Demystifying lease renewals for contracted-out tenancies: A guide for new property investors

For new property investors, navigating the lease renewal process can be complex. This guide breaks down how to approach renewals when the lease term is nearing its end and where the lease is contracted out of the Landlord and Tenant Act 1954.

What does “contracted out” mean?

When a lease is contracted out of the Landlord and Tenant Act 1954, the tenant does not have an automatic right to remain in the property once the lease expires. They also cannot legally demand a renewal. This gives the landlord greater flexibility and control over the future use of the property.

Renewal is a matter of negotiation

Since there’s no statutory right to renew, any continuation of the lease depends entirely on mutual agreement between landlord and tenant. If both parties wish to continue the relationship, they must negotiate a new lease. They cannot extend the existing lease.

How does the renewal process work?

We would typically advise clients to commence negotiations for a new lease well in advance of the current lease expiring. It is generally advisable to begin discussions 6 to 12 months before the lease ends. However, there is no legal restriction on starting earlier. Early negotiations offer benefits for both sides:

• Tenants gain peace of mind knowing they won’t need to relocate.
• Landlords secure future income and can plan ahead for the property.

The term of any new lease will commence the day after the current lease ends. Also, the new lease will not take effect until the current lease ends. Therefore, there could be a period where the current lease remains in force and governs the tenant’s occupation but a new lease has been signed and dated.

Once signed, the new lease becomes a binding legal commitment for both parties. The landlord agrees to let the property for the agreed term and the tenant agrees to pay rent and comply with the lease terms.

Key terms to negotiate

In negotiating a new lease, it is important to agree on the following:

• Rent
• Lease length
• Break clauses (if either party wants the option to end early)
• Rent review mechanisms
• Repair and maintenance obligations

Once terms are agreed, this should be documented in a ‘Heads of Terms’ document. The renewal lease will be drafted taking into account the ‘Heads of Terms’ and the terms of the existing lease.