As a commercial property investor, whether buying or selling, there are many positives that come with either parting with, or taking on a commercial property with tenants in situ. You’ll find our suggestions of both the positives and negatives of doing so here.
In either case, it’s important that the rights of the tenant are taking into consideration and in this article, we’re going to be taking a closer look into exactly what the rights of the commercial tenants are, and how this can have an effect on the buying or selling of commercial property.
The Landlord and Tenant Act 1954
The rights of commercial tenants are laid out in the Landlord and Tenant Act 1954. This act covers both residential and commercial tenants and it is worth noting that commercial tenants actually have fewer rights than their residential counterpart.
In addition, there are a number of exclusions under this act. As such, the rights laid out in the act cannot be referenced by either landlord or tenant, should there be a need for any form of litigation, should any of the following conditions be met:
Where the property has been leased for agricultural and/or farming purposes. Whilst a good proportion of farmland is owned and operated by the same individual or company, there are close to 17 million hectares of agricultural land within the UK, and many people prefer to rent their farms initially in order to gauge the profitability of the business.
Renting offers them an easier means to walk away from the farm if they are unable to make it work. Because the land owners are likely to be enjoying a share of the profits in addition to their rental income, such an arrangement was made exempt from the Landlord and Tenant Act 1954.
Another exception is where the tenancy of the premises is licensed for the sale of alcohol to be consumed on site. It’s important note here that properties such as hotels, restaurants, entertainment venues like cinemas and theatres, public gardens and exhibition halls hosting functions are not included here. These tenants need to acquire separate licenses for the sale of alcohol on their premises and, as such, are entitled to the same commercial tenant rights as any other operating business.
Should the tenant have already occupied the commercial property for a period in excess of 12 months, or should the lease provide the option to extend beyond six months from the outset, then they too are excluded under the Landlord and Tenant Act 1954.
The Commercial Tenants’ Rights
So, let’s take a look at the rights themselves, assuming that the commercial tenant in question does not come under any of the exclusions listed above.
Their first right is that of tenure. When a lease agreement is first drawn up between landlord and tenant, there is a start date, the length of the term, and a proposed break clause. A break clause, for anyone not familiar with commercial property investment, is earliest point at which a tenant can elect to terminate their lease. For example, there may well be a ten-year lease agreed between landlord and tenant, with a break clause at the five year mark.
Break clauses exist for the benefit of both commercial landlord and tenant. From the tenant’s perspective, the harsh reality is that a high proportion of new businesses fail within their first five years, so being trapped in a tenancy agreement is an unattractive proposition.
From the landlord’s perspective, as well as the reasons mentioned above concerning failed businesses, it’s also a sad fact that many tenants conduct themselves in a manner which is considered undesirable, and the landlord may well want them to leave sooner than originally anticipated, so a break clause serves to protect their interests in this way.
Returning to the point of tenure, whilst there is an effective ‘end date’ as part of the tenancy agreement, the tenant is required to give notice in writing if they don’t wish to continue leasing the property. If notice is not given, the lease acts as a form of auto renewing contract, the terms and conditions of which will have been laid out in the original lease agreement.
To be clear, what this means is that, if notice is not given, the tenant will retain the right to remain within the commercial property, but the terms and conditions of their original lease agreement still apply – namely that they are required to pay rent. Failure to do so will result in the lease being forfeited, and the landlord will be well within their rights to begin the process of removing said tenants.
Extending the Lease
There are other reasons why a commercial landlord may want their tenants to leave the property, and the most sensible thing to do is to give them decent notice so that there is no need to begin the unpleasant business of involving bailiffs and the courts.
Tenants can apply to the courts to have their leases extended, and the commercial landlord can oppose such an application on the following grounds:
Tenants who agreed, as part of their lease agreement, to assume responsibility for the maintenance and general upkeep of the building yet have failed to do so. This will mean that the commercial property investor will have to incur additional expenses in order to present the property in the most attractive way to future tenants. Granted, the commercial landlord can reclaim some of that cost by withholding their tenant’s deposit, but rarely is this going to be enough to take care of all of the work required.
