8 - Business Tenancies

Question 1

What is the purpose of the Landlord and Tenant Act 1954 regarding security of tenure for tenants?

Answer 1

The Landlord and Tenant Act 1954 was introduced to provide qualifying business tenants with security of tenure. This allows:
- The tenant to continue occupying the premises at the end of the contractual term.
- The tenant to request a new tenancy.
- Restrictions on the landlord’s ability to recover the premises from the tenant.

Question 2

What are the benefits of security of tenure for tenants under the Landlord and Tenant Act 1954?

Answer 2

• Long-term occupancy: Allows tenants to treat the premises as a long-term investment, enabling them to fit out the premises to suit their business.
• Goodwill retention: Retail or restaurant businesses can benefit from the goodwill associated with a consistent location.
• Reduced disruption: Eliminates the need for relocation at the end of the contractual term, avoiding business upheaval.

Question 3

What are the benefits and drawbacks of security of tenure for landlords under the Landlord and Tenant Act 1954?

Answer 3

• Can make the premises more appealing to prospective tenants.
• Tenants may treat the premises as their own and fulfil reparing obligations more readily.
• Market rent may be higher for leases with security of tenure at rent review.
• The landlord may be able to show that is has complied with the Code for Leasing Business Premises.

Drawbacks:
- Limits the landlord’s freedom over their property.
- Complying with security of tenure requirements can be complex.

Question 4

Provide a summary of the introduction to security of tenure.

Answer 4

· Before the Landlord and Tenant Act 1954, commercial tenants were vulnerable to exploitation by unscrupulous landlords at the end of their contractual term.

· The Landlord and Tenant Act 1954 introduced security of tenure provisions for commercial tenants.

· Security of tenure offers advantages for both the tenant and landlord.

Question 5

When do security of tenure provisions apply?

Answer 5

s23(1) Landlord and Tenant Act: Any tenenacy where the property comprised in the tenancy is or includes premises which are occupied by the tenant and are so occupied for the purposes of a business carried on by him or for those and other purposes.

Question 6

How do fixed term and periodic tenancies qualify for security of tenure?

Answer 6

Fixed term and periodic tenancies both create exclusive possession and a proprietary interest, allowing them to benefit from security of tenure:

Fixed term tenancy:
- Provides exclusive possession and a proprietary interest.
- Binds successors in title to the landlord.
- Allows the tenant to use the property as if they were the owner.

Periodic tenancy:
- Provides exclusive possession and a proprietary interest.
- Binds successors in title to the landlord but can be ended by notice.

Question 7

How do licences and tenancies at will differ from tenancies regarding security of tenure?

Answer 7

These arrangements do not provide tenants with the security of tenure afforded to tenancies.

Licence:
- A personal permission to be on the land, not a proprietary interest.
- Does not bind successors in title to the owner.
- Cannot benefit from security of tenure.

Tenancy at will:
- A personal permission with exclusive possession, but it can be ended at any time by either party.
- Cannot benefit from security of tenure.

(A tenancy at will arises when a tenant occupies a property, with landlord consent, indefinitely, on the basis that either party can end the arrangement by giving immediate notice at any time.)

Question 8

What does the “occupied by the tenant” requirement mean for security of tenure?

Answer 8

Vacancy: If the tenant leaves the premises vacant, they lose entitlement to security of tenure.

Underletting: If the tenant underlets the whole or part of the premises, they are not in occupation and will lose security of tenure for that portion.

Example: If a tenant has an office lease for floors 2 and 3 and underlets floor 3 until one day before their own lease ends, they retain security of tenure only for floor 2, not for floor 3.

Question 9

How is the requirement of “for the purposes of a business” for security of tenure defined under the Landlord and Tenant Act 1954?

Answer 9

Includes any “trade, profession or employment”

Examples of business purposes:
- Charity shops
- Member-only clubs, such as a tennis club
- Residential use furthering the tenant’s business (e.g., housing for medical students, shop leases allowing partial residential use)

Examples not considered business purposes:
- Free Sunday school sessions by an individual
- Letting a house with lodgers without profit

Question 10

What types of tenancies are excluded from security of tenure under the Landlord and Tenant Act 1954?

