Key Takeaways
- Selling a let commercial property doesn’t end the tenants’ leases. The buyer takes the property subject to them.
- For leases granted from 1st January 1996, the seller isn’t automatically released from the landlord’s obligations and must apply for release by notice, before or within four weeks of the sale.
- Rent arrears that built up before the sale generally stay with the seller, unless the sale contract says otherwise.
- In mixed-use buildings with flats, residential tenants may have a right of first refusal, and failing to offer it can be a criminal offence.
You’ve decided to sell a shop, office or industrial unit that still has tenants in it. The rent is coming in and a buyer is interested. But you’re not sure what happens to the leases or the arrears one tenant still owes.
These questions matter more than some sellers expect. Buyers scrutinise leases closely, and unresolved problems with tenants tend to surface at the worst moment, holding up a sale or reducing the price. Some can even leave you with liabilities long after you’ve sold.
This guide focuses on the lease and tenant issues that affect a sale of let commercial property, rather than the conveyancing itself. If you’d like advice on your leases before you sell, Osbourne Pinner offers a free 30-minute consultation with our commercial property solicitors.
Do the tenants’ leases survive a sale?
Yes. Selling the freehold, or a head lease, doesn’t end the tenants’ leases. The buyer steps into your shoes as landlord and takes the property subject to the existing tenancies, with the same rights and obligations on both sides.
Many business tenants also have security of tenure under Part II of the Landlord and Tenant Act 1954, unless their lease was contracted out. That means they could be entitled to a new lease when the current one ends. A buyer looking for vacant possession can’t simply ask the tenants to leave.
Will you still be liable as landlord after you sell?
Possibly, and this catches many sellers out. For leases granted on or after 1st January 1996, the Landlord and Tenant (Covenants) Act 1995 doesn’t release a landlord from its obligations automatically when it sells. Instead, under section 8 of the 1995 Act, the landlord needs to serve notice on the tenant asking to be released, either before the sale or within four weeks of it.
If the tenant doesn’t object in writing within four weeks, the release takes effect. If they do object, the landlord can ask the court to decide whether a release is reasonable. Missing the four-week window means losing the chance of a statutory release until the property is sold again, so the notices need to be diarised and served on every tenant.
Why would a tenant object? Usually because the landlord has significant ongoing obligations and the tenant wants to be sure the new landlord can meet them. That could be repairs, insurance or holding a large rent deposit.
What happens to rent arrears and existing breaches?
For leases granted from 1st January 1996, the right to recover arrears that built up before the sale generally stays with the seller. The buyer isn’t entitled to them unless the sale contract assigns them. In practice, that means you might need to pursue a tenant for arrears after you no longer own the property, which is far easier to plan for before completion than after.
The same principle applies to other breaches that happened before the sale, such as disrepair. Agree in the contract who will deal with existing claims and arrears, and tell the tenant clearly who they should pay. Our rent arrears solicitors can help recover sums owed before or after a sale.
What happens to rent deposits and guarantees?
Rent deposit deeds are treated as collateral agreements under the 1995 Act, so the landlord’s obligations under them bind the buyer. The deposit money itself needs to be transferred to the buyer on completion, with a clear record of the balance, any interest and any deductions already made. For more information, our guide to rent deposit deeds explains how they work.
For leases granted from 1996, the benefit of guarantees and authorised guarantee agreements generally passes to the buyer along with the reversion. Buyers will want to see copies of these documents, so make sure you can find them.
What about service charges?
Service charges are one of the most common sources of post-sale disputes. If you sell partway through a service charge year, someone has to reconcile the costs against what tenants have paid on account. Then they need to decide who keeps any surplus or covers any shortfall. Reserve or sinking funds need handling carefully too, as they’re often held for tenants’ benefit.
Agreeing the approach in the sale contract avoids arguments with the buyer and with tenants later. As does keeping clear service charge accounts. Our service charge recovery team deals with disputes on both sides if you need any help.
Does anyone have the right to buy first?
Commercial tenants don’t generally have a statutory right to buy the building when it’s sold, although some leases include a contractual right of first refusal or pre-emption clause. This is why it’s important to check every lease before marketing the property.
Mixed-use buildings need extra care. Under section 1 of the Landlord and Tenant Act 1987, qualifying residential tenants of flats can have a right of first refusal when their landlord sells. It can apply to a building with shops or offices below flats, as long as the non-residential parts make up no more than 50% of the internal floor area, excluding common parts.
Failing to offer the tenants first refusal where the Act applies is a criminal offence, and the tenants may be able to force the buyer to transfer the property to them.
Can a buyer get the tenants out?
Not easily. Where a business tenant has security of tenure, the landlord can only oppose a new lease at the end of the term on specific statutory grounds. This includes redevelopment or occupying the premises itself. There’s an important restriction here: a landlord can’t rely on the ground of wanting to occupy the premises itself if it bought its interest within the five years before the current tenancy ends.
Otherwise, a buyer wanting vacant possession will usually need to rely on a break clause or negotiate a surrender, often by paying the tenant. Our guides to ending a commercial lease early and our commercial lease renewals team can help with both.
Do you need to tell the tenants?
Yes. Tenants need to know who their new landlord is and where to pay rent. Until they’re properly notified, they’re entitled to keep paying you, which can lead to confusion and disputes over payments made after completion. A clear joint letter from seller and buyer, sent promptly, avoids most of these problems.
How should you prepare before selling?
Buyers will ask for the full picture, so it pays to assemble it early:
- Signed copies of every lease, with all variations, licences and rent review memoranda.
- A schedule of rents, arrears and deposits held.
- Service charge accounts and details of any reserve funds.
- Details of any disputes, notices served or claims threatened by or against tenants.
- A plan for serving release notices under the 1995 Act within the four-week window.
Above all, resolving tenant disputes before marketing the property usually makes a sale smoother and protects the price.
Get advice on your leases before you sell
Lease problems left unresolved can delay a sale, reduce the price or leave you liable as landlord after you’ve sold. Sorting out arrears, deposits, service charges and release notices early puts you in a far stronger position.
At Osbourne Pinner, our commercial property solicitors advise landlords on lease issues, tenant disputes, arrears and service charge claims before and after a sale. We’ll explain where you stand in plain English and give you a clear view of costs before you commit to anything.
Please note that this article is for informational purposes only and does not constitute legal advice. We always recommend speaking to a qualified solicitor for advice tailored to your specific circumstances.
We offer a free 30-minute consultation to discuss your situation, Monday to Friday. You can speak with us via video call or visit our offices in Piccadilly Circus, Canary Wharf, Wimbledon, Harrow or Manchester. To arrange your consultation, call 0203 983 5080, email [email protected] or complete the form below. We do not offer Legal Aid.
