The Court of Appeal has recently clarified the position on costs relating to the new procedures under The Landlord and Tenant Act 1954, made by the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003. In the case of Ley & Others v Drexler & Others (trading as Littlestone Martin Glenton) the Court of Appeal decided that it was appropriate for the tenant to meet the landlord's costs even in the circumstances where it was the landlord who started the "proceedings".

Statutory background

Prior to the 2003 regulations, the provisions of the 1954 Act were such that there was scope for landlords and tenants to use delays in negotiations to maximise their own advantage of existing rental levels between the period of the termination of an old tenancy and the commencement of a new tenancy. Initially, tenants had to apply to Court in order to ensure their right to a new tenancy at the expiry of their existing tenancy. During the period of the Court proceedings and for three months afterwards, the existing tenancy would continue and if in a market of increased rents, the tenant could prolong the Court proceedings in order to benefit for longer at the level of rent under the existing tenancy.

There was a subsequent attempt to make the situation fairer to landlords and the Court was entitled to exercise a discretion to determine an interim rent for the period a tenant remained in occupation following the end of the contractual term of its existing tenancy. The consequence of this was to move the position much more in favour of the landlords but to the detriment of the tenants. The tenant was not entitled to apply for an interim rent and potentially there was the case that the tenant was paying an increased rent for the premises. In reality, the method for calculating the interim rent often resulted in a lower figure and accordingly landlords did not regularly apply for such an order.

The 2003 Regulations sought to rectify the various inequities between the parties. It is now the case that either party is entitled to apply for the grant of a new tenancy. In addition, the old procedure whereby if the landlord made such an application, the tenant was required to serve a counter notice and bring any proceedings within two months, is no longer applicable. The Law Commission's intention was to ensure that the bargaining strengths between the two parties were more equal and also that Court applications would not be made unnecessarily.

In the current case the landlord applied for the grant of a new tenancy under Section 24(1) of the 1954 Act and the tenant entered an acknowledgement of service of this. At a much later date the tenant served a notice under Section 29(5) of the 1954 Act to terminate the proceedings and the case arose in order to ascertain the liability for costs.

New lease or not?

The tenant occupied premises under a lease that was due to expire in March 2005. In August of the previous year they informed their landlord that they were considering renewing the lease for three years and sought agreement to this and in relation to the level of rent payable under the lease renewal. In April 2005 the landlord commenced proceedings for the grant of a new tenancy under Section 24(1) of the 1954 Act and in November 2005 the tenant's solicitors wrote indicating that they were considering moving to alternative premises. In April 2006 the tenants gave notice to the Court that they no longer wished a new lease of their existing premises. A recorder pursuant to Section 29(5) of the 1954 Act then dismissed the claim. The record ordered that proceedings should continue for the purposes of calculating the amount of interim rent from the date the landlord's notice under Section 25 of the 1954 Act had terminated the tenancy until the date the tenant gave up possession of the premises and also to ascertain the liability for costs. The Judge made no order as to costs, stating that the parties should proceed with the trial or accept no order for costs. The landlord appealed to the Court of Appeal and the appeal was allowed.

The Court of Appeal made the statement that the Judge's reasons for making the initial order were wrong in principle. It was concluded that the landlord's exercise of its right to commence proceedings for the grant of a new lease was necessary to reach agreement on the proposed terms of the new lease.

It was the opinion of the Court of Appeal that the proceedings were not premature. Also, since the tenant entered an acknowledgement of service assenting to the grant of the new lease, they too were regarded as launching proceedings for the grant of a new tenancy albeit upon terms that would be more advantageous to them than those terms proposed by the landlord. The Court of Appeal concluded that the subsequent termination of the proceedings by the tenant was equivalent to a notice to discontinue proceedings where they had been seeking an order from the Court and accordingly, the normal rules as to costs would apply. The Court of Appeal did not accept the tenant's arguments that the proceedings had been started prematurely on the basis that the tenant had themselves joined in those proceedings. On the basis of their commitment to the proceedings, the subsequent termination as a result of the tenant's change of mind should have resulted in the trial Judge having placed the burden of proof on the tenant. The tenant should have been required to establish any such facts that would satisfy the Court's departure from the normal order in such circumstances of being required to meet the costs of the Section 24(1) application.

Clarity regarding costs

The case has brought clarity to the position on costs, which are not expressly provided for in terms of the 2003 Regulations. It is quite clear that the Court's view is that a tenant's decision to unilaterally bring to an end proceedings for the grant of a new tenancy, which it had joined in for its own purposes, requires to be regarded as having the same consequences as a decision to discontinue, resulting in a liability for costs. It is hoped that the combination of the 2003 regulations and this clarity from the Court of Appeal will improve the practical negotiations between landlords and tenants in relation to the lease renewal process. The Act reduces the scope for either party using the Courts to cause delays in negotiations and the case fairly allocates liability for costs.

It is to be hoped that there will now be clearer communication between the parties as to their intentions in relation to lease renewals. It promotes open dialogue of each parties' business interests and transparency of need which should result in more direct agreements and fewer unnecessary Court applications.