What is a section 25 notice?

Understanding section 25 notices and their impact on commercial leases

Many modern commercial leases are subject to the Landlord and Tenant Act 1954. This means that, at the end of the existing lease, the tenant is entitled to a new lease unless the landlord is able to object based on the limited ground of opposition available. The right to a new lease is a valuable and important commodity to ensure business continuity and to provide the tenant with an asset that it can assign at value if allowed.

For a lease under the Landlord and Tenant Act 1954 to be ended, a landlord must serve a section 25 notice. If the existing lease is not ended when its fixed term arrives, then the lease will continue rolling on, governed by the terms set out in the lease.

In a lot of cases, the landlord may want to negotiate a new rent and new terms so will want to terminate the lease. The landlord terminates a lease (absent any break clause which might apply) by serving a section 25 notice on the tenant.

What is a section 25 notice?

A section 25 notice can take two forms:

• A “friendly” notice which ends the existing lease but confirms that the landlord is prepared to enter a new lease and sets out the terms the landlord is prepared to accept
• A “hostile” notice which ends the existing lease and opposes a new lease on one of the limited grounds available

In either case, the minimum notice period that a section 25 notice can give is six months and the maximum is 12 months. In the case of a lease that is approaching its end date, these timelines need to be considered when deciding when to serve the section 25 notice to coincide with the end date in the lease.

How is a section 25 notice served?

It is important to check the terms of the lease as it will normally set out the way all notices should be served and if not complied with, the notice is likely to be defective.

If there is no lease, or the lease is silent on the issue of service, then section 196 of the Law of Property Act 1925 will normally apply. The issue of service is either by hand/personal delivery or by recorded post.

How can a landlord object to a new lease?

There are seven grounds on which a landlord can object to a new lease, of which two are mandatory

Two of the grounds are mandatory, and if proven in court will require the court to refuse a new lease. The mandatory grounds are where the landlord:

1. can prove an intention to demolish or reconstruct the property; and/or
2. intends to occupy the premises itself.

Five of the grounds are discretionary and, even if proven, allow the court discretion as to whether a new lease should be allowed or not. The discretionary grounds are:

1. a breach of a repairing covenant;
2. persistent delay in paying rent;
3. breaches of other obligations;
4. the availability of alternative accommodation; and/or
5. where (if there is a sub-tenant) the landlord can show that it can let the whole premises for more than the parts.

Under some of these grounds, compensation is also payable to the tenant if the ground is proved.

What happens once the section 25 notice is served?

Once the section 25 notice is served, it normally triggers a negotiation with the tenant either in relation to the terms of a new lease or in relation to the grounds on which the landlord is opposing a new tenancy and the merits of those grounds.

From the tenant’s perspective, it is important to note the deadline in the section 25 notice – the repercussions can be significant.

By the deadline in the section 25 notice, the tenant must either:

• Have agreed and completed a new lease with the landlord; or
• Have agreed an extension of the notice deadline in writing with the landlord; or
• Issued court proceedings asking for a new lease and a decision on its terms.

If none of these steps are taken, the tenant loses its right to occupy the premises and loses the right to a new lease.

It is open to the landlord or the tenant to issue proceedings earlier than 6 months (but only after two months from the service of the section 25 notice) for a determination as to whether a new lease will be allowed and the terms of that lease. This is seldom used, in my experience, but is a useful option if time is important and a decision needs to be made sooner rather than later.

Conclusion

It is important for landlords to be aware of their right to terminate a new lease (once the existing lease is at an end) and to negotiate a new rent or oppose a new one.

In many cases, leases will simply roll on until a section 25 notice is served. It is important that the section 25 notice is drafted and served properly, and, for the tenant, it is important that a note is made of the deadlines and swift action taken to protect their position.

If you have any questions on this topic or to discuss your situation, then please do not hesitate to contact our commercial disputes team.