Follow us

Frances Edwards and Shanna Davison discuss proposals for reform of the protection for UK business lease renewals ahead of the Law Commission's long-awaited consultation paper.

The Landlord and Tenant Act 1954 (the act) started life to protect tenants from the risk of paying rent that exceeded market levels, and from being forced to leave their business premises by opportunistic landlords in a diminished commercial property market following the second world war. The act thus provides security of tenure to business tenants – with controls around the terms, and the amount rent can be increased by, in renewal leases – and prohibits landlords from terminating tenancies unless they can satisfy the statutory grounds to do so (the most common of which is an intention to redevelop the property). Both the property landscape and business practices have changed dramatically in the almost 70 years since the act was passed, so it is only right that questions are being asked about the relevance of this regime in modern practice.

In March 2023, the Department for Levelling Up, Housing and Communities announced that it had commissioned a review of the act. Professor Nicholas Hopkins, law commissioner for property, family and trust law, implied in informal discussions with stakeholder groups that nothing would be off the table for the scope of the consultation, which will now be published in early 2024 (delayed from December 2023).

This led to questions concerning a repeal of the act in full; however, early indications showed that the opinion of the majority is that it still holds value for business tenants. Instead, streamlining the act in many areas, rather than repealing it entirely, would be welcomed. Everyone will have their own views, and responding to the consultation is clearly the correct form in which to share them, but in this article, we have chosen to consider the top three areas ripe for reform.

Simplified contracting-out process

As will be well-known, it is currently open to the parties concerned to contract out of the protection of the act before a lease is granted (or before an agreement for a lease is entered into). The process originally involved applying for a court order to sanction the contracting out, but this was replaced with a landlord’s warning notice and tenant’s declaration in 2004. The tenant’s declaration can be a simple one or a statutory declaration sworn in front of an independent solicitor or commissioner for oaths, if it is made less than 14 days before the lease is completed. However, as the declaration cannot occur until the lease is in its final form – by which time, typically, the parties are keen to complete the process – then, in most cases, a statutory declaration is required. The process is unnecessarily cumbersome, particularly where parties are legally represented, and any errors in the process (whether by the landlord or the tenant) leave the landlord open to the risk of a claim for security of tenure in the future. The case of TFS Stores Ltd v the Designer Retail Outlet Centres (Mansfield) Ltd and others [2021] EWCA Civ 688 – though the tenant was ultimately unsuccessful in the Court of Appeal – is a salutary reminder of the mischief that can be caused by the contracting-out process and the areas of weakness that can provide ripe grounds for disputes. The process causes problems in situations commonly encountered in modern transactions, such as an offer-back clause on the assignment of a protected lease; agreements for substations on development sites, where the precise location cannot be determined at the time that agreement is reached; or where a property is sold subject to a contracted-out agreement for lease.

The 1954 act and, in particular, the current contracting-out procedures are simply not designed to deal with these scenarios. Property practitioners have developed workarounds, but inconsistencies in approach continue across the market, and many of the solutions remain untested by the courts. And, as the TFS Stores case shows, it only takes one party to challenge the position in the courts to create uncertainty.

There are many forms that a contracting-out process could take, but, at its simplest, it could be a mandatory warning notice on the front of the lease informing the tenant to seek legal advice, as the tenancy would not have the protection of the act.

More flexibility in lease terms

While parties are free to agree the terms of a renewal lease between themselves, the forum for resolving any terms that cannot be agreed is currently the county court (or the First-tier Tribunal for unopposed lease renewals issued in the Central London County Court). The approach that the court will take when deciding the terms of the renewal lease was established 40 years ago in O’May v City of London Real Property Co Ltd [1983] 2 AC 726. The starting point will be the terms of the current tenancy, and the onus for persuading the court to change a particular term sits with the party proposing the change – but it must be fair and reasonable in all circumstances. Generally, changes to reflect a shift in the law are accepted as reasonable modernisation, but updating the lease to contain clauses that are considered to be market standard can be more problematic. As county court judgments are not binding, and many go unreported, inconsistencies in approach between different cases breed further uncertainty for parties unable to reach an agreement, and for practitioners trying to advise clients on the strength of their case.

Two particular areas of concern are turnover rents and green lease clauses. Turnover rents are often seen in retail leases and are specific to each tenant and how well their business performs. However, section 34 of the act expressly disregards the effect of a tenant’s occupation on setting the parameters of rent under a renewal lease. It instead requires an open market valuation based on a hypothetical transaction between a willing landlord and a willing tenant, to avoid tenants paying inflated rent due to their continued occupation at a premises. So, the process does not work for turnover provisions, which are based entirely on the tenant’s actual business.

With environmental, social and corporate governance (ESG) being a key focus for the property sector, landlords must streamline their property portfolios and ensure their leases contain consistent green clauses to achieve their energy efficiency and net-zero targets. The act seeks to strike a balance between tenants having security in their business premises and landlords not being impeded from redeveloping their properties (as to how well that is working in practice, see below). With climate change being one of the biggest challenges facing businesses, the act must adapt to allow appropriate clauses to be inserted into renewal leases so that ESG initiatives are not undermined.

Reformulated grounds to oppose renewal

Section 30 of the act contains seven grounds by which a landlord may oppose the renewal of a tenancy / terminate an existing tenancy once the contractual term has expired or otherwise ended. Ground (f), which concerns redevelopment, is the most used. However, over the years, case law has revealed the potential pitfalls for landlords wishing to rely on this ground, particularly when the premises forms part of a multi-let building where lease expiries do not neatly tally or where a phased development is planned. The complexity for landlords reached a pinnacle following the Supreme Court’s landmark decision in S Franses Limited (Appellant) v the Cavendish Hotel (London) Ltd [2018] UKSC 62. Landlords must now show a settled and unconditional intention to carry out their proposed scheme of works, whether the tenant leaves voluntarily or not. This calls into question any scheme of works that are structured in a manner to satisfy ground (f) – for instance, demolishing a terraced unit in a retail scheme prior to the termination of other leases for the planned redevelopment becomes more questionable. Similarly, this could risk development structures such as building leases that were developed to satisfy the ground, where the landlord does not propose to carry out the development but needs vacant possession to attract a developer’s interest. If the intention remains for the act to strike a balance between the interests of the parties and not sterilising the land, we must bridge these fault lines.

Resorting to litigation under the act has always been secondary to the primary aim for parties to agree matters between themselves. When settling terms for a tenant to leave a property that is ripe for redevelopment, a common component will be a payment in lieu of the statutory compensation the tenant would otherwise receive under the act if the landlord successfully relied on ground (f) (or one of the other compensable grounds). However, the tax treatment of such payments is complex and can present a bear-trap for the unwary. This should also be addressed when considering reforms of the grounds of opposition to ensure the system is workable in practice.

This article was originally published by The Law Society: Property in Practice (Issue 85, December 2023)

Key contacts

Frances Edwards photo

Frances Edwards

Senior Associate, London

Frances Edwards
Shanna Davison photo

Shanna Davison

Professional Support Lawyer, London

Shanna Davison

Stay in the know

We’ll send you the latest insights and briefings tailored to your needs

London Real Estate Disputes Real Estate Real Estate Real Estate Frances Edwards Shanna Davison