Articles

Security of Tenure - Know Your Rights

August 2010

Background

The Landlord and Tenant Act 1954 ("the Act") is a significant piece of legislation affecting the pub industry. The Act recognises the fact that business tenants who have built up valuable goodwill, incurred costs in fitting-out premises and installing equipment, could stand to lose it all on expiry of their lease term. Part II of the Act therefore protects business tenants by giving them security of tenure by allowing them to renew their tenancies. The effect is that at the end of the contractual term of the lease, the tenant's existing lease continues until terminated or renewed in accordance with the Act. The protection is therefore significant from a tenant's perspective.

Criteria

In order to benefit from the protection afforded by the Act, the tenant must be occupying the property under the terms of a lease. A licensee will not enjoy the benefit. The question as to whether or not a lease or a licence has been created is not a straightforward one and will be determined on the facts of each case. In considering whether a lease has been created it is necessary to determine whether or not the tenant enjoys exclusive possession of the property, pays regular rent and has agreed to occupy for a fixed term. If so, it is likely that a court will consider that a lease has been created.

Assuming that a tenant satisfies this requirement, it must then be able to show that it has occupied the property for the purposes of its business. The Act defines "business" to include a trade, profession or employment and includes any activity carried on by a body of persons, whether corporate (e.g. companies, LLPs) or unincorporated (e.g. individuals, partnerships). In order to qualify, the tenant need not occupy the whole of the property, nor must it exclusively use the property for business purposes.

Process

The Act lays down the procedure that a tenant must follow in order to be granted a new lease. The right can be triggered by service of a statutory notice, either by the landlord or the tenant. A landlord may serve what is known as a Section 25 Notice under the Act clarifying whether it agrees to or opposes the grant of a new lease at the end of the term of the existing lease, and stating the date when it wishes to bring the tenancy to an end. The notice must be served no less than six months and no more than 12 months before the date specified in the Section 25 Notice, and the date specified in the Section 25 Notice cannot expire before the end of the contractual term of the existing lease.

Landlords often serve notices even when they are not opposed to the granting of a new lease in order to protect their position and bargaining strength. If the landlord is agreeable to the granting of a new lease, it will state in the Section 25 Notice the basis upon which it will agree to the granting of a new lease (e.g. rent, term, user). The information to be included in the Section 25 Notice is prescribed by legislation and it is essential that the statutory requirements are strictly adhered to.

A tenant may serve a request on its landlord for a new tenancy by serving a Section 26 Notice. The form is similar to the Section 25 Notice, and again, must be served at least six months, but no longer than twelve months, before the proposed commencement date for the new lease (which cannot be before the expiry of the existing lease). Often tenants will serve a Section 26 Notice to bolster their bargaining position in seeking a new lease.

Application to Court

Either party can apply to the Court following service of a Section 25 or Section 26 Notice, in the case of the landlord seeking an order terminating the tenancy and in the case of the tenant seeking a new tenancy.

A landlord may oppose the grant of a new tenancy, but may only do so if it can satisfy one of the specified grounds detailed in the Act. They include:

tenant's breach of its repairing
persistent delay in paying rent
some other substantial breach by the tenant of its obligations under the lease
tenant has been offered suitable alternative accommodation
the landlord intends to demolish or reconstruct the property or to carry out substantial works and cannot reasonably do so without obtaining possession
the landlord intends to occupy the property as its own residence or for its business

New Lease

Assuming that the parties have reached the point where a new lease is to be granted, whether through negotiation or a Court Order, in renewing a lease the parties must reflect the terms of the existing lease (unless the parties agree to alter the terms). It is usual that parties will enter into a new lease on the same terms (other than those relating to the term, rent and rent review dates) save for modifications required to modernise the lease.

No Lease Renewal

In circumstances where a new lease is not granted as a result of the landlord successfully opposing renewal on certain specific grounds where the tenant is not at fault, the tenant will be entitled to compensation. The level of compensation payable is based on a multiplier of the rateable value of the property, and where the tenant or its predecessors have occupied the property for business purposes for at least fourteen years, the compensation is based on twice the rateable value.

Is there a simpler solution to avoid the complexity of lease renewal

The parties can agree to exclude the security of tenure provisions of the Act so that the tenant will not have the benefit of the statutory rights to a lease renewal. In order to do so, the parties must comply with the procedure for contracting out. Excluding the security of tenure provisions is beneficial for the landlord as it provides certainty with regard to the term of the lease as it is clear from the outset that the lease is for the fixed term only and cannot be renewed without the landlord's agreement. For tenants, the exclusion of the security of tenure provisions is not ideal as they effectively waive very important rights, including the right to compensation at the end of the term of the lease where the landlord does not renew.

Tenants, on the other hand, may wish to avoid the complexities of the security of tenure provisions by incorporating an option to renew in the lease. The lease could lay out the general basis on which the lease can be renewed should the tenant exercise its right. It all comes down to the bargaining position of the parties during the negotiation process.

For further advice on the above or any other property issue please contact us on 020 7354 3000 or see our property section for more information.

Author: Taf Ali

Published: Publican, August 2010: Legal Property Feature by Colman Coyle

Date: August 2010