Answer 10

• Agricultural tenancies (they have a separate statutory regime)
• Mining leases
• Service tenancies (e.g., a security guard’s flat, provided as part of employment)
• Fixed-term tenancies of six months or less (can become protected if the tenant has been in occupation for twelve months or more, either through successive tenancies or if the tenancy is renewable beyond six months)

Example: A shopping centre employs a maintenance person, letting them a room to store tools as long as needed for their employment. This tenancy would not have security of tenure.

Question 11

What is a contracted out tenancy, and when might it be used?

Answer 11

Section 38A of the Landlord and Tenant Act 1954 allows parties to agree to exclude a fixed-term lease from security of tenure, a process known as contracting out.

Only fixed-term leases can be contracted out; periodic tenancies with security of tenure cannot be.

Reasons for contracting out:
- Contracting out may limit tenant security, but offering protected tenancies can attract long-term tenants and increase the appeal of the premises.

Commonly contracted out tenancies:
- Short-term leases (5 years or less)
- Underleases (often required by the tenant’s own lease)

Question 12

What is the two-stage procedure for contracting out of security of tenure under the Landlord and Tenant Act 1954?

Answer 12

Step 1: Warning Notice
The landlord must serve a warning notice in a prescribed form on the tenant, detailing the consequences of contracting out the security of tenure provisions.
This notice must be served before the lease is completed.

Step 2: Tenant’s Declaration
The tenant must provide a declaration in the prescribed form to the landlord before lease completion:
- Simple Declaration: If the lease is completed at least 14 days after the warning notice.
- Statutory Declaration: If completion is less than 14 days from the warning notice, requiring the tenant to declare before an independent solicitor.

Question 13

What are the requirements for the lease and consequences if the contracting-out procedure is not followed correctly?

Answer 13

For the contracting-out procedure to be valid:

Lease Reference: The lease must explicitly reference both the warning notice and the tenant’s declaration (or statutory declaration).

Consequences of Errors: If the procedure is not strictly followed or if the lease lacks the required references, the tenancy is likely to retain security of tenure.

Example: If a landlord’s solicitor miscalculates dates, and the tenant provides only a simple declaration within a week of completion, the lease would not be validly contracted out, allowing the tenant to claim security of tenure.

Question 14

Provide a summary for application of security of tenure.

Answer 14

· To have security of tenure, there must be a tenancy occupied by the tenant for the purposes of a business

· A tenancy includes a fixed term lease or a periodic lease, but does not include a tenancy at will or a licence to occupy

· Certain types of tenancy, such as agricultural and service tenancies, are excluded

· The parties can agree to contract out fixed term tenancies, but not periodic tenancies

· The requirements of contracting out are a warning notice, a declaration or statutory declaration (depending on whether 14 days’ notice has been given) and that the procedure is referred to in the lease to be contracted out.

Question 15

What happens at the end of the contractual term for a non-protected tenancy?

Answer 15

The tenant has no right to occupy beyond the term.

If the landlord has notified the tenant that it requires possession at term’s end, the tenant:
- May be treated as a trespasser if they continue to occupy.
- The landlord may then recover possession of the premises.

Question 16

What happens at the end of the contractual term for a protected tenancy?

Answer 16

• The tenant has the right to remain in occupation, known as holding over.
• The landlord cannot evict the tenant.
• The tenant’s occupation can only be ended by specific methods outlined in the Landlord and Tenant Act 1954.

Question 17

What options does a landlord have to end a protected tenancy under security of tenure provisions?

Answer 17

A landlord has limited options to end a protected tenancy and can only take specific actions:

Forfeit the lease if:
- There has been a breach of the tenant’s covenants.
- The lease includes a provision allowing forfeiture.

Serve a section 25 notice, which:
- May indicate an intention to recover the premises.
- Could offer a renewal lease instead.

Note: Security of tenure provisions do not prevent the landlord from forfeiting the lease if the tenant is, for instance, in arrears with rent and the lease allows forfeiture.

Question 18

What options does a tenant have to end a protected tenancy under security of tenure provisions?

