The Law Commission has launched its much-anticipated consultation into how the right to renew business tenancies, set out in the Landlord and Tenant Act 1954, is working and possible options for reform.
We look below at the first stage of the consultation and five areas ripe for reform that could be considered at the second.
WolfBite - the key takeaways
• Part 2 of the Landlord and Tenant Act 1954 (LTA 1954) gives business tenants “security of tenure”, the statutory right to continue to occupy, and obtain a renewal tenancy, when their existing tenancy would otherwise come to an end, unless the landlord successfully opposes on certain limited grounds.• Part 2 also contains a “contracting out” procedure that can be followed if the parties agree that a proposed lease should not have security of tenure.
• Some aspects of the law are thought to be burdensome, unclear and out-of-date, standing in the way of modern commercial practices and causing unnecessary cost and delay.
• The Law Commission has been tasked with conducting a wide review of Part 2 of the LTA 1954 with a view to modernising it.
• On 19 November 2024, the Law Commission published the first of two consultation papers inviting views on possible reforms with a particular focus on whether to retain, amend or abolish security of tenure.
• The consultation will remain open until 19 February 2025.
• After the first consultation closes, the Law Commission will analyse responses before publishing a second, technical, consultation paper likely in 2025.
• The outcome of the first consultation paper will inform the scope of the second.
The consultation will not lead to any speedy changes in the law. Previous consultations have, however, resulted in meaningful and largely positive reform. This is therefore just the start of a process but one that could result in substantive changes during the period of the current government.
In the meantime, we suggest below that a dedicated Pre-Action Protocol could be quickly introduced that could improve the current system, and promote alternative dispute resolution, independent of the consultation and any legislative changes.
What does the LTA 1954 do?
Part 2 of the LTA 1954 provides that, subject to certain exceptions, where a tenant occupies premises for business purposes it will have “security of tenure”.Security of tenure gives a tenant of a lease the right to remain in occupation until it is brought to an end by one of the methods set out in the LTA 1954.
The landlord or a tenant of a fixed-term lease (but not a periodic tenant) can serve a notice bringing the current lease to an end. They can indicate in the notice whether or not they wish to enter into a new lease.
Where the tenant wants a new lease, and the landlord agrees in principle, this is called an “unopposed” lease renewal claim. If the parties are unable to agree the terms of the new lease, the court will determine them in accordance with provisions set out in the LTA 1954.
Where the landlord does not wish to grant a new lease, this is called an “opposed” claim. The landlord can, however, only oppose renewal on one or more of seven statutory grounds, for example where it intends to redevelop (Ground (f)) or occupy for its own business (Ground (g)).
What is “contracting out”?
It is possible for the prospective landlord and tenant to a fixed-term lease to agree to “contract out” of the security of tenure provisions of the LTA 1954 by following a set procedure.If the contracting out procedure is properly complied with, the tenant will have no right to remain in the premises at the end of the lease, or to request a new tenancy.
Law Commission’s consultation
On 19 November 2024, the Law Commission launched a consultation into how the right to renew business tenancies, set out in Part 2 of the LTA 1954, is working with a view to considering options for reform.The Law Commission has decided to take the consultation in two stages.
Stage 1 - first consultation paper
In its first consultation paper, the Law Commission has taken a step back and asked whether tenants of business premises should have security of tenure at all and, if so, how it should operate.The first paper has invited views on the following four alternative models:
• Mandatory security of tenure – which is how the LTA 1954 originally started out, where parties cannot “contract out”.
• No statutory security of tenure – where tenants will not have statutory protection and the renewal of leases will be a matter of negotiation.
• A “contracting-in” regime – where the default will be that tenants do not have security of tenure, but parties can “opt in” to the regime.
• A “contracting-out” regime – this is the current model, but the procedure could be modified.
The first paper has also sought views on whether, if security of tenure is to remain, there should be a change to the type of tenancies that it applies to. For example, whether tenancies should fall outside of the LTA 1954 depending on the use of the premises; the length of the tenancy; because some other statutory regime applies; or because of the size or location.
The Law Commission has also asked whether there are particular considerations or experiences relating to Wales that should be taken into account when considering the case for reform.
A separate survey has been published alongside the first paper, that aims to help the Commission understand the impact of the LTA 1954 on the commercial leasehold market and the context in which the case for reform should be considered.
The time for responding to the first consultation paper and the accompanying survey ends on 19 February 2025.
Second consultation paper
The responses received to the first consultation paper will inform the content of a second, technical, consultation paper.If, for example, having analysed the responses the Law Commission recommends that security of tenure should be abolished altogether, the second paper would look at how that might best be achieved.
If, on the other hand, the Law Commission recommends retaining security of tenure in some form (whether under the mandatory, contracting-in or contracting-out model), the second paper will consider all other aspects of the LTA 1954.
If security of tenure is to remain, the second paper would likely consider: the forum in which LTA 1954 cases are heard; the grounds of opposition; compensation where a landlord successfully opposes renewal; the court’s approach to the terms of the new lease; and issues caused by delays in completing the registration of transfers and assignments at the Land Registry.
Our initial thoughts on the consultation
The decision to take the consultation in two-stages is slightly surprising.Perhaps we will be proved wrong but, aside from some vocal outliers, we did not get the sense that there was any groundswell amongst our peers, property professionals or commercial clients either to abolish security of tenure altogether at the one extreme, or to move back to mandatory security at the other.
The Law Commission has, however, indicated that it is keen to consult on the fundamental question of whether to retain security of tenure at all so that it has as strong an evidence base as possible before it puts forward its recommendations to government. It seemingly considers that the outcome of the first paper will therefore give greater legitimacy to its final proposals.
The logic is no doubt sound.
However, for our part, assuming that the majority view is somewhere in the middle (that is, to retain security in some form, the risk of an unpredictable shockwave to the commercial property market by going with either extreme being simply too great), we perhaps did not need the first paper.
There are more fundamental issues that need to be urgently addressed, such as how the LTA 1954 could be refined to better support the upgrading of buildings to improve environmental performance.
Taking the consultation in two-stages will therefore lead to delay and, so far as environmental issues are concerned, this is time we do not really have.
Five key areas for possible reform
We believe that the LTA 1954 still serves an important purpose in giving security to those business tenants who want it, but that it could be refined and improved so that it works more efficiently in practice.The five main areas that we consider could usefully be reformed, and that we would like to see included by the Law Commission at stage 2, concern:
1. Contracting out procedure – we favour retaining, but simplifying, the current procedure.
2. Notices – for example, permitting service by e-mail, and by beneficial owners in the period before a transfer or assignment is registered by the Land Registry.
3. Rent – the LTA 1954 could usefully clarify whether tenants should benefit from rent-free discounts on renewal and whether the new rent can be partially or wholly based on turnover.
4. Forum – there is a real question as to whether lease renewal claims should continue to be dealt with by the over-stretched County Courts.
5. Environmental issues – the courts could be given wider powers to modernise lease terms, and Ground (f) could be modified, to better support energy efficiency improvements.
Pre-Action Protocol – the case for immediate change
There is a compelling argument that lease renewal claims should have their own formal, dedicated, Pre-Action Protocol that promotes negotiation and alternative dispute resolution, with cost sanctions for non-compliance.
This would hopefully increase the number of cases that settle, reducing the overall burden on the courts, and narrow the issues in dispute for those that don’t.
Introducing a new Pre-Action Protocol could also be implemented quickly. This need not await the outcome of the Law Commission’s two-stage consultation or any changes that Parliament might then go on to make to the LTA 1954.
