Fit For Purpose? The Law Commission's Consultation On Modernising Security Of Tenure Of Business Tenancies

In brief

• The Landlord and Tenant Act 1954 (the Act) was enacted in a post-war, commercial property market when premises were scarce, leases were longer and businesses were more closely tied to a physical location. Protecting tenants from displacement was a priority. Today's commercial leasehold market is different, placing far more weight on flexibility and speed, as well as redevelopment, environmental performance and the efficient use of space.
• Security of tenure still matters, especially where a business depends on its location and goodwill or has invested heavily in fitting out its premises. The question is whether Part 2 of the Act (that governs the security of tenure regime for business tenancies) has, over time, become too burdensome and insufficiently aligned with modern commercial practice.
• Having already concluded that the basic 'contracting out' model should remain, the Law Commission is now looking closely at how Part 2 of the Act works in practice and testing it against the demands of today's commercial leasehold market. Its second consultation paper seeks not only to clear up longstanding practical problems, but also to make the regime more responsive to modern commercial, developmental and environmental priorities.
• The following are some of the headline issues.

Who gets protection?

At present, a fixed-term business tenancy granted for less than six months is generally outside the scope of Part 2 of the Act. The "chaining" provision in the Act creates an exception where a tenant has already occupied the premises for more than 12 months. That earlier period of occupation is counted, with the result that the new (short) tenancy falls within the Act where it would otherwise have not qualified for protection.

The six-month threshold has not changed since 1969 and the Law Commission now offers two alternatives: a two-year threshold coupled with a reformed chaining provision, or a one-year threshold with chaining abolished. Either option would take shorter, more flexible lettings (where tenants do not tend to need or even want security of tenure) outside the regime and reduce the need to contract them out.

Periodic tenancies are treated differently. They are currently protected regardless of their length and cannot generally be contracted out, which can cause particular difficulty where an implied periodic tenancy arises after a contracted-out fixed term has expired. The Law Commission provisionally proposes taking most express and implied periodic tenancies outside Part 2 of the Act, subject to an important exception for a fixed-term or express periodic tenancy granted to an existing protected tenant. It also proposes that an express written periodic tenancy should be capable of being contracted out.

Moving contracting out into the lease

This may prove to be the most immediately practical proposal in the paper. The current contracting-out process is cumbersome and can add cost and delay, and the statutory declaration route is a particular source of frustration because it requires the tenant to find an independent solicitor to witness the declaration, often at the last minute.

Agreements for lease, renewal options and guarantees create further complications because contracting out must take place before the parties become legally bound, rather than when the lease is eventually granted. The process must also involve the parties who will actually grant and take the lease, leaving scope for uncertainty if an interest changes hands between agreement and completion.

The Law Commission's proposed answer is to bring the process into the lease itself. A contracted-out lease would contain a prescribed warning explaining what the tenant is giving up, together with a declaration signed by the tenant on execution to confirm that it has read and understood the warning. Both would appear prominently in an outlined text box, replacing the separate warning notice and declaration process.

An agreement for lease, renewal option or guarantee would contain similar prescribed wording, binding the parties and their successors to contract out the future lease when it is granted.

A similar issue arises when a protected tenant agrees in advance to surrender its tenancy, perhaps as part of a move to another unit. Just as a tenant must be warned before giving up security of tenure on entering a new lease, the law requires a similar safeguard here, called the 'validation process'. An agreement to surrender is currently void unless the statutory validation process is followed. If that safeguard is retained, the Law Commission provisionally proposes simplifying it along much the same lines as contracting out, although it has not yet decided whether validation should remain at all and is asking consultees for their experience of it in practice.

Section 28 of the Act raises a separate, more fundamental question. The provision has not been amended since 1954 and, where its conditions are met, a written agreement between a landlord and tenant for a future tenancy of the holding, or of the holding together with other land, causes the existing tenant to lose their statutory right to renew their existing tenancy under the Act. The Law Commission is concerned that section 28 no longer sits neatly with the later contracting-out and validation regimes, and that it may cause tenants to lose protection unexpectedly, particularly where a conditional agreement for a future tenancy does not proceed as planned. It does not yet propose a solution but asks what purpose section 28 now serves and whether it should be reformed or repealed.

