What happens at the end of a commercial lease?

For many business owners, signing a commercial lease marks the beginning of their relationship with their landlord. However, what happens at the end of the lease can be just as important. Understanding your rights, obligations and options in advance can help you avoid unexpected costs, business disruption and potential disputes. Whether you are a tenant approaching the end of your lease term or a landlord preparing for a lease expiry, it is important to know what happens next.

The expiry of a commercial lease does not always mean that the tenancy ends. Whether a tenant can remain in occupation and seek a new lease depends largely upon whether the lease is protected by the Landlord and Tenant Act 1954 (Act). Both landlords and tenants should plan ahead to understand their intentions, rights and obligations, and should seek professional advice early, particularly where lease renewal, possession, or dilapidations issues may arise.

Does the lease simply end?

Not necessarily. Much will depend upon the decisions made by the parties prior to the lease being granted and, specifically, whether the tenancy created by the lease benefits from security of tenure under the Act. You can often tell if a lease is contracted out by checking to see if the Act has been “excluded” from it. Usually, there are clues about 3/4 of the way through the lease document itself. If it has been “contracted out”, this part of the lease will refer to dates of notices being served, and declarations being executed. If the lease does not contain those provisions, it is likely that the tenancy was not contracted out and that the security of tenure provisions of the Act apply.

Where the Act applies, then the tenant is generally entitled (although not obligated to do so) to remain in occupation after the contractual expiry of the lease and will have a right to request a new lease from the landlord. However, a tenant's right to security of tenure depends upon continued occupation of the premises for the purposes of its business. If the tenant has ceased occupation before the lease expires (or is no longer occupying for business purposes) then the protection under the Act may be lost.

Where the lease is properly “contracted out”, then the Act will not apply and the tenancy created by the lease will end on the termination date specified in it. 

When a commercial lease reaches its contractual expiry date, one of several scenarios may arise:-

1. Where the Act does not apply, the tenancy will terminate upon the contractual expiration of the lease and either:-
   1. The tenant will remain in occupation under a form of short-term agreement (usually a Tenancy at Will if the parties are “actively negotiating” terms of a new lease); or
   2. The tenant will vacate
2. Where the Act applies, the tenancy will continue (by operation of law, provided the tenant is still carrying out business operations in the premises) unless or until either party seeks to terminate it by agreement or by serving notice on the other. As and when that happens, either:-
   1. The parties will seek to agree the terms of a renewal lease; or
   2. The landlord will seek to terminate the tenancy based upon one (or more) of the “statutory grounds” set out within the Act and, if successful, the tenancy will terminate and the tenant will have to vacate.

In either scenario, the outcome will generally be either the grant of a new lease or the tenant vacating the premises. The position will largely depend upon the terms of the current lease, and whether the tenancy benefits from security of tenure under the Act.

What if the landlord wants the premises back

A landlord will be in a better position if the lease is contracted out of the Act, because they are under no obligation to offer the tenant a new lease. Provided the Act does not apply, the tenancy created by the lease will come to an end at the same time as the lease expires. The landlord could then, in theory, simply seek possession (on the basis that the tenant has no continuing right to occupy).

Where the Act applies, the parties must either agree that the tenant will vacate at the end of the contractual term or, in the absence of such an agreement, the landlord must seek to terminate the tenancy by serving a special form of notice under the Act which specifies one or more of the “statutory grounds” of opposition set out within the Act. These grounds include (but are not limited to):-

1. The premises being in disrepair;
2. The tenant has “persistently delayed” in paying its rent; and
3. That the landlord wishes to redevelop or demolish the premises.

It would be wise for the landlord to plan ahead and serve any requisite notice to terminate even if it considers that a deal can be done by agreement. If the tenant wishes to renew, it can challenge the landlord’s ground(s) of opposition, which will be upheld only if the landlord can prove (to the civil standard of “on the balance of probabilities”) that its grounds are made out. If not, the Court will make an Order that a new lease be granted (on terms to be agreed between the parties or, in lieu of that, at a further Hearing where the Court will decide the terms of the new lease).

Dilapidations and repair obligations

If the landlord is able to obtain possession, disputes often arise at the end of a commercial lease term over dilapidations. These refer to breaches of the tenant's repairing, decorating or reinstatement obligations under the lease.

Before the tenant vacates, the landlord may instruct a surveyor to assess the property's condition and identify any required works. Potential claims can arise from:-

1. Failure(s) to repair the premises;
2. Failure(s) to redecorate the premises, where required;
3. Failure(s) to reinstate alterations carried out during the term; and/or
4. The inadvertent removal of fixtures that in fact belong to the landlord.

Where a tenant fails to comply with these obligations, a landlord may pursue a dilapidations claim to recover the cost of necessary repairs, reinstatement works, or other losses resulting from the breach. Typically, this begins with the service of a Schedule of Dilapidations, detailing the alleged defects and the estimated cost of remedial works.

For tenants, dilapidations can represent a significant financial liability if repair obligations have not been properly managed throughout the lease term. Early planning, regular property inspections, and obtaining professional advice can help minimise exposure and avoid costly disputes.

Landlords should ensure that any claim is properly evidenced and reflects their actual loss. In many cases, the level of damages recoverable may be limited by statutory provisions, including Section 18(1) of the Landlord and Tenant Act 1927, which can cap damages where the landlord's loss is less than the cost of repairs.

Given the potentially substantial costs involved, both landlords and tenants are encouraged to seek legal and surveying advice at an early stage. Effective negotiation and adherence to the Dilapidations Protocol can often lead to a commercial settlement, avoiding the need for costly litigation.

The end of a commercial lease can present both opportunities and risks for landlords and tenants alike. Whether the tenancy is protected by the Act, whether a lease renewal is desired, and whether dilapidations issues arise can all have significant financial and practical consequences. By reviewing lease terms well in advance of expiry and obtaining specialist legal and surveying advice where necessary, parties can minimise disputes and achieve a smoother transition at the end of the lease term.

How can we help?

Get in touch with our specialist property litigation solicitors. Contact our team by telephone on 0178 232 4454, complete our contact form, or send us an email via info@smithpartnership.co.uk. 

We also have offices across the East Midlands and Staffordshire with expert property litigation solicitors, in Burton, Derby, Leicesterand Swadlincote.