7th January 2025

Commercial Property Leases and Security of Tenure – Part II of the Landlord and Tenant Act 1954

“My tenant mentioned ‘security of tenure’ so I thought I should check with my Solicitor what that means for me”. These were the words spoken to me by a landlord client recently who had just been told by an informed tenant, in no uncertain terms, that they had a right to remain in the property they had leased from the landlord some five years earlier at the end of the term of their lease and the landlord could not ask them to leave. That wasn’t quite right but the tenant did have a point to an extent.

From time to time, I am approached by a landlord client who has let a commercial property to a tenant and dealt with the lease agreement themselves. This approach is usually made to me off the back of a landlord seeking a renewal or change to the terms of the lease or even with the objective of achieving an empty property ready for sale. Unless a commercial landlord is well versed in the ‘contracting out’ process required under The Regulatory Reform (Business Tenancies) (England and Wales) Order 2003, it is possible that the landlord will have granted a lease within the secure provisions of sections 24-28 of the Landlord and Tenant Act 1954 (the Act). The effect of this is that come the end of the lease, unless the tenant agrees to leave, the landlord can only bring the lease to an end by serving a section 25 notice pursuant to the Act.

 

Section 25 Notice

When terminating a lease protected under the Act, the landlord needs to serve a section 25 notice on the tenant and provide a reason for not renewing the tenant’s lease. There is a finite list of those grounds for the landlord to choose from contained in section 30(1) of the Act. Those grounds include the tenant’s failure in keeping the property in the repair required by the lease, paying rent on time on more than one occasion or other substantial breaches of tenant covenants in the lease. There is a further ground involving sub-letting of parts of a building where a landlord can show that the rent that can be achieved from sub-divided parts of a building are substantially less than the rent that could be achieved from a letting of the whole of a building, but it is the least used ground because seldom are the necessary requirements fulfilled. These grounds are referred to as “discretionary grounds” meaning that the Court has a discretion as to whether to order a new lease of the property even if a particular ground is evidenced by a landlord.

The list of mandatory grounds, i.e. where the Court must order possession for the landlord, is a little shorter, but includes the landlord offering the tenant suitable alternative premises on reasonable terms (having regard to the current tenancy), the landlord wanting to occupy the premises for their own use (which is subject to a requirement that the landlord has owned the reversion of the lease for at least 5 years before the end of the tenancy (i.e. the date stated in the section 25 notice)), or the most commonly used ground which is that the landlord intends to redevelop the premises. In each of these mandatory or ‘no fault’ grounds, the tenant might be entitled to statutory compensation based on the rateable value of the property.

Unless the landlord can demonstrate one of the discretionary or mandatory grounds as a reason for not granting the tenant a new lease, it will have no right to bring the tenant’s lease to an end and the tenant will be entitled to request a renewal tenancy from the landlord at a market rent.

 

Renewing a Lease 

Where a landlord is happy to renew the tenant’s lease, it again must serve a section 25 notice to bring the current lease to an end with the offer of new lease terms on which it would be prepared to grant a new lease. The minimum notice period is six months (the maximum is 12 months) with a requirement that the date on which the current tenancy is to expire cannot be specified as earlier than the end of the current tenancy which is being ended. For example, if the existing lease ends on 25 December 2025, the landlord cannot specify in its section 25 notice that the lease can end earlier than that date. Where the parties cannot agree the rent or other terms the Court can decide these for them but there are various factors that need to be considered, in particular market rents and the terms of the current lease. Where a tenant wishes to initiate the renewal, a similar process needs to be followed by serving a notice of renewal terms on the landlord pursuant to section 26 of the Act. Of course, there is nothing stopping the parties agreeing the terms informally and then completing a lease renewal and this is what tends to happen in many cases.

The above scenarios apply to leases which are granted to enable the Act to apply for example where the parties specifically agree that the Act is to apply. A tenant might want to make sure it retains the right to renew its lease as its business model might rely heavily on the property and its location. However, the Act will also apply where landlords have inadvertently granted a lease and not followed the contracting out procedure either correctly or not considered the ramifications properly. This will have the effect of providing the tenant with security of tenure and the above procedure will apply when bringing the lease to an end.

 

Contracting Out

By contrast, if a landlord follows the contracting out procedure correctly and grants a lease to a tenant so that it is granted outside the ambit of sections 24-28 of the Act, then the landlord is free, come the end of the term, to ask the tenant to leave or offer a new lease to its tenant on terms that it can dictate. The point being that the landlord is not beholden to its tenant to have to grant a renewal lease. When a contracted-out lease has expired, landlords need to be careful not to inadvertently provide the tenant with security of tenure by allowing the lease to continue and doing nothing other than continuing to take rent as this can have the effect of providing the tenant with what is called a ‘Periodic Tenancy’ which will have protection under the Act.

 

Consultation

There is a consultation being conducted by the Law Commission which is open until 19 February 2025 as to whether the current contracting out model of security of tenure under the Act remains the right approach, especially as the Act is now over 70 years old. The consultation will consider alternatives to the current methods such as mandatory security of tenure, abolition of security of tenure and a ‘contracting in’ model. It will also consider the types of business tenancies that should benefit from security of tenure.

 

The above emphasises the importance for parties to ensure that they seek legal advice not only in relation to the grant of a new lease but also when it is due to expire. There are other matters such as dilapidations which landlords and tenants need to consider come lease expiry. It is also vital for tenants to understand what status they have acquired through occupying commercial lease premises without or without a formal lease in place and when they are asked to leave or new terms are put to them for a new lease, the importance of seeking legal advice cannot be emphasised strongly enough.

Daldeep Jaswal

Daldeep Jaswal
Partner