Business Tenancies

Question 1

Where does security of tenure come from

Answer 1

Landlord and tenant act 1954 introduced security of tenure for commercial tenants.

Question 2

Benefits of security of tenure for the tenant

Answer 2

• 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 the suitable for their purposes
• retail or restaurant business know that they can reap the benefits of goodwill from their location
• 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

Question 3

Benefits of security of tenure for the landlord

Answer 3

• premises are more appealing to prospective tenants
• tenant may be encouraged to treat the premises as their own and therefore look after them (of course there are still repairing obligations)
• May be beneficial to the landlord at rent review as the market rent may be higher for a lease enjoying security of tenure

Disadvantages:
Limits the freedom landlords have over their own property - complying with its requirements can also be quite complicated

Question 4

To whom does security of tenure apply?

Answer 4

• Any tenancy
• Occupied by the tenant
• For the purposes of business

Question 5

What kinds of tenancies benefit form security of tenure?

Answer 5

• Fixed term tenancy (must be more than 6 months)
• Periodic tenancy

CANNOT benefit:
- tenancy at will (personal permission)
- Licence

Note 6 months fixed: - but can become protected if tenant has been in occupation for 12 months or more (whether successive or renewable)

Question 6

“Occupied by the tenant

Answer 6

• If vacant cannot claim
• if underlet the whole or part of the premises then it cannot be in occupation and will lose security over the whole or part of the premises accordingly

Question 7

“For the purposes of business”

Answer 7

Any “trade, profession or employment”

Have been held to be:
- charity shop
- tennis club
- residential use that furthers tenants use (lease of shop with flat above)

Not:
- free sunday school sessions
- tenant of a house taking a small number of lodgers without profit

Question 8

Excluded tenancies

Answer 8

Excluded:
- agricultural
- mining
- service tenancies
- fixed term tenancies of six months or less - but can become protected if tenant has been in occupation for 12 months or more (whether successive or renewable)

Question 9

Contracted out tenancies

Answer 9

Parties can exclude a fixed term lease from security of tenure by agreement - “contracting out”

May not want to as it can limit the premises’ appeal.

Commonly contracted out:
- short term leases (5 years or less)
- underleases (usually required by tenant’s lease)

Note: periodic tenancies cannot be contracted out

Question 10

Procedure for contracting out

Answer 10

1. Landlord must serve a warning notice on the tenant in a prescribed form (details the consequences of contracting out the security of tenure) - must be served BEFORE the parties complete the lease
2. Tenant must provide a declaration in prescribed form to the landlord.
   - if warning notice is at least 14 days before completion: simple signed declaration
   - less than 14 days: statutory declaration (declared before independent solicitor)

Lease MUST contain reference to both the notice and declaration of contracting out.

If not: lease will enjoy security of tenure

Question 11

End of term: contracted out

Answer 11

Where tenancy is not protected: tenant has no right to occupy beyond the contractual term.

If landlord has notified the tenant that it requires possession at end of term and tenant continues to occupy landlord may treat them as a tresspasser.

Question 12

End of term: security of tenure

Answer 12

If tenancy is protected then the tenant has the right to stay in occupation.

Known as ‘holding over’.

Landlord cannot evict the tenant and the tenant’s occupation can only be brought to an end by certain methods allowed by the LTA 1954.

Question 13

Ending protected tenancy - Landlord

Answer 13

Options:
- forfeit the lease if there have 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

Question 14

Ending protected tenancy - tenant

Answer 14

Options:
- vacate the premises at the end of the contractual term

• surrender the lease with the landlord’s agreement
• periodic: 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

Question 15

Serving section 25, 26 and 27 notices

Answer 15

These notices are mutually exclusive.

Once one of these notices have been served the other party cannot serve a different type of notice.

Question 16

What is included in a section 25 notice?

Answer 16

S25 notice states when the current tenancy will end.

The date of termination must be on or after the date on which the contractural term ends (end of lease).

Section 25 notice must be in the form prescribed by statue.

Hostile notice will include the grounds on which the landlord will be relying.

Question 17

When can a landlord serve a serve a section 25 notice?

Answer 17

s25 notice must be served no less than 6 months and no more than 12 months before the date of termination.

Question 18

Friendly versus hostile section 25 notice

Answer 18

A friendly section 25 notice indicates that the landlord is willing to renew the lease.

A hostile section 25 notice is sent where the landlord intends to oppose the lease.

Question 19

Friendly section 25 notice

Answer 19

Landlord may send:
- 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 period

Note: most leases have a rent renewal on the last day before before the end of the contractual term (so review right before holding over - but can’t increase once holding over starts)

Question 20

Hostile section 25 notice

Answer 20

Seven grounds on which the landlord can oppose renewal of the tenant’s lease:

• persistent and serious breach by the tenant of a repairing obligation
• persistent delay in the tenant paying rent
• serious and persistent other breaches of covenants by the tenant
• landlord offers suitable alternative accommodation
• the landlord intends to demolish or reconstruct the premises or carry out substantial construction work which require possession
• landlord intends to occupy the premises themselves

Question 21

Mandatory and discretionary grounds

Answer 21

Mandatory: means that if the landlord establishes the ground the court must grant possession to the landlord

Discretionary: means that even if the landlord shows the ground it is up to the court’s discretion. (all of the breaches are discretionary grounds)

Question 22

Compensatory and non-compensatory grounds

Answer 22

Compensatory: If the ground is no fault of the tenant then the tenant may be entitled to compensation

Non-compensatory: if the ground relies on the tenant’s fault then the tenant is not entitled to compensation

breaches are not compensatory and neither is an offer of alternative accommodation (because they are providing a solution) but wanting to develop or move in is compensatory

Question 23

What is rateable value?

