Commercial Tenants - Beware of Section 25 Notices

For many business owners the option of leasing commercial premises rather than purchasing a freehold property outright is often a much more favourable alternative.

There are a number of distinct advantages to leasing such as locking up less capital and providing flexibility as the business grows. A further reassurance for the vast majority of commercial tenants is the security of tenure offered by the Landlord and Tenant Act 1954. The Act ensures that commercial tenants cannot, provided they honour the terms of their lease, be evicted without the landlord first having complied with the strict requirements of the Act.

How can a landlord end the tenancy under the Act?

In certain circumstances a landlord can oppose renewal of the tenancy, for example failure to pay rent, if the landlord wants to redevelop the premises or acquire them for his own use. If a landlord wishes to bring a current tenancy to an end then he would need to serve the tenant with a Section 25 Notice followed by an application to the local county court to bring the tenancy to an end. If the landlord wishes to keep his tenant, but on new terms, again a Section 25 Notice will need to be served on the tenant followed by a court application. It is important that commercial tenants properly understand the consequences of being served with a Section 25 Notice and act appropriately. It is an unfortunate fact that commercial tenants often weaken their bargaining position by not dealing promptly with notices served upon them. Be aware that only the “competent landlord” can serve a Section 25 Notice – this frequently results in landlords serving the notice on a sub–tenant, because the competent landlord will often be the freeholder.

How should a tenant proceed following the service of a landlord's notice?

Commercial tenants should always seek legal advice to determine whether they have been served by the competent landlord. Sometimes, the competent landlord can change whilst the renewal negotiations are ongoing. If it is not clear whether the individual who served the Section 25 Notice is likely to remain the competent landlord then the commercial tenant can serve what is called a “Section 40 Notice” seeking clarification. The Act lays down strict rules that a landlord must follow when serving a Section 25 Notice on a commercial tenant. The landlord should use a prescribed form which contains detailed explanatory notes for the tenant.

On receipt of a Section 25 Notice Commercial tenants should consider

• Check the expiry date immediately – do not leave the notice collecting dust on a shelf!
• The section 25 Notice must specify the date on which the tenancy is to come to an end and must be served not more than 12 and not less than six months before the termination date specified.
• Check that the notice relates to the correct property (or part of it) comprised within the tenancy.
• There is no need for the tenant to serve a counter notice as used to be the case under the old (prior to 1 June 2004) legislation.
• Check whether the landlord is opposed to the granting of a new tenancy or seeks a new tenancy on different terms.
• If new terms are being suggested, what are they? Most disputes, perhaps not surprisingly, relate to rent.
• Seek advice immediately from a solicitor to ensure that your rights are protected. You will also need to enlist the help of a suitably qualified surveyor to advise on issues such as rent.
• The tenant must make an application to the local county court before the expiry of the date specified in the section 25 Notice; otherwise that tenant will lose his protection under the Act and the landlord will be entitled to possession on the date specified in the notice (or the later agreed date – see below).
• Be aware that the termination date can be extended by agreement with the landlord if and only if such agreement is committed to writing.
• If the tenant makes an application to court within the relevant timescale then the tenancy will continue as a “continuation tenancy” until three months after the matter has been determined by the court.
• Be aware that once a landlord has served a Section 25 Notice he may try and apply for what is called an “interim rent”. This interim rent will apply until the matter has been finally determined by the court. Landlords may adopt this tactic in circumstances where the market rent is higher than the actual rent being paid. The provisions relating to interim rents are highly complex and immediate legal advice should be obtained if you are faced with an interim rent application from your landlord.

How can the tenant request a new tenancy?

If a tenant, in the knowledge that the lease is approaching the end of its term, wishes to bring renewal negotiations to a head then he can serve what is called a “Section 26 Notice” requesting a new tenancy.

What happens if no notice is served?

If neither party serves a notice prior to the expiry of the fixed term then the lease will be held over and continue on as before until either the landlord or tenant takes steps to bring the tenancy to an end or seek a new tenancy on fresh terms.

Section 25 Notices are very common; however commercial tenants should always seek legal advice upon receipt. The requirements of the Act are exacting and the consequences of failing to deal with a Section 25 Notice properly can be devastating for the commercial tenant.