Even if England and Wales avoid a double dip recession the economic climate is such that the termination provisions of the Landlord and Tenant Act 1954 (the 1954 Act) and , the manner in which they interact cause a lengthy period of uncertainty for landlords at the end of the lease term.
The old regime
Before changes in 2004, the old regime under the 1954 Act promoted certainty in that whenever a landlord served a notice under Section 25 of the 1954 Act (the Section 25 Notice) the tenant was under an obligation to respond. Within two months of Section 25 Notice being served the tenant was required to let the landlord know whether or not it was willing to give up possession of the premises in question. This was the case regardless of whether in its Section 25 Notice the landlord was offering the tenant terms for a new tenancy, or notifying the tenant of its intended grounds of opposition to renewal.
A tenant was unable to withdraw a counter notice indicating a desire to give up possession, and if a tenant failed to serve a counter notice in time he lost his right to renew.
So, if a landlord had identified a potential new tenant for its premises but wanted certainty of the existing tenant’s intentions it would serve its Section 25 Notice as a soon as it could and achieve a degree of certainty within two months. Even under the old regime there was nothing to stop the tenant from indicating a willingness to take a new business tenancy and subsequently deciding to vacate. Despite this, a landlord would at least know following the expiry of that two month window whether it could safely contract with a new tenant. A section 25 notice can be served up to 12 months before the end of the lease so the Landlord could know the future of the property with plenty of time and rent still in place under the existing lease
The current regime
Because of the abolition of the requirement to serve counter notices the current regime removes that certainty for landlords.
Once a landlord serves a Section 25 Notice (whether proposing new lease terms or citing a ground or grounds of opposition) the tenant has only to do one of the following by the statutory termination date specified in the Notice, if it desires a new business tenancy:
- Enter into a new lease or binding agreement for lease;
- Agree in writing an extension to the statutory period; or
- Apply to Court for a new tenancy.
If both parties clearly want a new tenancy then the uncertainty will usually disappear relatively swiftly. A tenant may however wish to hedge its bets. It may have designs on new premises but not yet be in a position to commit to them, or there is a risk that those premises may not in fact become available. It may wish to leave the landlord in limbo in the hope of being offered incentives to stay. Alternatively it may have decided to leave but simply does not wish to engage with the landlord at all.
Section 27 of the 1954 Act
In theory Section 27 of the 1954 Act provides a mechanism by which the landlord can achieve certainty. Section 27 provides that a tenant wishing to terminate its 1954 Act rights can do so by giving not less than three months notice; the earliest the notice can expire is the contractual termination date of the tenancy. In practice few tenants serve such a notice.
Save that there is no requirement for any Section 27 Notice to expire on a quarter day the regime is similar to that under the old regime. It follows that the difficulties present under the old regime (outlined below) are retained:
- First, on any reading the requirements of Section 27 would only give a landlord a maximum of 3 months certainty (for that is the minimum period of notice required to be given). Three months may not provide a landlord with sufficient time in which to market the premises and secure a fresh rental stream.
- Second, in reality Section 27 is only of practical application in circumstances where the tenant is holding over following the termination of the contractual term of the lease (the Term Date). Whilst Section 27 requires three months’ notice if the tenant wishes for the tenancy to end on the Term Date, in reality, a tenant who vacates premises on or shortly before the Term Date does not have to give any notice at all. This is because but for the provisions of the 1954 Act all business tenancies come to an end on the Term Date. The effect of the 1954 Act is to continue protected business tenancies provided the requirements of the 1954 Act are met. One such requirement is that the tenant is in business occupation. If the tenant vacates the premises on or before the Term Date it will cease to be in business occupation. Consequently the security of tenure provisions within the 1954 Act will cease to apply and the tenancy comes to an end by effluxion of time.
One way said to avoid the risk of the tenant leaving on the term date is for the landlord to serve a Section 25 Notice with a statutory termination date beyond the Term Date. The theory goes that the effect of the service of a Section 25 Notice is to engage the 1954 Act by creating a continuation tenancy, in response to which the tenant has to serve 3 months’ notice. Is this correct though? A Section 25 Notice does nothing more than bring statutory rights of occupation to an end, but in order for statutory rights of occupation to be brought to an end they must first exist. If, by vacating business premises by the Term Date, the statutory rights disappear, it does rather suggest that the service of a Section 25 Notice would be of no practical effect.
Support for this comes from two sources:
- Section 27 of the 1954 Act now contains a new provision which confirms that tenancies do not automatically continue if a tenant is not in business occupation at the date when the lease comes to an end. If tenancies do not continue in those circumstances Section 25 of the 1954 Act is not engaged.
- Whilst it is a case under the old regime the Court of Appeal decision in Single Horse Properties Limited v Surrey County Council (2002) runs counter to the theory proposed. In Single Horse Properties the landlord served a Section 25 Notice. In response the tenant first served a counter notice confirming its desire to seek a new tenancy. It then applied to court for a new tenancy. Shortly before the Term Date the tenant changed its mind, vacated the premises and handed the keys back to the landlord. When court proceedings for the grant of a new tenancy are determined the 1954 Act provides that the existing tenancy will come to an end in three months time. In this case the landlord argued that as court proceedings had been commenced the tenant could not simply walk out and at the very least had to be responsible for three months’ rent. The Court of Appeal disagreed; it said that the provisions of the 1954 Act are disengaged when the tenant ceases its business occupation prior to the Term Date. This was the case notwithstanding the fact that the tenant had indicated a willingness to take a new tenancy by serving a counter notice and, furthermore, applied to court for a new tenancy. As the tenant ceased its business occupation by the term date the 1954 Act simply did not apply any more. Under the current regime it seems likely that the outcome would be the same if the tenant vacated business premises by the Term Date in response to a Section 25 Notice, irrespective of the termination date specified in that Notice.
Given the above what practical advice is there for landlords? There is no easy answer but one drastic solution might be to serve a hostile Section 25 Notice, citing grounds for opposing a new lease. However, serious caution must be applied before undertaking such an approach because:
- There must be a genuine belief that the landlord is entitled to rely upon grounds of opposition cited in a Section 25 Notice. A failure to hold such a belief not only calls the validity of the Section 25 Notice into question but also may give rise to a misrepresentation claim by the tenant.
- If only non fault based grounds are cited the tenant could simply accept them and seek the statutory compensation for which the landlord would be liable.
Perhaps a more effective way to draw out a tenant would be to serve a Section 25 Notice at the earliest opportunity (quoting terms for a new lease) and to follow that up with the service of a priced terminal schedule of dilapidations. The schedule would be accompanied with a formal request for the tenant either to confirm its position by a specified date so far as taking a new tenancy of the premises is concerned or alternatively to provide its formal response to the dilapidations claim. Given the lease obligations to yield up premises in the required condition and to take up a new business tenancy are mutually exclusive, a tenant, if faced with a large dilapidations claim would perhaps be more decisive than otherwise, particularly if his intention was to take a new tenancy.
Another option for a landlord to consider is to take full advantage of any advertising provisions in the lease. The erection of a ‘To Let’sign (which may adversely affect the tenant’s business) could well prompt the tenant to make a decision about his future occupation at the premises.
Of course the practical suggestions identified are not intended to provide landlords with a definitive answer to the question in each and every case but hopefully they may help reduce the level of uncertainty created by the current lease renewal regime.
Many landlords in the past have been fairly relaxed about whether a new lease is granted with 1954 Act protection but these issues suggest a landlord might wish to avoid this lengthy period of uncertainty by excluding if they can a lease from the protection of the 1954 Act in the first place.