The paper also addresses the 'Thomas van Staden trap' by proposing that any written tenancy within the Act should be capable of being contracted out, rather than limiting the process to fixed-term tenancies. This would remove the drafting trap that can arise where the contractual term includes an uncertain period of holding over.

Grounds of opposition under scrutiny

The Law Commission has heard little evidence of serious problems with Grounds A to E of section 30(1) of the Act (the statutory grounds to oppose a renewal tenancy) and therefore makes no provisional proposals to change them, although it still invites consultees to identify any difficulties. Most of the attention instead falls on Ground F, the redevelopment ground, and Ground G, the landlord's own-occupation ground, both of which have prompted considerably more concern among stakeholders.

The Supreme Court's 2018 decision in S Franses Ltd v Cavendish Hotel (London) Ltd changed the landscape for Ground F by requiring a landlord to show a firm and settled intention to carry out the works whether or not the tenant wishes to remain. Lord Sumption's 'acid test' asks whether the landlord would carry out the same works if the tenant left voluntarily. Landlords argue that the decision disrupted settled practice and made Ground F too difficult to establish, while some tenant representatives maintain that the ground can still be used oppressively. The Law Commission's view is that the decision strikes the right balance, and it therefore proposes no change to the intention test.

The more difficult question is what kind of works should qualify for a landlord to establish Ground F. Currently, a landlord must prove an intention to carry out works of demolition, reconstruction or substantial construction, for which it needs vacant possession of the premises. This language does not expressly rule out modern construction methods but may leave refurbishment and retrofit outside the existing categories or below the required threshold. Given the volume of retrofit and refurbishment work now being driven by net zero targets and ageing stock, the Law Commission acknowledges that the Ground F threshold test is problematic, and puts forward three possible approaches: expanding the categories and adding a purpose or motive test (linked to environmental performance or compliance with planning requirements), expanding them without that filter, or replacing the list with a general test of "substantial works". Each option would create more room for retrofit and changing construction methods, but each would also weaken tenants' security to some degree.

Ground G is also marked out for a targeted change. The Commission provisionally proposes abolishing the rule in Nursey v Currie, so that alterations planned before the landlord takes occupation would no longer affect whether the ground is made out. That appears to be a sensible way of removing an artificial and uncertain trap. The paper also raises the wider question whether purchaser-landlords can benefit unfairly from a tenant's goodwill despite the existing five-year ownership rule. The five-year rule generally prevents a purchaser-landlord from relying on Ground G unless it has been the competent landlord for the five years preceding termination of the tenancy. It was intended to discourage landlords from buying tenanted premises simply to displace the tenant, take over the same business and benefit from the goodwill the tenant has built up. The Law Commission questions whether the five-year safeguard is sufficient, or whether extending it could restrict genuine owner-occupiers and encourage more contracting out.

Rent and renewal terms

The Law Commission does not propose changing either the open-market valuation test in section 34 or the use of comparables when applying it. One issue nevertheless remains contentious, which is whether the rent payable by a sitting tenant should reflect the equivalent of a rent-free fit-out period that would be offered to a new tenant. County court decisions point in different directions. Although a sitting tenant will not usually need time to fit out premises from which it already trades, section 34 proceeds on the basis of a hypothetical new letting, so arguably the renewal rent should reflect the rent free fit out period. The Commission takes no provisional view and instead asks whether the equivalent rent-free period should be reflected and, whichever answer is preferred, how the Act should achieve it.

Alternative rental models bring their own difficulties, as the Act does not deal easily with turnover rent or with disputes about the rental model itself, its component parts and the lease terms linked to it. The Law Commission provisionally proposes allowing the court to carry forward a turnover model from the existing lease. It also asks whether the court should be able to change that model on renewal and, if so, how.