Answer 18

A tenant has multiple options for ending a protected tenancy, as the security of tenure provisions are designed for their protection:
- Vacate the premises at the end of the contractual term.
- Surrender the lease with the landlord’s agreement.
- For a periodic tenancy, serve a notice to quit to end the tenancy.
- Serve a section 26 notice to request a new tenancy.
- Serve a section 27 notice to vacate the premises.

Note: Surrender and notice to quit also apply to non-protected tenancies.

Question 19

Provide a summary of the implications of security of tenure.

Answer 19

• The tenant of a protected tenancy is entitled to remain in occupation (hold over) at the end of the contractual term.
• The tenant of a non-protected tenancy is not entitled to remain in occupation after the end of the contractual term, and if the tenant stays in the premises after the landlord has asked them to leave, they may be treated as a trespasser.
• The tenant of a protected fixed term lease may leave at the end of the contractual term.
• The landlord may serve a section 25 notice which will indicate whether the landlord intends to offer a renewal lease or oppose the renewal.
• The tenant may serve a section 26 notice which requests a renewal lease, or a section 27 notice which indicates the intention to leave the premises.

Question 20

What is the purpose and procedure for a Section 25 notice under the Landlord and Tenant Act 1954?

Answer 20

Issued by the landlord to specify when the current tenancy will end (the date of termination), which must be on or after the contractual term’s end date.

It must be served between 6 and 12 months prior to the date of termination.

The notice must follow the statutory form precisely. If the landlord is seeking to recover possession, it may only do so on stautory grounds.

There are two types of Section 25 notices:
- Friendly Section 25 Notice: Indicates the landlord is willing to renew the lease, proposing the rent and principal terms of the new tenancy.
- Hostile Section 25 Notice: Indicates opposition to the lease renewal. The landlord can only oppose renewal on certain statutory grounds, which must be specified in the notice.

Question 21

Why might a landlord issue a friendly Section 25 notice, and what are the benefits?

Answer 21

For peace of mind, aiming to secure the tenant for a further term, ensuring continuity of rental income.

In a rising market, it allows for a market rent to be fixed for the renewal tenancy.

Even if the lease includes a rent review on the last day before the term ends, which ensures a market rent during holding over, this solution is limited since the rent stays the same during holding over.

Example: A tenant pays £20,000 annually; on the last day, rent is reviewed to £22,000. During holding over, the tenant pays £22,000, but there are no further increases until renewal.

Question 22

What grounds can a landlord rely on in a hostile Section 25 notice to oppose lease renewal?

Answer 22

A hostile Section 25 notice allows a landlord to oppose lease renewal based on seven statutory grounds, including:
- Persistent and serious breach by the tenant of a repairing obligation.
- Persistent delay by the tenant in paying rent.
- Serious and persistent other breaches of tenant covenants.
- The landlord offers suitable alternative accommodation.
- The landlord intends to demolish, reconstruct, or carry out substantial work requiring possession.
- The landlord intends to occupy the premises for itself.

The landlord must provide evidence for the chosen ground (e.g., planning permission or a construction contract if redevelopment is intended).

Question 23

What is the difference between mandatory and discretionary grounds in a hostile Section 25 notice, and how does it impact the court’s decision?

Answer 23

Mandatory Ground: If the landlord establishes a mandatory ground, the court is required to grant possession to the landlord.

Discretionary Ground: Even if the landlord demonstrates a discretionary ground, the court has the discretion to deny possession.

Example: If a landlord proves a tenant’s persistent and serious breach of a repairing obligation, but the court finds the landlord’s actions contributed to the breach, it may choose not to grant possession.

Question 24

How are grounds for lease termination classified into compensatory and non-compensatory, and what impact does this classification have on tenant compensation?

Answer 24

Compensatory Grounds: These arise when the landlord needs to carry out work or another reason that is no fault of the tenant. The tenant may be entitled to compensation.

Non-Compensatory Grounds: These occur when the tenant is at fault (e.g., breach of covenant). The tenant is not entitled to compensation.

Compensation Calculation:
- 1x rateable value: If the tenant has occupied the premises for less than 14 years.
- 2x rateable value: If the tenant has occupied the premises for 14 years or more.

Rateable Value: This is based on the estimated annual rental value of the premises, fixed by the local authority for business rates, and is not necessarily the same as market rent.

