Tenure in Commercial Leases

Here are some of the common questions that commercial landlords may have when it comes to security of tenure within commercial leases. 

Can a tenant stay after the lease expiry date?

Yes, the tenant is entitled to stay after the commercial lease expiry date if it is protected by the 1954 Act. As a commercial landlord, you are not entitled to treat them as trespassers by changing the locks or forcing them out. Attempting to do so is seen as unlawful and can result in severe legal penalties, injunctions, and claims for damages against you as the landlord. (Gov.UK)

When can a tenant ask for a renewal?

A tenant can ask for a renewal immediately by serving a Section 26 notice, and they do not have to wait for you to act. The request will need to be served between 6 and 12 months before the tenant’s proposed start date for the new lease. The tenant will then have the opportunity to outline their ideal terms for the new tenancy, and they will have the opportunity to propose their new rent rate, ensuring it reflects current market value and the desired lease length. Usually, commercial tenants do this to secure long-term business certainty or to ensure they pay reasonable rent if they think the market rates are about to increase. (Gov.UK)

Under what circumstances can a landlord resist that renewal?

There are a few circumstances that allow you to resist the renewal as the commercial landlord. If a tenant requests a renewal, you’ll need to establish at least one of seven strict statutory grounds of opposition (using grounds A to G), which are all outlined in Section 30 of the Act. Here are the most common grounds used by landlords: 

Tenant Fault Grounds

• Ground A (Breach of Repair Obligations): The tenant has seriously neglected the structural state of the property.
• Ground B (Persistent Delay in Paying Rent): The tenant has a documented, consistent history of failing to pay rent on time.
• Ground C (Other Substantial Breaches): The tenant has flagrantly violated other major covenants within the lease.

Landlord Intention Grounds

• Ground F (Redevelopment): As the landlord, you intend to demolish or carry out significant structural work on the premises that could not be done with the tenant in occupation. 
• Ground G (Own Occupation): As the landlord, you want to use the property to run your own business or as your personal residence. Note that you would have needed to own the property for at least 5 years. 

You will legally be required to pay statutory compensation to the tenant when they vacate if you oppose a renewal based on non-fault grounds, for example, Grounds F or G. This will be calculated as a multiple of the property’s rateable value. (Gov.UK)

How Does This Impact Your Portfolio? 

Understanding what security of tenure is is vital in knowing how this will play out in everyday commercial property situations, for example: 

Scenario A: The Blocked Redevelopment

So, you’re a commercial landlord who has purchased an old commercial property with the intention of converting it into a mixed-use development of offices and apartments, and your contractual leases for the ground-floor retail shop expire in six months. You can’t simply tell the shopkeepers to leave when the contract ends. Instead, you will need to serve a hostile section 25 notice relying on Ground F (redevelopment). You’ll also need to be able to prove to the court that you have a genuine plan with planning permission and finances and are ready to go. 

Scenario B: The Under-Market Rent Trap

If a tenant is holding over a lease that has reached its end date two years ago, and the rent was fixed five years before this, the tenant is happy to sit tight and continue paying the old, more affordable rent. This is allowed because the lease is under statutory continuation. 

As the commercial landlord, you’ll need to serve a friendly Section 25 notice to propose a new lease at the true and current market rent. To protect your income while negotiations or court proceedings take place, you must also apply for ‘interim rent’ to ensure the tenant pays a fair market rate during the transition period.

Security of tenure for a commercial lease alters the balance of power within commercial property relationships, and it dictates who controls the building when a lease comes to an end. So, proactive asset management will be your greatest tool as a commercial landlord. Make sure that you audit your property portfolio regularly so that you can identify which agreements sit inside the 1954 Act. (Gov.UK)

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