4 Year 11 Month Leases – A Thing of the Past? (August 2008)

One of the most far-reaching changes to commercial landlord and tenant law in the last 15 years has recently come into force.

Since 20 July 2008, all commercial tenants (and not just office tenants as before) can opt out of their statutory entitlement to renew their leases. The opt out (or contracting out) provision applies to all tenants of business premises provided the tenant has obtained independent legal advice and signed a deed of renunciation.

This change, coupled with the new VAT regime (which has removed the prohibitive VAT consequences to landlords of granting leases of between ten and twenty years in length) will facilitate the grant of leases of more than five years duration. Previously, the only means of preventing renewal rights accruing for retail and industrial tenants was to ensure that a tenancy was for less than five years duration. The lack of a contracting out procedure for retail and industrial users created a high degree of inflexibility and made subletting other than for short terms particularly problematic.

One of the several advantages to landlords of this new development is that concession and franchise arrangements, which are popular in the retail sector, will no longer carry a risk to the landlord of being deemed tenancies provided the lease is structured correctly. This will also benefit department store tenants and large multiples who frequently grant concessions.

The new opt out provision also means that developers who have short to medium term plans to re-develop or refurbish outdated schemes will have the certainty of obtaining vacant possession when they need it, and can continue to let premises following the expiration of existing arrangements during the planning application and pre-construction periods, thus securing valuable additional income. Tenants will also have longer periods to make alternative arrangements.

An interesting aspect of the new contracting out procedure is that the renunciation is not required to be effected prior to the commencement of the tenancy (as was the case with office tenants).