Perpetually Renewable Leases
Jasmine Keeble, Legal Assistant
Some commercial leases grant the Tenant an option to renew the lease at the end of the lease term. Including this option is often beneficial for Tenants as, unlike security of tenure, the Landlord is not able to refuse to grant the renewal lease and must instead comply with the terms of the option to renew. This, in turn, provides a Tenant with greater security should they wish to remain in the premises for an additional term.
However, these options must be drafted carefully. If an option is granted so that at the end of each term the lease may renew and be renewed again with no limits placed on how many times this may occur, a perpetually renewable lease will be created. Such leases are sometimes referred to as ‘never-ending leases’ as the Tenant will always have the right to renew their lease at the end of every term.
Law of Property Act 1922
For the purpose of the Law of Property Act 1922, these perpetually renewable leases are deemed to have a term of 2000 years from the start of the original term. If an underlease is drafted in a way that creates a perpetually renewable lease, the term is instead 2000 years, minus one day, from the start of the lease out of which it was created.
The courts will often seek to avoid the creation of perpetually renewable leases where possible. For example, where the option to renew is stated to be on the same terms and conditions of the original lease, the courts will usually take the view that this will not be a perpetually renewable lease. However, if the option to renew is on the same terms and conditions, and includes a further option to renew without any limit on how many times this can occur, a perpetually renewable lease will have been created.
Once a perpetually renewable lease has been created, the Tenant may apply to the Land Registry to have the 2000-year term noted on their title, even if the Landlord had not intended to grant them a perpetually renewable lease.
Rent Reviews and Termination
These perpetually renewable leases have no mechanism within them to allow for rent reviews, and so rent will remain at the same rate as referred to in the lease, from the end of the original term and until the lease expires after 2000 years.
A Tenant is permitted to terminate a perpetually renewable lease by giving 10 days’ notice at the end of each renewal cycle. For example, if the original lease with the option to renew was granted for a term of 5 years, the Tenant may give notice to terminate the lease at the 5th year of each term.
A perpetually renewable lease may also be assigned to another tenant in the same manner as any other lease. The incoming Tenant will continue to have the benefit of the longer lease term, and under the terms of the Act, a guinea should be paid as a fee.
It may be tempting for a landlord to draft a lease without instructing a solicitor, particularly where the lease is deemed to be simple, or to be for a short term, or low rent. However, there is a risk that in doing so, potential complications such as this may arise.