Qualifying Time Period: The tenant can include the time the business was carried on by a previous tenant if the current tenant has taken over the same business, typically requiring a transfer of goodwill.

Contracting Out: A protected lease can only contract out of paying compensation if the tenant has been in occupation for less than five years.

Question 25

What are the grounds for lease termination, the evidence required, and the classification of each ground (mandatory, discretionary, compensatory)?

Answer 25

Ground (a) – Breach of Tenant’s Repairing Obligation:
Evidence: Evidence of a serious breach.
Classification: Discretionary, not compensatory.

Ground (b) – Persistent Delay in Paying Rent:
Evidence: Length of delay and number of failures to pay rent on time.
Classification: Discretionary, not compensatory.

Ground (c) – Other Substantial Breaches of Tenant Obligations:
Evidence: Evidence of serious and persistent breaches.
Classification: Discretionary, not compensatory.

Ground (d) – Availability of Suitable Alternative Accommodation:
Evidence: Landlord must have made an offer of suitable alternative accommodation with regard to the tenant’s business and goodwill.
Classification: Mandatory, not compensatory.

Ground (f) – Intention to Demolish or Reconstruct Premises or Carry Out Substantial Construction:
Evidence: Firm and settled intention to redevelop, possibly including planning permission or a construction contract.
Classification: Mandatory, compensatory.

Ground (g) – Landlord Intends to Occupy the Premises:
Evidence: Firm and settled intention, with the landlord having owned the reversion for at least 5 years before the date of termination.
Classification: Mandatory, compensatory.

Where there is more than one ground, you should include them all.

Question 26

Provide a summary of Landlord’s notices.

Answer 26

• The landlord may serve a section 25 notice specifying a date of termination no earlier than the end of the contractual term, and no less than six months and no more than 12 months from the date of the notice.
• The section 25 notice may be friendly, meaning that the landlord will not oppose the renewal of the tenant’s lease.
• The section 25 notice may be hostile, meaning that the landlord will oppose the renewal of the tenant’s lease.
• If the landlord is seeking to recover possession, then it may only do so on statutory grounds.
• The court has discretion to decide whether to grant possession with discretionary grounds, but with mandatory grounds they must grant possession if the landlord establishes the appropriate ground.
• Some grounds will require that the landlord pays the tenant compensation; others do not.

Question 27

What types of notices can a tenant serve to end a protected tenancy or renew it?

Answer 27

A tenant may choose to simply vacate the premises at the end of the contractual term, which ends the tenancy regardless of whether it is protected, though
notifying the landlord is good practice to avoid doubt.

The tenant may agree with the landlord to surrender the lease during the contractual term (surrender is when the tenant gives up the leasehold interest to the landlord, ending the lease).

The tenant can also serve:
- Section 26 notice: To renew the lease.
- Section 27 notice: To end the lease after holding over.

Key Point: Section 25, Section 26, and Section 27 notices are mutually exclusive. Once one notice is served, the other party cannot serve a different type

Question 28

Why would a tenant want to serve a Section 26 notice to renew the lease?

Answer 28

• The tenant may want the certainty of a fixed term, especially if they plan to carry out improvements to the premises or assign the lease as part of a business sale.
• In a falling market, the tenant might be stuck on a higher-than-market rent while holding over (especially if there was a penultimate day rent review). The tenant may want to renew the lease at a market rent instead.

Example: If a protected tenant has been holding over and the rent review fixed the rent at £80,000, but the market rent has dropped to £70,000, the tenant will want a renewal lease to benefit from the lower market rent.

Question 29

What are the requirements for a tenant to serve a Section 26 notice to renew a lease?

Answer 29

Section 26:

1) The tenant must have a protected tenancy and a lease originally granted for more than one year. A tenant with a lease of one year or less cannot start the renewal process, though the landlord can use a friendly Section 25 notice.

2) There is a minimum notice period of six months and a maximum notice period of twelve months. – This is the date between giving the notice and the proposed commencement date.
This proposed notice commencement date cannot precede the contractual date of expiry. The notice must not expire on the termination date but on the proposed commencement date of the renewal lease.

3) A tenant’s request for a new tenancy shall not have effect unless it is made by notice in the prescribed form, and given to the landlord, setting out the tenant’s proposals as to the property to be comprised in the new tenancy, the rent payable, and other terms.

