In March this year, the government announced that it had tasked the Law Commission with carrying out a review of the Landlord and Tenant Act 1954 (the "Act") as part of its Anti-Social Behaviour Plan to "revitalise high streets and town centres, creating thriving spaces which landlords, businesses and communities choose to invest in and use."
The commercial leasehold market has evolved significantly since the inception of the Act nearly 70 years ago. As part of the review the Law Commission proposes to look at how the Act is working and consider options for reform, to ensure the legislation is relevant to the current market. Whilst originally expected in December, the Law Commission is now promising to publish its consultation paper as soon as possible in 2024.
We consider there are five key areas which will most likely form part of the Law Commission's review. We have set out our thoughts on these aspects below.
1. Purpose
The existential question for the Law Commission is whether security of tenure under the Act should survive at all. Do commercial tenants require this sort of protection in 2023? Some point to the declining number of protected leases as evidence that the market dislikes the Act – the majority of shorter leases, in particular, are contracted out. If security of tenure were removed, surely the parties would contract accordingly – agreeing terms to provide an appropriate commitment from the tenant versus the investment required to operate from the premises. Leases might become longer, but more flexible via break options.
However, whilst this works for parties with strong negotiating power and access to high quality professional advice, what about the smaller tenants – the start-ups, sole traders, independent small businesses and community organisations so key to "revitalising high streets"? Imperfect as it may be, the Act does provide a framework for those tenants – and their landlords – for a fallback position when the initial lease term expires. Removing this could make it more difficult for smaller tenants to find the confidence to invest in and build the physical businesses needed to keep town and city centres thriving.
2. Contracting Out
One of the most likely targets for reform by the Law Commission will be the procedure for contracting out of the security of tenure provisions under the Act.
Up until 2004, it was necessary for parties to obtain a court order to contract out of the protection of the Act, so the current statutory notice procedure is much simplified but there is still room for improvement. The process can be cumbersome, with strict timeframes and significant risks arising if errors are made. Changes of landlord between exchange and completion cause issues, as do amendments made to a lease after the notices have been served.
The current process could be simplified to eradicate some of the confusion and take into account technological advancements, by explicitly allowing for the service of notices by e-mail and for declarations to be signed electronically or sworn remotely. There is an argument that we could even do away with the notice/declaration process altogether. Suggestions include switching the default to contracting out of the Act, and requiring the parties to "contract in"; or simply including prescribed wording in the lease itself to contract out, rather than relying on the notice procedure.
Streamlining the contracting out process seems one of the easier "wins" for the Law Commission – but there will still be consideration around the smaller tenants and whether a formal process is needed to ensure that these tenants are fully aware of their rights and what they may be giving up.
3. Grounds of Opposition
If the Act remains in place, then we expect close scrutiny of the current termination process and, crucially, the grounds of opposition. Many commentators have identified that the ground most obviously out of kilter with today's world is ground (f). "Redevelopment" in 1950s terms means demolition and construction, but in 2023 taking a sledgehammer to a property is not always the most appropriate or sustainable way to repurpose or improve it. Landlords who want to carry out projects with a lighter touch are faced with having to either "beef up" the scheme of works to meet the requirements of the Act (a risky option following the S Franses Supreme Court decision), buy the tenant out, or simply give up on their plans.
Redefining ground (f) sounds attractive, but the devil would be in the detail. How should a redevelopment provision be defined so as to future proof it for the next 70 years? It is arguable that there will always be uncertainty, risk and litigation around grounds of opposition as landlords and tenants battle over whether particular provisions apply, whatever the wording.
4. Terms of Renewal Lease
If the parties are unable to agree the terms of a renewal lease, the court will determine what the renewal lease terms should be. Under the Act, the court must have regard to the current tenancy and to all relevant circumstances. Generally, a court will replicate the terms of the old tenancy with minor amendments to reflect modern drafting practice. This sounds straightforward, but renewals regularly hit the buffers in negotiations when the parties cannot agree what approach the court is likely to take on particular issues.
There is an abundance of case law on this part of the Act, much of it recent litigation as landlords and tenants push to obtain beneficial terms in difficult times (see links to our case updates here). Not all of this case law is binding, however, and each renewal will be based on its own facts which makes it difficult to draw out clear principles. Further clarity in the legislation would be welcome in principle – but the problem once again will be the diversity and variety of leases to which the Act applies. General principles around renewal terms will be difficult to impose in circumstances where they would affect different tenants in different ways.
5. Interim Rent and Rent
Interim rent (in very general terms, the rent payable for any "gap" between the expiry of a protected lease and the commencement of a renewal lease) can be a complicated process which is sometimes not reflective of how the matter is dealt with in the market. It will be interesting to see whether the Law Commission is prepared to recommend any changes or refinements to what can be a very technical area.
Rent on renewal more generally is becoming an increasingly thorny issue as parties innovate to tailor their rental arrangements to their particular circumstances. Turnover rent is a common example of this. Reforms could be effected to clarify when and under what circumstances a court could grant a turnover rent, but there will be difficulties again around the diversity of requirements for different tenants. Turnover rent can be very personal to a tenant – depending on not only turnover, but margin and the way in which the turnover is generated (physically on the premises or online, for example). Once again, if the Act is to be effective for a wide range of tenancies, permitting different approaches to rent may only cause further complexity.
One issue that could be clarified relatively easily is the position around rent free periods. There is a lot of discussion in the market as to whether a renewal rent should incorporate discounts to amortise incentives which would be provided in the market to alternative hypothetical tenants, and/or (more controversially) discounts to reflect a rent free period for fitting out when the incumbent tenant actually has to do no such thing. Case law on the issue has been inconclusive and many valuers have identified this as an area ripe for reform.
However, many of the complaints parties have around the difficulties of determining rent, particularly within a court forum, are already capable of being addressed via PACT. PACT, or Professional Arbitration on Court Terms, is a process where the terms of a renewal lease are referred to an independent third party professional with a view to speeding up the process and avoiding costly litigation. This is usually limited to valuation issues determined by an expert valuer. PACT can be a good way to narrow down disputes and save costs, but it is a completely voluntary process and parties can currently become bogged down in the process of agreeing the PACT parameters.
Conclusion
The Act has existed largely in its current form since it was originally drafted and essentially does the job it is required to do, although it undeniably brings an additional layer of cost and delay to the process of lease renewal or termination. It is clear that the market has moved on since the 1950s, but the commercial property sector in England and Wales is diverse and multifaceted. The points identified above are certainly worthy of Law Commission consideration, but the issue will be whether it is really possible to simplify and streamline a piece of legislation which covers such a wide range of commercial landlord and tenant relationships – from a multimillion pound lease of super prime London office space to a low value tenancy of a remote community centre.
It will be very interesting to see how the Law Commission approach their review and what the outcome will be. We will keep you updated.
