Business Tenancies Flashcards
The Landlord and Tenant Act 1954
The somewhat belated response to this was the Landlord and Tenant Act 1954 which was introduced under Winston Churchill’s government. Amongst other things, the Act provided qualifying business tenants with security of tenure.
The tenant in a lease with security of tenure may continue to occupy the premises at the end of the contractual term. They may request a new tenancy, and the landlord’s ability to recover the premises from the tenant is limited. Although the 1954 Act has undergone many changes, it is still an important piece of legislation and the overriding rationale behind it has not changed.
Benefits of security of tenure for the tenant
· The tenant being able to treat the premises as a long term prospect means that the tenant can invest in fitting out the premises and making them suitable for their purposes.
· A retail or restaurant business know that they can reap the benefits of goodwill from their location.
· A tenant does not have to worry about the considerable upheaval that could be caused by having to move at the end of the contractual term.
Benefits of security of tenure for the landlord
Although the tenant stands to gain more from security of tenure, there are benefits for the landlord as well in offering security of tenure.
· The premises will be more appealing to prospective tenants.
· The tenant may be encouraged to treat the premises as their own, and therefore look after them. Of course, there will be repairing obligations in the lease anyway, but it is better if the tenant observes them without being coerced into doing so.
It may be beneficial to the landlord at rent review, as the market rent may be higher for a lease enjoying security of tenure.
· It may be beneficial to the landlord at rent review, as the market rent may be higher for a lease enjoying security of tenure.
That said, there are disadvantages for the landlord as well. Security of tenure by its nature limits the landlord’s freedom over their own property. Complying with its requirements can also be quite complicated.
Application of security of tenure
“ANY TENANCY”
Security of tenure provisions only apply to a tenancy. It is therefore useful to distinguish other similar arrangements.
Landlords might use these arrangements to try to avoid security of tenure provisions being implied, but care should be taken as if the substance of a transaction is a tenancy, the arrangement could still become protected with security of tenure.
Fixed term tenancy
· A fixed term tenancy creates exclusive possession and a proprietary interest.
· It binds successors in title to the landlord.
· The tenant can use the property as if they were the owner.
· It can benefit from security of tenure.
Periodic tenancy
· A periodic tenancy creates exclusive possession and a proprietary interest.
· It binds successors in title to the landlord. However, it can be brought to an end by notice.
· It can benefit from security of tenure.
Licence
· A licence is a personal permission to be on the land and is not a proprietary interest.
· It does not bind successors in title to the owner granting the licence.
· It cannot benefit from security of tenure.
Tenancy at will
· A tenancy at will is similar to a licence as it is a personal permission but unlike a licence, the tenant can have exclusive possession.
· However, the important feature is that either landlord or tenant can end the tenancy at any time.
· It cannot benefit from security of tenure.
“OCCUPIED BY THE TENANT”
This requirement is reasonably straightforward. If the tenant leaves the premises vacant, then it is not entitled to claim security of tenure.
However note also that if the tenant underlets the whole or the part of the premises, then it follows that it cannot be in occupation and will lose security of tenure over the whole or part of the premises accordingly.
Example: a tenant has an office lease of floors 2 and 3 of a building. It underlets floor 3 for a term ending one day before its own. At the end of the contractual term, the tenant has security of tenure for floor 2 but not 3.
“FOR THE PURPOSES OF A BUSINESS”
This requirement is widely defined by the Landlord and Tenant Act 1954 as including any “trade, profession or employment”.
Case law has refined this definition further.
These have been held to be business purposes:
· a charity shop
· a tennis club for members only
· residential use that furthers the tenant’s business (eg, accommodation for medical school students or a lease of a shop, part of which could be used for residential purposes)
These have been held not to be business purposes:
· Sunday school sessions provided free of charge by an individual
· A tenant of a house taking a small number of lodgers without profit
Excluded tenancies
Section 43 of the Landlord and Tenant Act 1954 specifically excludes some types of tenancies from security of tenure:
* Agricultural tenancies (as they have their own statutory regime)
* Mining leases
* Service tenancies (a lease granted as part of a tenant’s employment, eg, a security guard’s flatpo)
* Fixed term tenancies of six months or less (but can become protected if the tenant has been in occupation for twelve months or more, whether through successive tenancies or if the tenancy is renewable beyond six months)
Contracted out tenancies
S38A of the Landlord and Tenant Act 1954 allows the parties to agree to exclude a fixed term lease from the security of tenure provisions.
