Commercial leases, and more specifically, rights to extend them have rather unusually found themselves in the media due to the ongoing negotiations between the UK and Mauritius over the proposed lease of the Chagos Islands.
After agreeing to return the Chagos Islands to Mauritius in October 2024, the UK Government is now in the process of trying to negotiate a lease for the UK/US military base there, and it would appear that the terms are not – at least according to the media – particularly favourable.
Most noticeably, a previously agreed Option to Extend in favour of the UK is now a bone of contention and it is looking likely that the UK Government will agree to proceed without out.
What is a right to extend and why might it be important here?
An Option to Extend in practice does exactly what it says on the tin – it gives a tenant the right to extend its lease without having to negotiate a new lease. This right is drafted within the original lease document and is generally subject to conditions, such as the lease having not been breached and perhaps an additional premium being paid at the point of the extension along with a time frame as to when the right can be exercised. A well drafted clause should set out specifically exactly what the extension will mean – for instance in this case, it was supposed to be for 40 years, and it should make it clear that the extension is one off and that the lease cannot simply be extended indefinitely.
The reason that the extension would be important here is because the proposed lease term is for 99 years, which whilst may sound a long time, in reality it is not. In having the option to extend the lease, the UK (as the tenant) has greater security over a longer-term basis which allows for better future planning. It also gives both parties longer to negotiate terms for any future lease.
Should I have a right to extend in my lease?
A right to extend is helpful for all tenants, but particularly residential leaseholders on shorter long-term leases, such as those for 99 or 125 years, as protections for residential leaseholders are limited. Additionally, once residential leases have a life span of approximately 70 years or less to run, many lenders become reluctant to lend upon them because, as the lease term runs down, the value of the leasehold interest dwindles and the properties become harder to sell. This is because at the end of the lease term, the property reverts back to the freeholder and therefore the leaseholder often faces very high costs to try and renew their lease. A right to extend would allow the leaseholder the comfort of knowing that the lease could be extended for a fixed price.
By contrast, commercial tenants have protections under the Landlord and Tenant Act 1954 which allows them to renew their lease on the same terms, except for rent, at the end of a lease term. Commercial leases often also contain a specific clause as to lease renewal or extensions, setting out the exact terms on which this will be, meaning that tenants have a far greater sense of security than they otherwise might.
If you’re looking for legal advice in relation to a lease or lease renewal on a commercial or residential property, our experts at Farleys can help. Get in touch on 0845 287 0939, by email, or through the online chat below to discuss your requirements.
