Renewal & Compensation Overview
Tenant’s Rights to Lease Renewal
Under Landlord and Tenant legislation, a tenant of a business property who has been in continuous occupation of the property for more than five years generally has a right to a new lease. Since late 2008, it has been possible to agree that this right will not apply (“contract out”). It had been possible to contract out only in relation to offices, prior to that date.
The property must consist principally of a building in order to qualify. Any land must be incidental or ancillary. The property must be used for the purpose of a business. Business is very widely defined as including any trade, profession or business whether carried on for gain or reward or not. It includes cultural, charitable, educational, social and sporting services and public services by public bodies.
The right is claimed by serving a notice shortly before or after the previous lease or tenancy has expired. The conditions must be satisfied at the date of the notice. The property must have been used for business purposes by the tenant or his predecessors, for five years before this date. The right applies to the tenant in actual occupation. Therefore if a property is sub-let, the tenant who sub-lets will lose the right but the sub-tenant itself may obtain the rights.
Other than in the case of post-2008 leases and in the case of post-1994 leases of offices, any attempt to “contract out” of the Act is void. This means any agreement which attempts to prevent the Act applying, will be invalid. Any strategy such as pre-agreed large increases in the rent, or artificial requirements designed to impede the right is also void.
The claim for a new lease involves certain formal procedures and ultimately an application to the court, which can fix the terms of the new lease. In practice, the landlord and tenant will almost always agree on the terms of the lease in light of what the Court is likely to grant. The necessity for a court application would, therefore, be very rare.
Where a tenant has been in possession for more than five years, he effectively has the option to take a long lease but also the right to leave at short notice. The landlord does not have a right to require the tenant to commit to a long lease. In order to secure a longer-term commitment from the tenant, the landlord must bring the matter to a head by terminating the existing letting so as to require the tenant to leave or apply for a new lease.
Frequently, the landlord serves notices terminating the letting and applies to Court for an order for possession. The tenant then serves notice claiming the statutory rights and the two proceedings are united in a single proceeding. In this way, the tenant is effectively forced to take a new letting or to leave. The parties usually agree to a new lease at that point.
The right to a new lease is for a term between 5 and 20 years as the tenant nominates. Therefore, the tenant must at least commit to a five-year term but may require a term of up to 20 years. Almost invariably, the new lease is negotiated in the light of these rights for periods of between 20 to 25 years. 35 years lease were formerly more common.
Renouncing rights
Until 1994 it was not possible to contract out of Landlord and Tenant Act rights at all. After 1994, contracting out was permitted for office premises only. There had to be a valid renunciation in writing and the tenant must have received independent legal advice. The renunciation had to be entered prior to the lease commencing.
In 2008, the right to renounce the right of renewal was extended to apply to any type of property. There is a requirement is that the tenant receives independent legal advice. The reference to the renunciation being entered prior to the lease has been removed.
Apart from renunciation, there are some limits on the right to a new lease which may apply in some circumstances. One ground is that the landlord intends to undertake a scheme of reconstruction for which it has planning permission and the grant of tenancy would not be consistent with good estate management. In this situation, compensation must be paid.
A business tenant is entitled to compensation for disturbance, where he would be entitled to a new tenancy but for one of the grounds mentioned above. The compensation is the loss and expense which the tenant incurs by reason of leaving or in consequence of leaving. Compensation must be paid within one month. If compensation is not paid, the tenant is entitled to renew his application for a new tenancy.
There are exceptions to the right to a new lease, such as in the case of tenants holding from the State and certain state bodies. There are other exemptions for particular circumstances.
Improvements and Compensation
Where a tenant proposes to make improvements, he must serve an “improvement notice” on the landlord stating the proposed works, the cost, and whether planning permission is required. The landlord may within one month serve a notice consenting to the works, undertaking to do the works himself or objecting and specifying the grounds of objection. If the landlord agrees to do the works, he may specify an increase in rent, either specific or to be determined by the Court, in respect of the value of the works.
If the landlord does not serve an improvement undertaking or objection within one month, the tenant is entitled to do the works within one year (subject to other compliance obligations such as planning permission etc.). The tenant will be entitled to compensation on the eventual termination of the lease in this situation, to the extent the property has increased in value as a result of the works.
Where the landlord agrees to do the work, the tenant may accept this agreement or withdraw the improvement notice or object to the increase in rent specified in the undertaking. The tenant may apply to Court under certain situations as an alternative to withdrawing the improvement notice. An improvement notice is not obligatory, but failure to serve it runs the risk of a tenant losing entitlement to compensation.
Where a tenant terminates a lease of a building, he may be entitled to compensation from the landlord for improvements made to the property by the tenant or his predecessors as tenants. This does not apply where the tenant himself terminates the tenancy by surrender or where it is terminated for non-payment of rent or non-compliance with obligations.
The amount of the compensation is agreed between landlord and tenant or in default of agreement, is the capitalised value of the addition to the letting value at the termination of the tenancy as the Court determines to be attributable to the improvements. The Court has regard to the length and duration and life of the improvement.