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Terminating a commercial lease agreement

4-minute read

Terminating a commercial lease agreement
Jessie Day

Jessie Day

2 June 2020

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Ending a commercial lease early? Or surrendering a commercial lease but not sure where to start? Our guide, created together with legal support specialists Farillio, covers the 1954 Act and some of the scenarios you might face.

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What happens when a commercial lease expires?

The 1954 Act

There are key automatic protections in place for tenants, under the Landlord and Tenant Act 1954 (the 1954 Act). As a commercial landlord, you need to be aware of these, and we’ll cover them off before explaining the specific lease termination sections.

The 1954 Act gives your tenants the right to:

lawfully stay on the premises, using the same terms as their existing lease (when it expires), and ask the court for a new lease if you can’t agree on terms (known as ‘security of tenure’)

For more control over your property and end-of-lease terms, you may want to exclude these rights, or agree new ones. However, this requires a formal procedure complete with notices and declarations, so that the tenant understands the rights they’re giving up.

Terminating a commercial lease agreement

Assuming you haven’t decided to exclude your tenant’s rights (see above), and these are protected as usual, your commercial tenancy agreement will carry on until it’s ended in a way that’s allowed under the 1954 Act.

Your tenant might decide that once their tenancy has expired, they don’t want to stay on. If they decide this before the contractual end date’s passed and they’ve vacated the premises, your lease comes to a natural end, in-line with the agreement you have in place.

If they remain on the premises and then decide to leave after the end date, they’ll need to give you three months’ notice, using a Section 27 Notice (see below) and you’ll begin a ‘tenancy at will’, for this period.

Section 25 Notice (Termination of tenancy by the landlord)

You can give your tenant notice that you plan to end their tenancy with a Section 25 Notice (sometimes called an S25 Notice). This confirms:

  • the end date for your existing lease
  • that you won’t oppose a renewal, OR
  • that you don’t want to renew it, for reasons you’ve legally set out

Terminating a commercial lease agreement? Use the Section 25 Notice template to get the ball rolling.

This template’s wording is statutory, so don’t change it unless you’re adding the required information. You’ll also need to include the notes that go with the template, or your notice won’t be valid.

Section 25 timeframes

Strict timings apply to a Section 25 Notice. You’ll need to serve it between six and 12 months before the end of your contractual term, and if your tenant’s already given you formal notice that they want to renew the lease (see Section 26 Notice below), you can’t serve it.

If your lease is already in its final six months (or has expired), you’ll still need to provide at least six months’ notice.

What if your tenant doesn’t want to leave?

If you’ve served a Section 25 Notice but your tenant wants to stay, these are the legal steps you should take:

  • serve a Section 25 Notice, using recorded or special delivery
  • if they don’t want to leave, your tenant will need to send you a ‘counter notice’, using the format prescribed in your Section 25 Notice notes (included in our Section 25 Notice template)
  • try to negotiate a compromise
  • if you can’t agree, you’ll need to apply for a court order, giving you the right to take possession of the property
  • your tenant can choose to make a counter application to the court (asking for a new lease), and the court will make a final decision

Taking matters this far is expensive for all parties, and often the landlord and tenant reach an agreement along the way. Some landlords offer a financial incentive (for example a month rent-free) in return for a quick resolution.

Section 26 Notice (Tenant requests for a new tenancy)

If your tenant wants to stay and you haven’t issued a Section 25 Notice (see above) to terminate their tenancy, they may send a request for a new lease. This is known as a Section 26 Notice, or S26 Notice, and again it’s written in statutory wording, required by law.

The schedule that comes with the Section 26 Notice allows your tenant to set out the terms they’d like, for the new lease. If you can’t agree these terms, a court can intervene and make the decision for you both.

Your tenant can use the Section 26 Notice template for this, but remember, they should only edit it to add the required information.

Section 27 Notice (Termination by tenant of tenancy for fixed term)

If your tenant stays on the premises, and only decides they want to leave after the contract’s expired, they’ll need to give you three months’ notice, with a Section 27 Notice (sometimes called an S27 Notice).

You can provide the Section 27 Notice template to help them with this. The wording is much less formal than in the Section 25 Notice template, but we recommend they send it to you with their intentions set out clearly in a letter format, by recorded delivery.

Once a Section 27 Notice is served, it’s irrevocable. Your tenant won’t have a legal right to stay on the premises after the termination date has passed.

If your tenant has served you with a Section 26 Notice (see above) to renew the lease, they can’t send a Section 27 Notice to ‘undo’ this. However, they can serve a Section 27 Notice to come into effect after their Section 26 Notice end date has passed.

What happens if I do nothing?

Unless you’ve terminated the tenancy with one of these notices, it carries on under the same terms as the original lease. The rent will also be fixed at the amount being paid before the contractual termination date.

This document has been produced by Farillio so we can’t take responsibility for its contents. We'd recommend you take professional advice before making any important decisions based on its contents.

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