4) A tenant’s request for a new tenancy shall not be made if the landlord has already given notice under the last foregoing section to terminate the current tenancy, or if the tenant has already given notice to quit. No such notice shall be given by the landlord or the tenant after the making by the tenant of a request for a new tenancy.

5) Where the tenant makes a request for a new tenancy in accordance with the foregoing provisions, the current tenancy will now expire on the day before the PCD. A court application can be made to stop the tenancy from expiring. This gives the tenant’s current tenancy an actual end date.

6) A landlord has two months from receiving the Section 26 notice to serve a counter-notice opposing the renewal of the lease. The landlord can only oppose the renewal on one or more of the statutory grounds. If the landlord does not serve a counter-notice, they lose the right to oppose the new tenancy which the court will impose.

Question 30

What are the timing requirements for s.26 notices by the tenant?

Answer 30

You can serve a s.26 notice before or after the contractual expiry date (CED) but

(a) The request must be served no less than 6 months and no more than 12 months before the proposed commencement date (PCD) set out in the notice.
(b) The PCD must not precede the CED (it can be on the CED or after)

Question 31

What is the purpose of a Section 27 notice and when must it be served by a tenant?

Answer 31

A Section 27 notice is used by a tenant to terminate a lease after the contractual term ends, with a minimum notice period of three months before the intended termination date. The termination date must not be earlier than the date the contractual term ends.

If a tenant wants to remain in the premises beyond the contractual term, they must serve the Section 27 notice no less than three months before the lease expires.

If the tenant intends to leave at the end of the contractual term, no notice is required, though it is good practice to notify the landlord.

Once a Section 27 notice is served, the tenant cannot serve a Section 26 notice, and the landlord cannot serve a Section 25 notice.

Question 32

Provide a summary of the Tenant’s notices.

Answer 32

• A tenant need not serve notice if they intend to vacate premises at the end of the contractual term, whether a protected tenancy or not.
• A tenant who wishes to renew the lease may serve a section 26 notice. The landlord has two months to serve a counter-notice if the landlord opposes renewal.
• A section 26 notice must be served no less than six months and no more than twelve months before the proposed commencement date of the renewal lease.
• A tenant who wishes to end the lease at any time after the contractual expiry date will need to serve a section 27 notice.
• Section 25, 26 and 27 notices are mutually exclusive, and once one has been served, the others cannot be used.

Question 33

What are the key points regarding an application to the court for lease renewal or possession?

Answer 33

Either party (tenant or landlord) can apply to the court to:
- Renew the lease and fix the terms of the new lease.
- For the landlord, to recover possession.

The application can be made:
- After service of a Section 25 notice, with the deadline being the date of termination specified in the notice.
- After a Section 26 notice has been served, but only after the landlord has served a counter-notice, or if no counter-notice is served, after two months have elapsed.
- The deadline for applying is the day before the proposed commencement date of the new lease.
- The deadline may be extended if both parties agree in writing.

Remember, for Section 25 notices, the date of termination is relevant, while for Section 26 notices, the date before the proposed commencement date is the key deadline.

Question 34

How are the terms of a new lease negotiated following a Section 25 or Section 26 notice?

Answer 34

Both a friendly Section 25 notice and a Section 26 notice propose the principal terms of the renewal lease.

The landlord and tenant typically attempt to agree on the terms between themselves.

If they cannot reach an agreement, they may ask the court to decide on the terms.

The court can grant a lease term of up to 15 years, with the rent being set at the open market rent.

Other terms are determined by the court, considering the terms of the current tenancy and relevant circumstances.

For example, if the tenant serves a Section 26 notice proposing a 5-year term at £25,000 rent with terms to mirror the existing lease except allowing an underletting of part, the landlord agrees to all proposals except the underletting. The court will only decide on the contentious issue (underletting), and the tenant must justify why the change is reasonable.

Question 35

What are the key principles surrounding interim rent during the period of holding over and negotiation?

Answer 35

During the holding over and negotiation period, the tenant continues to pay rent as last reviewed under the lease.

Either party may apply to the court to fix an interim rent, which is based on the open market rent.

