The implications of holding over at lease expiry
The COVID-19 pandemic has created uncertainty in many aspects of our business and personal lives. In some cases, it has made what were already complex business decisions even more complicated.
An example of this is the decision that a tenant has to make at the end of its lease – whether to renew its existing lease (if it has a right to renew), negotiate a new lease for its existing premises (if it does not have a right to renew), or move to new premises.
We consider the pros and cons of “holding over” where a tenant wants to delay its decision to commit to a new lease.
Committing to a new lease term is a significant decision
The decision to commit to a new lease term carries with it the potential for significant cost, including the financial commitment to pay rent for a new lease term and, potentially, the cost of moving to and fitting out new premises.
It is understandable then, that businesses may struggle to make this decision when the effects of COVID-19 have made the immediate future so uncertain. The retail and hospitality sector is contending with reduced customer levels and restrictions on operations, and office based businesses have workforces that are more alive than ever to the possibility of working from home and the need for more flexible workplaces.
Holding over is a short-term solution on lease expiry
Holding over is what happens when a tenant stays in occupation of its premises on expiry of its lease, with the landlord’s permission/consent, but without having renewed its existing lease or entered into a new lease. A holding over period can be ended by either party at any time, with most leases having a notice period of 20 working days.
A tenant can hold over on final expiry of its lease (i.e. the end of the current term, where the tenant does not have a right to renew) or where it has a right to renew its lease but has not yet committed to the renewal term.
The benefit of flexibility
The key benefit to holding over is the flexibility that a short term lease commitment provides. As a tenant, you can choose to leave your premises on short notice and your rental commitment is similarly short. This can be useful where a tenant needs to buy some time before making a final decision. Having said that, there are significant risks to holding over and any decision to hold over should be a well-considered one.
The risks in holding over are largely related to the inherent lack of certainty. The decision as to whether or not the benefits outweigh the risks will depend on the tenant’s particular circumstances, but an important part of that decision is knowing and taking account of the potential risks:
Landlord permission or consent
Most leases contain an express provision requiring landlord permission to hold over. If that express provision is not in a lease, then a requirement for landlord consent is implied at law. Whether or not a landlord has given permission or consent will depend on the circumstances, but will usually require a positive act on the landlord’s part rather than simply not objecting to the tenant’s continued occupation of the premises. For this reason, it may be wise for a tenant to approach its landlord sufficiently far in advance of expiry to ensure the tenant has time to meet its make good obligations and relocate should the landlord not be agreeable to the tenant holding over.
Not all landlords will be happy for a tenant to hold over, particularly in a strong leasing market where the landlord is well placed to lease the premises to a new tenant. However, in the absence of a new tenant to take over the premises, many landlords will welcome continued rent payments while marketing the premises for lease. Other landlords may attempt to renegotiate lease terms for any holding over period.
Dealing with an uncertain term
Once a tenant is holding over, it has no control over how long it can stay in occupation of its premises. This risk could be significant if, for example, the tenant has extensive make good obligations, and ends up with a very short timeframe in which to do the necessary works (while also trying to locate, and maybe fit out, new premises).
If this lack of certainty is of particular concern, a tenant could attempt to negotiate a short term fixed extension with its landlord to secure it some more decision making time, rather than relying on the holding over provisions of its lease.
Losing the right to renew
Tenants who have a right to renew their lease on expiry, but instead choose to hold over before making a decision to renew run the risk of losing their renewal right.
To renew a lease, a tenant needs to give notice to its landlord by a set date before expiry, usually somewhere between three and twelve months. It is possible to renew a lease after that date, but by doing so the tenant will be in breach of the lease and at risk of the landlord refusing to grant the renewal. That could happen, for example, where the landlord has already agreed to lease the premises to a new tenant or is seeking to renegotiate lease terms.
The Property Law Act 2007 allows a tenant to apply to the Court for relief where a tenant has exercised its renewal out of time and its landlord refuses to grant the renewal. Relief is at the Court’s discretion, so a tenant should not take it as a given that it will get relief, and the Court may order the tenant to pay the landlord’s costs incurred as a result of it not renewing on time.
In deciding whether to grant relief, the Court will consider:
- the conduct of the parties;
- the reasons for the failure to renew the lease;
- any prejudice to the parties; and
- the interests of third parties.
If the Court decides to grant relief, it can order the landlord to renew the lease subject to any conditions as to expenses, damages, compensation or any other relevant matters that the Court thinks fit. This gives the Court the ability to compensate a landlord for actual losses arising from a tenant’s failure to renew on time, for example any costs incurred in trying to obtain a new tenant for the premises.
The fact that a landlord may have granted a new lease of the premises to a new tenant is not fatal to the existing tenant’s ability to obtain relief. In those circumstances, the Court may:
- cancel or postpone the new lease granted to the new tenant; and/or
- order the payment of damages or compensation to the new tenant (either by the landlord or the existing tenant, or shared between them).
Because the grant of relief and any associated conditions are discretionary and highly fact specific, the risk to a tenant of not being granted relief, or being granted relief subject to onerous financial conditions, is difficult to predict and could be significant. For that reason, in most circumstances, a tenant with a right of renewal would be best placed to agree a negotiated position with its landlord before expiry of the lease, rather than relying on holding over.
We can help
Our property team has extensive experience advising landlord and tenants at lease expiry, and can assist with negotiations and lease variations.
If you are a tenant approaching lease expiry, or a landlord who has received a request to hold over, we would be delighted to help.