All commercial property leases are written within the scope of the Landlord and Tenant Act 1954.
As a result, most business tenants have a right to renew their tenancies when the existing one comes to an end – allowing their business to remain in the same premises. This legal right is referred to as ‘security of tenure’. And the landlord can only refuse the renewal if at least one of seven ‘statutory grounds’ applies.
The problem is… the Act is over half a century old.
Initially put in place in 1954, the legal framework is now 70 years old. Some updates have since been made, but even these were introduced around 20 years ago. And it’s fair to say, the commercial landscape has dramatically changed during this time.
As a result, how ‘security of tenure’ operates can now be a real burden for both landlords and tenants – and may no longer be fit for purpose.
The fundamental issue with commercial property leases
Essentially, the 1954 Act was designed to promote business or commercial activity, support the economy and provide a secure basis for businesses to grow post-war. But since its introduction (and its last review), unsurprisingly, the world around us has changed – and so has the commercial leasehold market.
For a start, the birth of the internet in the 80s completely revolutionised shopping, leading to an increase in online retail and services. Commercial sectors have been hugely impacted by world events, including the financial crisis of 2008 and the pandemic – which accelerated the ‘stay at home to shop’ trend. Plus, government priorities have evolved, with an ever-increasing focus on energy efficiency.
As such, the Act is no longer working as well as it could for landlords and tenants.
Reports now suggest that aspects of the law are burdensome and unclear. In fact, it’s been described as ‘inflexible, bureaucratic and out of date’. There’s now real concern that it’s standing in the way of modern commercial property services – causing extra costs and delays, and preventing commercial space from being occupied quickly and efficiently.
If high street shops and commercial centres are to survive, businesses – and the commercial leases under which they operate – need to change. And thanks to a review, recently announced by the Law Commission of England and Wales, that change could be just around the corner.
A modern update of the Landlord and Tenant Act 1954
Commissioned by the Department for Levelling Up, Housing and Communities (DLUHC) and forming part of the Government’s new Anti-Social Behaviour Action Plan, the review will explore issues with the existing law – with a view to developing a new modern legal framework.
Here we take a look at some of these issues, and how the review could help.
- A tendency to ‘contract out’
Today, many landlords and tenants entering into a commercial property lease decide to exclude (or ‘contract out’ of) the security of tenure protection. But that certainly isn’t an easy process.
‘Contracting out’ was simplified in 2003 by removing the need for court involvement. However, it’s still a very convoluted procedure – in which the landlord must serve notice and the tenant must sign statutory declarations, witnessed by an independent solicitor or commissioner for oaths.
To resolve this issue, the review may consider switching the emphasis.
Rather than ‘contracting out’, instead, landlords and tenants may be asked to ‘opt into’ the security of tenure. This would remove the need for statutory declarations, significantly speed up the leasing process and (hopefully) improving the resilience of high street shops and commercial centres.
- Difficulty promoting ‘net zero’ leases
Many landlords believe the 1954 Act does not align with the government’s ‘net zero’ objective.
ESG (Environmental, Social and Governance) targets have become an increasingly prominent focus for the property industry. And to meet the new Minimum Energy Efficiency Standards (MEES), many commercial properties require upgrades. Yet security of tenure can make this very difficult.
A landlord can currently appeal a lease renewal if they intend to demolish or reconstruct a property. But not if they require access to the building to make energy-efficient improvements.
To settle this problem, the review may consider widening the landlord’s grounds for opposition. Or, at the very least, giving the court the power to grant a commercial lease renewal – whilst also requiring the tenant to provide access for any upgrades the landlord deems necessary.
- Limited rent arrangements
Turnover rents are commonplace nowadays, especially following the pandemic.
By paying the landlord a percentage of their turnover, rather than a fixed monthly or annual sum, both parties share the risk and reward of the business – therefore improving its overall resilience.
However, this type of agreement does not sit well with the provisions of the 1954 Act. As it currently stands, courts do not have the express statutory power to order a turnover rent in protected lease renewals – which is likely one of the main reasons that people choose to ‘contract out’.
To help avoid this situation – and encourage landlords and tenants to use the security of tenure framework – the review may introduce a statutory recognition of turnover rents. Whereby, the updated Act grants jurisdiction for courts to order this type of rent in compelling cases.
- Lengthy court proceedings
At present, courts are largely involved in security of tenure lease renewals and the disputes that arise from these. And as such, commercial leasing can be a highly lengthy and frustrating process. In fact, in a recent survey, the courts were cited as the main cause of delays in renewal negotiations.
To streamline this process and reduce the number of delays, the review might consider alternatives to court proceedings – such as a pre-action protocol, first-tier tribunal or even arbitration.
A looming expiry date on commercial leases as we know them
For far too long, landlords and their tenants have been held back by an outdated legislative framework that is out of sync with the realities of today. And it’s hoped the anticipated review will remove some of the barriers that inhibit growth.
It should be a huge positive step for the sector. Almost 20 years since the last, it’s certainly overdue.
Ultimately, the agreed terms of reference and key goals for the project include:
- creating a legal framework that is widely used rather than opted out of, by ensuring legislation is clear, easy to use and beneficial to all involved.
- supporting the efficient use of space in high streets and town centres, by making sure current legislation is fit for today’s commercial market.
- fostering a productive and beneficial commercial leasing relationship between landlords and tenants.
But things aren’t going to improve overnight.
The Law Commission initially aimed to publish a consultation paper by December 2023. However, this has now been delayed until Autumn 2024.
This consultation paper will ask questions about possible options to reform the Landlord and Tenant Act 1954. A second, technical consultation paper will then be published based on the responses received and the conclusions reached – and the timing of this is yet to be confirmed.
Of course, any changes decided upon will also take a while longer to implement.
The planned review is by no means a fast process. Which begs the question – as the landlord of a business property, what can you do in the meantime?
Need help with ‘security of tenure’ issues?
If you’re struggling with a commercial lease renewal due to the 1954 Act, or are wondering whether to contract out of ‘security of tenure’ protection in a new lease agreement, it’s a good idea to seek independent legal advice. And here at St Helens Law, we can help.
Our commercial property team have recognised expertise in this type of legally binding contract, including a thorough understanding of the Landlord and Tenant Act 1954 – and can assist with the full process of drafting commercial leases that work for you and your prospective tenants.
We also offer a fixed fee ‘reviewing and advising’ service for commercial property documents (e.g. leases, tenancy agreements etc.) and can offer guidance on many landlord and business tenant disputes.
An initial consultation with our commercial property solicitors is available free of charge. So why not contact us today? You can either fill out our online enquiry form and we’ll respond as soon as possible with some suggested times and dates. Or if you have any questions, please feel free to call us on 01744 742360. We’re always happy to help.