“The Act” (The Landlord and Tenant Act 1954) is a tremendous piece of legislation for tenants. It was designed when commercial property was in short supply after the Second World War to re-balance the power that English landlords had over their tenants. Nowadays, landlords are happy to see it fall out of fashion, but tenants would be ill-advised to let that happen too easily.
The benefits come at the end of the lease, when it is time to renew, and for some occupiers that is too far in the future to worry when they are negotiating with the landlord at the start of the lease. However, being ‘Inside the Act’ at the end of the lease means that tenants get a beneficial rent valuation if they renew and if they want to move out they get control over the timing of their exit. We think the rent savings alone are worth paying about 3% – 10% of rent depending on the market conditions. And that is not all:
Tenants can choose the timing of their move
At the end of your lease you can choose the timing of your next move. If, as the tenant, you play it right, you can get an extra year or so at the end of your lease during which you have a three month, tenant-only, rolling break option. The landlord still gets paid rent but he can rarely avoid this ‘extension’, except in a few specific circumstances: usually because the landlord has plans to redevelop. Even then, tenants get compensation and about 11 months to move out in most cases.
Getting a better rental deal
If you decide you want to renew your ‘Inside the Act’ lease the landlord must grant this to you (except in those few specific circumstances mentioned above) at a market rent. Agreeing the rent on the new lease is similar to having an upward and downward rent review with the added bonus that the valuation is usually skewed in your favour to a “net net rent”. A “net net rent” is one better than the “net effective rent” which most rent reviews use. It is the average rent over the course of a lease including all the rent free period.
If the landlord objects to the new rent they have to make their case in Court. Therefore, you don’t have to threaten to move to get the best deal on a new lease. In fact, very often tenants do not get the best deal when they make such threats to move; landlords know that moving is an expensive alternative and use this as leverage to achieve higher than market rent. Never let your agent persuade you that you need to pretend you are looking for new space. If your lease is ‘Inside the Act’ this would not be the best negotiating strategy.
Disposing of a fag-end lease is easier
Let’s say that you want to exit your lease a few years before it ends. Trying to sublet a fag-end lease is hard because no incoming tenant wants to spend money on fit-out and then have to negotiate against the clock a couple of years later. But you can assign your ‘Inside the Act’ lease to a new tenant and they will have the same rights you did; they can demand a new lease at market rent too.
Tenants have a lot to gain from these benefits and should not be deterred by a lack of enthusiasm for a lease ‘Inside the Act’ from their agent. Acquisition agents, who are paid according to the terms of the initial letting, sadly have little incentive to complicate negotiations by bringing up the 1954 Act, so they can brush over the benefits that a lease ‘Inside the Act’ would offer.
There are times when a landlord will simply not be persuaded to sign an ‘Inside the Act’ lease, but most tenants taking leases of 10 years or more (with or without a break), or single let buildings should expect and hold out for these benefits.
Our top tip to occupiers who feel they are only getting one side of the story from their agent or need support during the negotiation process is to seek specialist advice from a Lease Consultancy team, such as ours at Allsop.