Leases in the retail sector: The term, the Landlord and Tenant Act 1954 and lease security
This series of articles explores key issues to be considered when agreeing heads of terms and negotiating the provisions of leases, with a focus on the retail sector.
Term and Landlord and Tenant Act 1954 ("54 Act")
The lease term is a critical consideration for retail tenants, as it directly impacts both the flexibility and security of their business. Typically, modern retail leases tend to be shorter, generally ranging from 5-10 years, as opposed to the 10-15 year terms that were once the norm. Shorter-term leases are often preferred by retailers in uncertain times because they allow more flexibility to adapt to market changes, adjust to shifts in consumer demand, or even relocate if necessary. However, this flexibility comes with the downside of potential rent increases or the risk of losing the premises in the future.
One exception to this trend is when a retailer is incurring significant fit-out costs or has invested heavily in making the premises suitable for their business. In such cases, a longer-term lease may be more desirable to protect that investment, as it provides stability and more time to recoup the expenditure.
Another important factor for retail tenants is whether the lease is granted under the security of tenure provisions of the Landlord and Tenant Act 1954. Leases will automatically be protected under the 54 Act unless the relevant provisions are expressly excluded. If the lease benefits from 54 Act protection, the tenant will have an automatic right to remain in the property at the end of the term, unless the landlord successfully seeks possession. This protection can be invaluable for retailers, as it ensures that they are not forced out of the premises at the end of the lease term, providing more stability for their business.
If the landlord wishes to regain possession of the premises, they must serve a notice relying on one of the following statutory grounds:
- Ground A: The premises are in disrepair.
- Ground B: Arrears of rent.
- Ground C: Other breaches of covenant.
- Ground D: Suitable alternative accommodation has been offered by the landlord.
- Ground E: The tenancy was created by subletting part of the premises.
- Ground F: The landlord intends to redevelop the premises.
- Ground G: The landlord intends to occupy the premises themselves.
These grounds are complex, and whether a particular ground can be relied upon depends on a variety of factors, which go beyond the scope of this article. However, tenants should be aware that, depending on the statutory ground used by the landlord, the tenant may be entitled to compensation, which can range from 1x to 2x the rateable value of the property, depending on how long the tenant has occupied the premises.
Retail tenants should also be mindful that if they vacate the premises before the end of the lease term, the 54 Act protection will no longer apply. If the tenant remains in the premises and no 54 Act notices have been served, the tenant will have the right to continue occupying the premises on the terms of the original lease.
Historically, most shorter-term leases were excluded from 54 Act protection, with only longer-term leases benefiting from such protection. However, in recent years, it has become more common for shorter-term leases, particularly those in prime retail locations, to be granted with 54 Act protection. Retail tenants should carefully consider whether they want 54 Act protection in their lease, particularly in cases where the location of the property is critical, such as in restaurants or flagship retail stores, where significant sums are invested in the fit-out. Having the security of tenure under the 54 Act can provide peace of mind and protect a retailer’s long-term business interests.
It should however be noted that The Law Commission has launched a consultation to reform the right to renew business tenancies under the Landlord and Tenant Act 1954. The consultation asks whether business tenants should have a legal right to a renewal tenancy after their existing tenancy expires and, if so, how this should operate. It will be interesting to see what developments occur in the future in respect of the 54 Act.
Guarantor/rent deposit
When negotiating a lease, landlords often require security in the form of a guarantor or rent deposit to ensure that the tenant will comply with the terms of the lease, especially in terms of paying rent. This is particularly important in retail leases, where the tenant’s covenant strength may be less established or if the retailer is a new business or in a high-risk sector.
A rent deposit is typically 3 to 6 months' worth of rent, which the landlord can draw upon in the event of default by the tenant. Retail tenants should be aware that while a rent deposit offers security to the landlord, it can be a significant upfront cost. The deposit may be refunded at the end of the lease term if there are no outstanding issues, such as unpaid rent or damages.
Alternatively, a guarantor may be required, particularly where the tenant’s financial position is less robust. A guarantor can be required to fulfil the tenant’s obligations under the lease if the tenant defaults. Retail tenants should carefully assess whether they can meet the landlord’s requirements or whether negotiating for a lower rent deposit or other forms of security is possible.
Negotiations around rent deposits and guarantors are a matter of balancing the interests of both parties, with landlords seeking security for the rent and the tenant looking to minimise upfront costs.
Retail tenants should seek professional advice to ensure that these security provisions are fair and reasonable given their financial situation and the nature of their business.