The Law Commission also looks at the date on which a renewal tenancy commences (in the absence of agreement), which under the current law also fixes the rental valuation date, currently three months and three weeks after the court determines the terms of the new lease. Because that date lies in the future and depends on when a hearing happens to be listed, it is uncertain and open to tactical delay, which is part of why a complex interim rent regime is needed to bridge the gap. To address this, the Law Commission proposes fixing the valuation and commencement date for the renewal tenancy at an earlier set point, either the date six months after the section 25 notice or section 26 request was served, or the (later) expiry date specified in that notice, removing uncertainty and reducing the need for interim rent. 

For other lease terms, the Law Commission favours retaining the established O'May approach, under which the court begins with the existing lease and asks whether a proposed change is fair in all the circumstances. It does not simply import whatever terms happen to be standard in the current market. The outcome, when applying O'May can be uncertain, but a purely market-based test could tilt too far towards landlords and undermine the protective purpose of the Act. The Law Commission also rejects the idea of mandatory or prohibited terms, including compulsory green lease clauses. That caution is understandable because environmental clauses are varied and developing quickly, and legislation could freeze practice just when it needs room to evolve.

The paper does explore a more modest 'guided approach' to environmental terms. Environmental matters could become an express factor for the court to consider under section 35 (when determining the "other terms" of the lease apart from rent, duration and premises), either by reference only to the MEES regime or by extending the factor to wider environmental and sustainability concerns. In either case, the court would retain its overall discretion under the existing O'May test.

Where and how should disputes be decided?

Court proceedings can be slow and expensive, sometimes lasting for years, and the Law Commission accepts that this can discourage parties from using the Act. It also identifies a gap in specialist knowledge. County court judges are skilled generalists, but lease renewals can involve difficult questions of commercial property valuation and market practice.

Against that background, the paper presents three possible reforms. Higher-value or more complex cases could make greater use of the High Court, all opposed and unopposed renewals could move to the property tribunal, or jurisdiction could be divided so that unopposed renewals go to the tribunal while opposed cases remain in court. Moving cases to a tribunal could bring greater property and valuation expertise. A divided system, however, might add cost and confusion, particularly if a landlord withdraws its opposition or fails to establish it and the character of the case changes part-way through.

One option has already been ruled out. The Law Commission will not pursue compulsory, binding ADR because of the risk of infringing Article 6 of the European Convention on Human Rights, as well as the loss of precedent and transparency and the potential to exacerbating power imbalances between the parties. Instead, the paper asks about a bespoke pre-action protocol, standard case management directions and a tailored Part 36-style costs regime, while also considering whether either party should be entitled to require non-determinative ADR such as mediation or early neutral evaluation.

Mishcon comment

• The proposed contracting-out process is the clearest practical improvement in the paper. Bringing the warning and declaration into the lease should reduce cost, delay and accidental non-compliance while retaining a prominent safeguard for tenants. Its success will depend on clear prescribed wording and proportionate rules, so that minor presentational errors do not simply generate a new category of validity disputes.
• Raising the fixed-term threshold for qualifying tenancies and excluding most periodic tenancies would bring the Act closer to the reality of short and flexible occupation, but the trade-off should not be overlooked. Default protection would be reduced, particularly for smaller businesses that remain in occupation for years under rolling arrangements. The exceptions, together with any chaining rule that survives, will need to be clear enough for landlords and tenants to understand without needing specialist advice at every turn.
• Ground F plainly needs to accommodate refurbishment, retrofit and newer construction methods. A general 'substantial works' test would be the most adaptable option, although it would also make the greatest inroad into security of tenure. Expanding the existing list and adding a purpose test would be more targeted, but there is a risk that arguments about the nature of the works would simply be replaced by arguments about their purpose.
• The dispute resolution options reveal a genuine tension between specialist expertise and procedural simplicity. Moving cases to the tribunal could improve the quality of decision-making on property and valuation issues, while dividing jurisdiction could create expensive arguments about where a case belongs and when it should transfer. In the end, improving the procedure within a single forum may prove more valuable than changing the forum itself.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.