Unlike a rent review, the interim rent is not upwards only and may be lower than the last reviewed rent if the market is falling.

The interim rent is payable from:
- The earliest date of termination that could have been specified in the landlord’s Section 25 notice, or
- The earliest proposed commencement date that could have been specified in the tenant’s Section 26 notice.

For example, if a tenant serves a Section 26 notice with a proposed commencement date in 12 months, but the interim rent is applied for, it will be payable 6 months from the date of the Section 26 notice, not from the 12-month proposed date.

Question 36

What are the key points regarding court orders for lease renewal or termination?

Answer 36

Either the tenant or the landlord can apply to the court for an order to:
- Grant a new lease, even if the landlord opposed the renewal.
- If the tenant is dissatisfied with the terms determined by the court, they have 14 days to request the court to revoke the order. The court must agree, and the tenant loses the right to renew.

If the landlord opposes renewal (e.g., through a hostile Section 25 notice or counter-notice to a Section 26 notice), the landlord can apply to the court for an order to terminate the existing lease.

This order brings the existing lease to an end, and the tenant will have no right to remain in occupation.

Both types of court orders (for renewal or termination) have the effect of ending the tenancy three months and 21 days after the order date (with 21 days allowed for appeal).

If the court order is for a new lease, the new lease will commence the day after the existing lease terminates.

Question 37

Provide a summary of the procedure following notice.

Answer 37

· Following a section 25 notice, or for a section 26 notice, the earlier of two months after the notice or the service of a landlord’s counter-notice, either party may apply to the court for a renewal lease.

· The deadline for applying to court is the termination date specified in a section 25 notice, or the day before the proposed commencement date specified in a section 26 notice. The deadline may be extended by the parties’ agreement in writing.

· The parties will try to negotiate the terms of a lease, but if they are unable to reach agreement, the court will determine the contentious terms.

· Either party can apply for an interim rent, which will be payable from the earliest date for termination or proposed commencement date that could have been specified in the relevant notice.

· The court can give an order for the grant of a new lease or the termination of the existing lease, either of which take effect three months and 21 days from the date of the order.

Question 38

What are the key date rules for notices and how do they apply to a Section 26 notice?

Answer 38

A notice expires on the same date as it was served. For example, a 6-month notice served on 1 January expires on 1 July.

Corresponding Date Rule: A notice served on the last day of the month will expire on the last day of the corresponding month if it is a shorter notice. For example, a 6-month notice served on 31 August will end on 28 February (or 29 February in a leap year) of the next year.

Section 26 Notice Example:
- If today is 1 January, and the tenant’s protected lease was “from and including 15 July,” the contractual expiry date of the lease is 14 July that year.
- The tenant can specify a proposed commencement date (PCD) for the renewal lease between 14 July and 1 January the following year.
- The PCD must be no earlier than 14 July and no later than 1 January next year, ensuring the 6-month to 12-month rule for notice periods is followed.

Question 39

What defines a competent landlord for the purposes of section 25 and section 26 notices?

Answer 39

The section 25 and section 26 notice procedures must be conducted between the tenant and the competent landlord, which may not necessarily be the immediate landlord to the tenant.

The competent landlord is the first in the chain of landlords who holds a reversionary interest that is either:
- Freehold, or
- Leasehold that will not end within 14 months.

Example: If an undertenant has a protected underlease and the tenant’s lease expires a day after the undertenant’s, but the tenant’s landlord has a long leasehold with over 120 years remaining:
- The undertenant must serve a section 26 notice on the tenant’s landlord, not the tenant.
- Similarly, the tenant’s landlord, not the tenant, would be entitled to serve a section 25 notice on the undertenant.

Question 40

Provide a summary of notices and other notice requirements.

Answer 40

• Notice periods expressed in numbers of months run from the calendar date of service to the same calendar date in the appropriate month.
• If notice is served at the end of a month, then if the notice expires in a shorter month, the last day of the month is used.
• In calculating a termination date or proposed commencement date for a section 25 or 26 notice respectively, both the end of the existing contractual term and the notice periods must be taken into account.
• Section 25 and 26 notice procedures must be conducted between the tenant and the competent landlord, who may not necessarily be the immediate landlord.