Commercial leases – what’s next?

Reform of the Landlord and Tenant Act 1954

Spring has sprung and we have been reviewing the progress of some the legal reforms that we identified at the start of this year. We previously highlighted the Law Commission’s consultation, ‘Business Tenancies: the right to renew’, which evaluates how Part 2 of the Landlord and Tenant Act 1954 (the Act) is working in practice. The consultation period for that project has now ended. In this update, we consider some of the published responses and the next steps on the road to reform. 

How does the Act work?

Part 2 of the Act gives all business tenants in England and Wales an automatic right to renew their lease at the end of the specified term. The tenant can continue to occupy under the existing lease terms until a new lease is either agreed between the parties or determined by the court in accordance with the Act, subject to the landlord’s right to oppose on limited grounds.

This ‘security of tenure’ is the default position unless the parties had previously agreed that the lease would be ‘contracted out’ of the Act and had correctly followed the required procedure. It is very common for leases with short terms or low rents to be contracted out.

Problems with the Act

There is general consensus that reform of the Act is long overdue with the last updates having been made over 20 years ago. Common complaints include:

• The administrative burden of the statutory processes for contracting out and renewing.
• The excessive cost, time delays and court time taken up by contested renewals.
• The limited effectiveness of the landlord’s seven grounds to oppose renewal.
• The tenant right to statutory compensation where a landlord successfully opposes a renewal.
• The inability of the courts to include turnover rents in new protected leases.
• The negative impact on ‘net zero’ targets where landlords are prevented from accessing premises to carry out environmental efficiency improvement works.

Models of Security of Tenure

This initial consultation is the first of two intended consultations on the topic. The Law Commission invited comments on four proposed models of security of tenure:

1. Mandatory security of tenure: This would be compulsory, and leases could not be contracted out, making the grant of leases simpler. This offers the most protection to tenants but could deter landlords from offering leases of certain premises and they may look at ways to structure deals to avoid security of tenure.
2. Contracting-out: Retaining the current model would keep the status quo and avoid potential changes to the market that a new model could cause.
3. Contracting-in: Tenants would have no security of tenure unless the parties opt in. This model is more landlord friendly as it relies on tenants being well advised on the need to opt in to obtain security. It would remove the administrative inconvenience of the current notice and declaration procedure and reduce the risk of leases being unintentionally protected due to an error in that procedure.
4. Abolition: Tenants would have no security of tenure so would have to agree contractual renewal rights. Landlords would have certainty that leases will end on the specified expiry date and could confidently develop plans for their premises. There would be no administrative burdens.

Views on future reform

It is already apparent that there is a divergence of views and there will be much for the Law Commission to consider. The Property Litigation Association carried out an internal survey of its members prior to submitting its response to the consultation - 60% of those who responded favoured the current contracting-out model with just 32% favouring a contracting-in model.

However, the City of London Law Society expressed a preference for the contracting-in model in its response.  This was for reasons of business efficacy because its members reported that most of the leases they currently encounter are contracted-out.The Association of Real Estate Funds (AREF) also favoured a contacting in model, acknowledging that there are certain tenants that require protected leases. However, AREF propose that contracting-in should only be available for leases longer than 5 years.

Next Steps

The Law Commission is now analysing the responses to determine any change to the scope of the 1954 Act is needed and which model to recommend. It will then launch a second, more technical, consultation on how the recommended model should function. There will be some interesting legal points to consider whichever model is adopted, for example, will the changes only apply prospectively and how will any transitional arrangements work?  Timings for the second consultation have not been confirmed so it is a case of watch this space.