This is known as contracting out.
Assessment tip: Note that only fixed term leases can be contracted out. A periodic tenancy that qualifies for security of tenure cannot be contracted out.
Why/why not contract out?
It might be thought that if a landlord can contract out every tenancy, they would want to.
In practice, offering protected tenancies may encourage long term tenants, and not doing so may limit the premises’ appeal.
The following tenancies are commonly contracted out:
* short term leases (5 years or less)
* underleases (usually required by the tenant’s lease)
Procedure for contracting out
The Landlord and Tenant Act 1954 used to require a court order be obtained to any contracted out tenancy.
From June 2004, a much simpler two-stage procedure has been in place, not requiring a court order. However, it must be strictly observed.
The landlord must serve a warning notice on the tenant in a prescribed form. This details the consequences of contracting out the security of tenure provisions.
It must be served before the parties complete the lease.
The tenant must provide a declaration in prescribed form to the landlord before completing the lease.
If lease completion is at least 14 days from the date of the warning notice then this can be a simple signed declaration.
If lease completion is less than 14 days away, then the tenant must provide a statutory declaration (declared before an independent solicitor).
The lease must contain reference to both the notice and declaration (or statutory declaration) of contracting out.
If the procedure is not correctly carried out, or not correctly referred to in the lease, the likelihood is that the lease will enjoy security of tenure.
Implications of security of tenure
For a non-protected tenancy, the tenant has no right to occupy beyond the contractual term. If the landlord has notified the tenant that it requires possession at the end of the contractual term, then if the tenant continues to occupy, the landlord may treat them as a trespasser and recover possession.
By contrast, for a protected tenancy, the tenant has the right to stay in occupation. This is known as holding over. The landlord cannot evict the tenant, and the tenant’s occupation can only be brought to an end by certain methods allowed by the Landlord and Tenant Act 1954.
Ending a protected tenancy - landlord
The landlord has limited options to bring the tenancy to an end.
The landlord’s options are to:
* forfeit the lease if there has been a breach of the tenant’s covenants and the lease allows this
* serve a section 25 notice, which may indicate an intention to recover the premises or offer a renewal lease
Note that the security of tenure provisions do not prevent the landlord from forfeiting the lease if, for example, the tenant is in arrears with rent, and the lease allows for it. This is covered in the elements on termination of leases.
Ending a protected tenancy - tenant
As the security of tenure provisions are for the protection of the tenant, the tenant has more options for bringing the lease to an end.
The tenant’s options are:
* simply to vacate the premises at the end of the contractual term
* to surrender the lease with the landlord’s agreement
* for a periodic tenancy, serve notice to quit to bring the tenancy to an end
* serve a section 26 notice to request a new tenancy
* serve a section 27 notice to leave the premises
As surrender and notice to quit also apply to non-protected tenancies, they are covered in the elements on termination of leases.
Section 26 and section 27 notices will be examined in the element on tenant’s notices.
Section 25 notice
The landlord’s section 25 notice states when the current tenancy will end (the date of termination). The date of termination must be on or after the date on which the contractual term ends.
A section 25 notice must be served no less than 6 months and no more than 12 months before the date of termination.
The section 25 notice must be in the form prescribed by statute.
A ‘friendly’ section 25 notice indicates that the landlord is willing to renew the lease to start the day after the date of termination. It will propose the rent to be paid and principal terms of the new tenancy.
A ‘hostile’ section 25 notice indicates that the landlord intends to oppose renewal of the lease. The landlord can only do this on certain statutory grounds, and must specify on which ground or grounds the landlord intends to rely.
The friendly section 25 notice
Why would a landlord want to serve a friendly section 25 notice?
* Peace of mind – the landlord wants the tenant to be tied to a further term and therefore the landlord’s rental income will be guaranteed.
* In a rising market, to enable a market rent to be fixed for the renewal tenancy.
