Businesses - Are you paying too much rent?

For many years landlords held the upper hand when it came to negotiating new terms with tenants for them to remain in occupation of commercial premises following the expiry of their leases. Rents steadily increased for many years and there was generally no shortage of alternative tenants should the existing tenant not like what was on offer. However, the recent economic climate has seen a significant shift in the balance of power. With rents falling and good tenants fewer and further between, tenants have generally been able to agree much more favourable terms.

Tenants frequently occupy commercial premises under agreements of no fixed duration, simply paying rent at regular intervals. Other tenants may have remained in occupation following the expiry of a fixed term agreement. In these circumstances, particularly where the level of rent was negotiated some time ago and has not been reviewed since, the tenant may be paying above the market rent.

Such tenants may be in a position to serve notice on their landlord under section 26 of the Landlord and Tenant Act 1954 requesting a new tenancy and proposing terms for that new tenancy, including a level of rent. The landlord is entitled to oppose the tenant’s request on certain grounds but unless the landlord can rely on breaches of the lease by the tenant (such as rent arrears) he may have to pay compensation to the tenant should he wish to oppose the new lease request.

If the landlord does not oppose the tenant’s request (and most landlords are keen to hold on to their tenants in the current climate) then the tenant will be entitled to a new lease at the current market rent. The parties will generally instruct surveyors to negotiate rental levels and solicitors to negotiate the terms of the lease. However, in the absence of agreement, ultimately a court has power to decide the terms and to fix what it considers to be the property’s market rent. Where the market rent is lower than the rent being paid, the benefits to the tenant of invoking this procedure are clear. If you rent premises for the purpose of a business and feel that you may be paying too much rent it may well be worthwhile seeking legal advice on your position.

Written by Keith Songhurst from Birkett Long LLP. Keith will be pleased to discuss any of these issues further with landlords or tenants. He can be contacted on 01206 217335 or [email protected]