Business leases: how to end a lease
There are different procedures for ending a lease depending on whether the fixed lease term has expired or not and whether the procedure is started by the landlord or the tenant.
During the fixed term (the duration as stated in the agreement), a lease can be terminated only if one of the following applies:
- both the tenant and the landlord come to a mutual agreement. This should be recorded.
- the tenant is in substantial breach of the lease. This depends on the terms of the lease. The route to vacant possession however, is via the County Court.
- the tenant or the landlord uses a break clause (if there is one in the lease).
A tenant has two options to end the tenancy if he or she does not wish to continue it beyond the original term.
The first, and most common is simply to move out before the last day of the fixed term without giving the landlord notice. Provided that he or she has vacated the property, returned the keys and is no longer in occupation, the tenancy ends (Esselte AB v Pearl Assurance Plc ).
If the tenant continues in occupation after the expiry of the term, his or her occupation is deemed to continue so far as possible under the terms of the lease (including provisions as to rent). The lease can then be terminated only by agreement or by one party starting the process set out in sections 24-28 of the Landlord and Tenant Act 1954.
The second option is for the tenant to serve a Section 27(1) notice. This has no prescribed form but must be in writing. It must be served at least three months before the expiry of the original term. For example, if the contractual term ends on the 30th June then the tenant should serve the notice to the landlord by no later than the 28th March.
Moving out is usually preferred by the tenant because serving a Section 27 notice is irrevocable and gives him or her fewer options later. If the tenant is late to move out he or she becomes a trespasser, and having served a s27 notice, cannot apply for a new tenancy under Section 26.
Even if the landlord and tenant have opted out of sections 24 to 28 of the Landlord and Tenant Act 1954 (see the next section), it is still safest for the Landlord to give at least 3 months notice (or however much is required by the lease). Notice should be written, but need not follow the prescribed format under s27 of the LTA 1954.
Unless the landlord and tenant have contracted out of sections 24 to 28 of the Landlord and Tenant Act 1954, before the start of the lease, the tenant has automatic security of tenure. In those circumstances the landlord can obtain possession only by following one of the routes set out in the Act. They are explained in our article here.
Security of tenure is granted automatically if the fixed term of the lease is greater than 6 months, or if the tenant has been in occupation for more than 12 months.
- the right to stay in the property when the fixed lease term expires on the same terms as during the fixed period
- the right to be offered a new lease
We have an article on the Regulatory Reform Order 2003 that covers security of tenure and opting out in more detail.
The lease is said to be "periodic" once the fixed term ends. This means it runs from period to period, where a period is the length of time between rent payments (if a tenant pays rent monthly, the period is monthly, if he or she pays annually, then the period is yearly).
During a periodic tenancy, the tenant is said to "hold over" under the terms of the expired lease until either:
- both the landlord and the tenant agree a new lease at a new rent and possibly with changes to other terms, or
- the landlord serves a notice to quit in order to seek possession.
While "holding over", both parties have the same rights and obligations as they did under the old lease. A hold-over can last indefinitely.
The notice procedure laid down in the Act may lead to a hearing before a judge. Where the court finds in favour of the tenant, a new tenancy will be ordered. The terms will be decided by the court after hearing the evidence of the parties or their surveyor experts. The usual term of the new lease is the same as the old one. The rent ordered is that at which the premises might reasonably be expected to be let on the open market.
In practice, the service of a notice is treated as a “wake-up call” by the parties who then instruct professional surveyors to argue about the terms of a new lease. A case will be litigated only when a tenant is challenging the ground given by the landlord.
When the tenant wishes to vacate during a periodic tenancy (after the formal term of the lease has expired)
The tenant should send a Section 27 notice to the landlord if he or she hasn't contracted out of ss24 to 28 of the LTA 1954, or should follow the procedures set out in the lease (usually just giving it in written form).
Usually, the tenant can only leave at the end of a period (before the next payment of rent is due), but must give at least the amount of notice required in the lease (3 months if not contracted out). So a tenant is likely to have to give between 3 and 4 months notice if rent is paid monthly, and 3 and 6 months notice if rent is paid quarterly.
To gain possession when the parties have contracted out of ss24 to 28 of the LTA 1954, the landlord should follow the procedures in the lease - usually giving at least a certain amount of written notice.
If the parties haven't contracted out of security of tenure, then the landlord can only obtain possession if he or she applies to court on any of the "grounds" set out in the Landlord and Tenant Act 1954, section 25. He can only do this after the fixed term has ended.
The steps involved for gaining vacant possession are as follows:
- the landlord serves the tenant with a Section 25 notice stating the grounds for possession
- the tenant serves a counter notice in accordance with the instruction notes on the landlord's notice, saying he or she is not willing to give up possession
- the two parties negotiate
- if the parties continue to disagree, the landlord applies to court for possession
- the tenant makes a counter application for a new lease
The procedure is laid down by statute, therefore there is little scope for departing from it. That means either side will lose out very easily if they do the wrong thing or fail to do the right thing within the appropriate timescale.
Because litigation is expensive, most situations are resolved by negotiation between either the parties personally, or their surveyors before the parties go to court. The landlord may have to offer a financial incentive to avoid further action.
Recently, mediation is also more often used, replacing negotiation. The discussion becomes a "negotiation with a referee" where both sides are encouraged to see the advantages of settling outside of court.
Where the court finds in favour of the tenant, a new tenancy will be ordered. The terms will be decided by the court after hearing the evidence of the parties or their surveyor experts. The maximum length of the new tenancy will be fourteen years. The rent to be ordered is that at which the premises might reasonably be expected to be let on the open market.
We have a further article about how to serve a section 25 notice.
There are 7 grounds for rejecting a tenant's application for a new lease, or objecting to the tenant's right to renewal. We cover these in another article.
Two grounds require the court to give possession mandatorily if the landlord can prove them to be valid. These are:
- Ground F: Landlord intends to demolish or reconstruct the property
- Ground G: Landlord intends to occupy the premises himself
There are conditions on these grounds. The landlord may be required to pay compensation to the tenant if the tenant is forced to vacate. The court would decide how much compensation is due.
There is also a third ground where the court has little discretion to prevent the grant of possession. This is:
- Ground D: Availability of alternative accommodation
Those three grounds constitute around 99% of all notices. The others cover esoteric and occasional circumstances or are settled without notices and litigation.
Net Lawman provides all the forms necessary to end a business tenancy.
The words of the forms are laid down by law so do not change them. The tenant must then respond within a set time and in the manner also laid down by law.
Each form is in two parts: the notice and the notes for tenant. The notice is invalid unless the notes are served with it.
You may also need a new lease agreement.
Please note that the information provided on this page:
- Does not provide a complete or authoritative statement of the law;
- Does not constitute legal advice by Net Lawman;
- Does not create a contractual relationship;
- Does not form part of any other advice, whether paid or free.
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