Business tenancy renewals: Some further tweaking?

It has been over 60 years since the enactment of part II of the Landlord and Tenant Act 1954. Since then, there have been two revisions of the legislation. The first, in 1969, made limited amendments, including the introduction of interim rents (see the Law of Property Act 1969), and the second, under the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003, introduced more radical changes, particularly in relation to contracting out, notices, and interim rents. To what extent, however, would further changes improve the mechanics of the statutory code governing commercial lease renewals?

Contracting out

One of the major changes introduced under the 2003 Order related to contracting out of part II.
The rationale behind these changes was to replace the unnecessarily complicated joint application procedure with a new scheme avoiding any court application. Concerns have been expressed, however, that the new rules have provided fresh scope for technical challenges on grounds of procedural irregularity.

Some have argued, therefore, that the contracting out procedure should be abolished altogether, in favour of allowing the landlord and tenant to agree that the lease is contracted out
by simply stating this in the lease (with an acknowledgment that the tenant understands the consequences of contracting out, having taken independent legal advice), without the need for any formal processes at all.

Complete abolition, however, is unlikely.
Instead, there is considerable scope for further improvement to the current scheme. Under the current law, if the lease is amended after the landlord's warning notice is served, it is
unclear whether it will be validly executed (see Metropolitan Police District Receiver v Palacegate Properties Ltd [2001] Ch 131). This has resulted
in almost all practitioners using the statutory declaration, rather than the simple declaration, although the 2003 Order clearly intended statutory declarations to be used in urgent cases only.

There is also uncertainty as to whether the tenant may vary the lease after it has made the statutory declaration and, if the tenant agrees to contract out, whether the lease would remain contracted out even if the original landlord or tenant changes before the lease is completed.
The current rules also do not make it clear whether it is necessary to serve a warning notice on (and obtain a declaration from) a guarantor under a lease where the terms of the guarantee require the guarantor to take up a fresh lease on demand if the tenant becomes insolvent and the original lease is disclaimed. A similar problem arises where a tenant has a contractual option to renew and the new lease is to be excluded from part II, or where the contracting out procedure has been undertaken with the original tenant but an assignee tenant exercises the right to renew and/or takes the renewal lease.On a different note, the parties cannot make a requirement to offer to surrender the lease (before assigning) fully binding without contracting the whole lease out of part II. Such a requirement is currently void as it purports to remove the tenant's renewal rights under part II (see section 38(4) of the 1954 Act and Allnatt London Properties Ltd v Newton [1984] 1 All ER 423).

Apart, therefore, from removing the requirement for a statutory declaration (which most would agree is unduly technical), the current rules should be amended to make clear that:

• The landlord's warning notice is not invalidated by any subsequent changes to the new lease;

• The landlord who ultimately grants the renewal lease does not have to be the same party that served the warning notice;

• The tenant may vary the lease after it has made its declaration;

• If the tenant agrees to contract out, the lease will remain contracted out even if the original tenant changes before the lease is completed;

• If a lease is contracted out, a guarantor's replacement lease is also automatically contracted out;

• If the tenant is required under the lease to give an authorised guarantee agreement upon assignment of the term, any fresh lease following disclaimer by the assignees' liquidator is also automatically contracted
  out; and

• It is possible simply to contract out the offer to surrender part of the lease.

Section 25 notices

Currently, the landlord cannot serve a section 25 notice claiming possession unless the tenant is in business occupation. This is because the notice can only be given in relation to a tenancy to which the 1954 Act applies (see Cheryl Investments Ltd v Saldanha [1978] 1 WLR 1329). The inability to
serve the notice may delay the landlord's planned development if a tenant who has vacated moves back into occupation at the very end of the contractual term. The resumption of occupation
for the purposes of a business will ensure that the tenancy once again becomes one to which the 1954 Act applies.

A welcome change, therefore, to the notice procedure would be to allow a landlord to serve an opposed section 25 notice on the tenant regardless of whether or not the tenant was in business occupation at the time of the service of the notice.

Interim rent

The interim rent is determined by reference to the rent payable at the commencement of the new tenancy, which, by implication, fetters a landlord's ability to make an application for interim rent before the final determination by the court of the new rent under section 34. Moreover, when setting the section 34 rent, the court must have regard to the terms of the tenancy. This it can only do once it has determined those terms under section 35(1).

The Act could, therefore, be amended so as to allow an interim rent application to be considered at the same time as the renewal of the lease or, alternatively, at any time after service of the relevant section 25 notice or section 26 request.

Other issues

Currently, an unlawful sub-tenant enjoys the benefit of the 1954 Act, which may operate
unfairly on a landlord who is not made aware of the existence of the sub-tenancy until the expiry of the headlease (see D'Silva v Lister House Developments Ltd [1971] Ch 17). There is, therefore, an argument for amending the 1954 Act so as to prohibit an unlawful sub-tenant claiming protection under part II.

Another welcome change would be to allow the tenant to claim the higher rate of compensation for disturbance under section 37(3) by amending the 14-year eligible period of occupation so that it
ends with the termination date specified in the landlord's section 25 notice or the date of expiry of the contractual term, if earlier. This would reverse the decision in Sight & Sound Education Ltd v Books Etc Ltd [2000] L & T Rev 146, where the tenant lost its entitlement to the higher rate of compensation because it vacated the premises on the expiry of the contractual term.

Another feature of the current rules is that they do not make it clear whether the court may take into account the fact that, where an 'old tenancy' under the Landlord and Tenant (Covenants) Act 1995 is being renewed, the new lease will be
one under which the tenant will enjoy, on an assignment, an automatic release from liability in respect of the tenant's covenants in the tenancy. Here again, clarification would be welcome on the meaning of section 34(4) of the 1954 Act, which declares that the matters which the court may take into account in determining the rent for the
new lease shall include 'any effect on rent of the operation of the provisions of the Landlord and Tenant (Covenants) Act 1995'.

Clearer guidance could also be given on what type of lease renewal terms (which depart from the original terms of the lease) may be introduced into the new lease. In current practice, this is a fertile source of argument between the parties where the landlord wants a modern lease and the tenant wishes for a repeat of its old lease. Second, there
is some ambiguity as to the correct application of section 35(2), which provides that references to 'all relevant circumstances' in section 35(1) shall include a reference to the operation of the Landlord and Tenant (Covenants) Act 1995. In this connection, the Act could make clear that section 35(2) gives the court power to order lease terms incorporating all forms of assignment provisions, including the requirement for an authorised guarantee agreement. This would mean that
the insertion of such provisions would be automatically reasonable without reference to
the tests laid down in O'May v City of London Real Property Co Ltd [1983] 2 AC 726.

On a fundamental level, there is little doubt the 1954 Act is working well, providing an invaluable statutory framework for both landlord and tenant that is designed to cut down on unnecessary negotiation at renewal time. What is needed, however, is a focus on further simplification and clarification of key procedures. SJ

Mark Pawlowski is a barrister and professor of property law at the School of Law, University of Greenwich