Answer 23

Based on the estimated annual rental value of the premises and FIXED by the local authority

Question 24

Calculating compensation

Answer 24

Occupied for less than 14 years: 1x rateable value

Occupied for 14 years or more: 2x rateable value

Note: if someone has taken over a business they can include the time the previous tenant spent there but requires transfer of goodwill not simply same kind of business.

Only possible for parties to a protected lease to contract out of compensation if tenant has been in occupation for less than five years.

Question 25

(a) breach of tenant repairing obligation

Answer 25

Evidence:
evidence of serious breach

Discretionary ground

Not compensatory

Question 26

(b) persistent delay in paying rent

Answer 26

Evidence:
length of delay and number of times

Discretionary

Not compensatory

Question 27

(c) other substantial breaches of tenant obligations

Answer 27

Evidence:
evidence of serious and persistent breach

Discretionary

Not compensatory

Question 28

(d) availability of suitable alternative accommodation

Answer 28

Evidence:
landlord must have made an offer of suitable alternative accommodation (with regard to the tenant’s business and goodwill) to the tenant

Mandatory

Not compensatory

Question 29

(f) intention to demolish or reconstruct premises or carry out substantial construction

Answer 29

Evidence:
firm settled intention to redevelop, possibly planning permission or construction contract

Mandatory

Compensatory: yes

Question 30

(g) landlord intends to occupy premises

Answer 30

Evidence:
firm and settled intention by landlord, has owned reversion at least 5 years before the date of termination

Mandatory

Compensatory: yes

Question 31

What if the landlord has more than one ground to serve a hostile section 25 notice?

Answer 31

You should include all the grounds.

Note: the court will have regard to the whole situation and decide what the primary ground should be.

Question 32

When are 26 and 27 notices used?

Answer 32

26: where the tenant wants to renew the lease

27: where the tenant wants to end the lease after a period of holding over

Question 33

Why serve a section 26 notice?

Answer 33

Notice that the tenant wants to renew the lease.

• tenant may want the certainty of a fixed term, particularly if it is planning to carry out improvements to the premises or assign the lease as part of a business sale
• in a falling market the tenant may be stuck at a higher market rent while holding over and will want a renewal lease at market rent

Question 34

Requirements of a section 26 notice

Answer 34

• protected tenancy
• lease was originally granted for a contractual term of more than one year (if less cannot serve s26 notice but landlord can serve s25)
• minimum notice period of 6 months and maximum of 12 months, but key date is the proposed commencement date of renewal lease (not end date of the old lease)

Question 35

Responding to a s26 notice

Answer 35

After receiving a section 26 notice the landlord has TWO months to serve a counter notice.

The landlord can only oppose the renewal on one or more the statutory grounds.

Question 36

Use of a section 27 notice

Answer 36

Used to end the tenancy after a period of holding over.

Otherwise if want to leave at the end of the lease the tenant can just vacate the premises (but good practice to notify the landlord).

Question 37

Timing of a section 27 notice

Answer 37

Section 27 notice must give three months of the intended termination date which must be no earlier than the date on which the contractual term ends.

Question 38

Application to the court: s26 notice

Answer 38

Apply:

• after landlord has served counter notice
  OR
• if two months have elapsed from the s.26 notice

Deadine: day before the proposed commencement date of the new lease

Deadline may be extended by the parties agreeing in writing.

Question 38

Application to the court: s25

Answer 38

Either party may apply to the court after service of a section 25 notice.

Deadline: date of termination specified in the notice

Question 39

Negotiation of the terms of the lease

Answer 39

Friendly s25 and a 26 notice will propose the principle terms of the new lease.

Landlord and tenant will usually try to agree the terms of the lease between themselves and only if they are unable to reach agreement will they ask the court to decide.

Question 40

Courts powers in granting a new lease

Answer 40

• Court can grant a term of up to 15 years
• rent will be open market rent
• other terms: determined having regard to the terms of the current tenancy and relevant circumstances but has discretion to change terms

Question 41

Interim rent

Answer 41

• during period of holding over and negotiation, the tenant will continue to pay rent as it was last reviewed by the lease
• either party may apply to the court during this period to fix an interim rent.
• The interim rent may be either higher or lower

Interim rent is payable from the earliest date that could have been specified as the proposed commencement date in the tenant’ section 26 notice.

Question 42

Court orders

Answer 42

Order to grant a new lease:
- brought by either the landlord or the tenant
- if tenant is not happy can ask court to revoke the order but then loses right to renewal

Order for termination of the existing lease:
- brought by landlord (after hostile 25 or counter 26)
- brings lease to an end following which the tenant has no right to remain in occupation

Both orders bring the existing tenancy to an end three months and 21 days after the date of the order.

If order is for a new lease, the new lease will start the day after the termination of the existing lease

Question 43

What is a competent landlord?

Answer 43

s25 and s26 notice procedures must be conducted between the tenant and the competent landlord.
This may not be the immediate landlord.

E.g. an undertenant wants to renew their lease but their immediate landlord, the tenant, has a lease which expires the day after them. They should send their s26 notice to the tenant’s landlord.