A lease may contain a rent review on the last day before the end of the contractual term. This is designed to ensure that the tenant pays a market rent during the period of holding over. Even if this is done, the rent will stay the same during the period of holding over, so this is only a limited solution.
The hostile section 25 notice
There are seven grounds on which the landlord can oppose renewal of the tenant’s lease, of which the most important are:
* 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 covenants by the tenant
* the landlord offers suitable alternative accommodation
* the landlord intends to demolish or reconstruct the premises or carry out substantial construction work which require possession
* the landlord intends to occupy the premises for itself
There is another ground, but it is rarely used in practice and is unlikely to come up in an assessment.
The landlord must be able to substantiate the ground on which it is relying. For example, if the landlord intends to redevelop the premises, it may show that it has obtained planning permission or entered into a construction contract.
The grounds can be categorised into mandatory or discretionary.
A mandatory ground means that if the landlord establishes the ground, the court must grant possession to the landlord.
A discretionary ground means that even if the landlord shows the ground, it is down to the court’s discretion.
The grounds can also be categorised into compensatory and non-compensatory, which unfortunately follows a different pattern.
If the ground relies on no fault of the tenant (eg, the landlord needs to carry out work), then the tenant may be entitled to compensation. This is a compensatory ground.
Conversely, if the ground relies on the tenant’s fault (breach of covenant), then the tenant is not entitled to compensation. This is a non-compensatory ground.
Compensation is calculated:
* at 1x the rateable value if the business has occupied the premises for less than 14 years
* at 2x the rateable value if the business has occupied the premises for 14 years or more
Key word or definition: rateable value is based on estimated annual rental value of premises, and is fixed by the local authority for the purpose of the calculating business rates due for the premises. It is not necessarily the same as the market rent.
The grounds in more detail
The following is a list of the grounds, together with the evidence they require, whether they are mandatory or discretionary, and whether they are compensatory:
Ground (a) – breach of tenant repairing obligation
Evidence will be required of a serious breach. Discretionary, not compensatory
Ground (b) – persistent delay in paying rent
Evidence of length of delay and number of failures to pay rent on time. Discretionary, not compensatory
Ground (c) – other substantial breaches of tenant obligations
Evidence of serious and persistent breaches. Discretionary, not compensatory
Ground (d) – availability of suitable alternative accommodation
Landlord must have made an offer of alternative accommodation suitable to the tenant (with regard to the tenant’s business and goodwill). Mandatory, not compensatory
Ground (e)
Not covered for our purposes
Ground (f) – intention to demolish or reconstruct premises or carry out substantial construction
Firm and settled intention to redevelop, possibly planning permission or construction contract. Mandatory, is compensatory
Ground (g) – landlord intends to occupy premises
Firm and settled intention by landlord who must have owned the reversion for at least 5 years before the date of termination. Mandatory, compensatory
Tenant’s notices
This element examines the notices that a tenant can serve to end a protected tenancy
A tenant may decide simply to vacate the premises at the end of the contractual term, and if so, the tenancy ends on that date, regardless whether it is protected or not. However, to avoid any doubt, it would be good practice to notify the landlord of that intention.
Alternatively the tenant may be able to agree with the landlord to surrender the lease during the contractual term.
This element, however, is concerned with the notices where the tenant either wants to renew the lease (section 26 notice) or end the lease (section 27 notice) after a period of holding over.
Key word or definition: A surrender is when the tenant gives up its leasehold interest to the landlord, bringing it to an end. There is more detail on this in the elements on termination of leases.
Note that the different notices (section 25, section 26 and section 27) are mutually exclusive. Once one of these notices has been served, the other party cannot serve a different type of notice.
The section 26 notice
As the tenant is entitled to hold over, why would a tenant want to serve a section 26 notice to renew the lease?
* The tenant may want the certainty of a fixed term, particularly if it is planning to carry out improvements to the premises, or to assign the lease as part of a business sale.
* In a falling market, the tenant may be stuck on a higher than market rent while holding over (particularly if there was a penultimate day rent review) and will want a renewal lease at a market rent
Either the landlord or tenant therefore has the option to request that renewal takes place.