Tenant’s rental payment were consistently late – not so much to the point where the lease was forfeited at any point, but at least to a level where the landlord was regularly concerned with regard to at what point their rental income could be expected.
The tenants have breached the terms and conditions of their lease agreement by a sizeable margin. This is an interesting area, and other articles on this site have touched on this issue. In summary, all commercial premises are granted a classification by the local authority. There is an exhaustive list available here (link to different types of commercial property) but to offer the condensed version – A grades are for retail, B for offices, C for hospitality and D for non-residential institutions.
When a tenant takes on a lease in a commercial property they agree to work within the guidelines of the classification or planning class of that building. Operating any business on premises for which it is not classified is a major violation, and both landlord and tenant will be held accountable.
A commercial landlord operating their property portfolio remotely may well be able to prove that the violation was taking place without their knowledge, and it will be a matter for the courts to decide if that was the case.
Many commercial properties provide accommodation to multiple businesses. When a new commercial property investor takes over a building, it is possible that they will have received interest from tenants looking to take over the entire building who lease agreement provides greater long-term security on the investment, as well as higher profits.
The courts do recognise the rights of the tenants, but they also recognise that the primary aim of any commercial property investor is to maximise their profits, hence providing a barrier to a higher level of income would be deemed unlawful.
It may well be that the commercial property in question has been purchased for the land, and that the building is scheduled to be demolished. Under those circumstances, the tenants must be given adequate notice. It could be argued that the commercial landlord has a duty to notify their tenants of the plans of the new owners, but this really is more of a moral obligation than a legal one.
Even then, pre-existing lease agreements supersede any agreements drawn up by new owners – there is no obligation on the part of the tenant to agree to them. In practical terms, any commercial property investor looking to buy property with tenants in situ should have their solicitors thoroughly peruse the lease agreements to learn the earliest point at which those tenants could be asked to vacate the property, thus leaving it safe for demolition.
Owning and Operating
Many businesses will, at some point, find themselves in the financially strong position of being able to purchase commercial premises for themselves and thereafter operating out of the new building.
This would of course mean that there is no new lease agreement in place, hence nothing for a previous agreement to supersede. Under these circumstances, the tenants could certainly contest the decision to bring their agreement to a close, but they are unlikely to be successful.
We hope we have demonstrated in this article that sitting tenants in commercial property have rights protecting their business interests, but that there are many avenues a new commercial landlord can go down in order to bring their lease agreement to a close.
Should the matter go to the courts and a new lease not be granted, then the tenants are entitled to compensation at a rate of one to two times the rateable value of the property. Such decisions are usually a last resort, as most commercial landlords will provide reasonable notice and, in many cases, will also work with the tenant to provide them with alternative accommodation. Indeed, the commercial property investor may well be sitting on an entire portfolio, hence finding new accommodation for their tenants is a win-win for everyone concerned. The tenants get new (and perhaps improved) premises, the landlord vacates their new acquisition with minimal fuss and another property within their portfolio starts generating a profit.
Commercial landlords do have the right to opt out of the Landlord and Tenant Act, meaning that their tenants will not have renewal rights. At the point of renewal, new contracts will need to be negotiated – there will be no standing agreement in place.
Both landlord and tenant must agree to this arrangement by way of formal written notice, and the tenant must make a formal written declaration that the understand what contracting out means to them and their business.
Naturally, both commercial property investors and tenants alike would prefer to avoid disputes that ultimately involve the courts. Such things are simple enough provided that reasonable notice is given by either party when changes are to be made.
As always, no single article can act as a substitute for professional, legal advice, and if such help is needed, the team at Prideview Group would be more than happy to arrange an introduction to our legal experts, so please don’t hesitate to ask.