Commercial real estate often feels as if it's on the move – whether that's repurposing from office space to residential, retail outlets to warehouse units, shopping centres to community spaces – there's always a sense of shifting sands. COVID-19 has accelerated those shifting sands, with commercial landlords looking more and more to repurpose and redevelop space.
For those looking to do so in England & Wales, here, we highlight some important considerations:
Firstly, check how long is left to run on the term of the lease. If you're nowhere near the end of the fixed-term, consider the financial health of the tenant-business – is it looking to downsize? Might it be receptive to a relocation at a lower rent or on lower rates? You may have to propose a surrender of the lease to the tenant so, understanding the tenant's position before engaging in those communications is vitally important when deciding on the best strategy to achieve your objective.
Secondly, establish whether the lease has the protection of the Landlord and Tenant Act 1954 ("LTA"). The LTA governs all commercial leases in England & Wales (unless expressly excluded by the parties). If it applies, the tenant will be entitled to a new lease upon the expiry of the term of the current one. Any property litigation lawyer worth their salt should be able to answer this question pretty handy – and be aware that even if the parties have attempted to exclude the provisions of the LTA, the exclusion might be defective.
Redevelopment when the LTA applies
If the tenant's lease has protection under the LTA and it's getting close to the end of the fixed term, your next step is to serve notice under the LTA giving an end-date of the current lease and confirming that you do not wish to offer the tenant a new one. You can only do this if you are able to prove one of the statutory grounds for opposing renewal. Redevelopment falls under 'ground (f)'. You must be able to prove you have the necessary intention to redevelop the property.
Problems frequently arise in scenarios where a landlord is selling the property to, say, a residential developer. Here, you should be challenging yourself about when notice needs to be served, just whose intention it is that exists and at what time for the purpose of satisfying ground (f).
Tenant's entitlement to compensation
Remember to factor in the cost of compensation in your redevelopment plans. Ground (f) is a compensatory ground, meaning that your tenant will be entitled to be paid compensation from you. If the tenant has been in occupation for over 14 years, its entitlement will be 2 x rateable value of the property, which can be costly.
Finally, remember always and regardless of whether the LTA applies, redevelopment is likely to defeat a dilapidations claim at lease-end, because the statutory cap rendering those repairs valueless, will apply.
If you have any concerns or questions about how to deal with tenants when redeveloping your property or how these issues may impact you or your business, please do not hesitate to get in touch with our Real Estate Disputes team or your usual Brodies' contact.