Landlord and Tenant Act 1954

Security of tenure for commercial tenants

Read on, or get ready for unintended consequences

When it comes to business tenancies, the most important statutory intervention is probably Part II of the Landlord and Tenant Act 1954. That provides certain security of tenure rights in certain circumstances to certain tenants. As legislation goes, it is relatively straightforward. And it’s been around for a long time, so it has had time to ‘bed in’. But, it is not without its detail. And landlords unfamiliar with that detail can easily make mistakes which can have significant unintended consequences.

The fundamental elements

There are three fundamental elements to the security of tenure rights that will be afforded by Part II, if it applies.

Firstly, as long as the tenant remains in occupation, a protected business tenancy does not automatically terminate at the end of the contractual term which had been agreed between the landlord and the tenant. Instead, there is a statutory continuation of the tenancy. That statutory continuation continues until it is terminated in accordance with the Act or a fresh new tenancy is granted.

Secondly, the tenant is given the right to call for a new tenancy. The landlord can only reject that call in certain limited circumstances by following a procedure set out in the Act. If those circumstances don’t apply (or the landlord fails to follow the set procedure), the landlord will be obliged to grant a new tenancy.

And thirdly, if, notwithstanding the above, the tenant is required to leave then the landlord may have to pay them compensation.

Does it apply?

First off, we need to look at whether Part II applies. Subject to limited exceptions, Part II applies to any tenancy where the property is occupied by the tenant for the purposes of a business carried on by the tenant.

So, let’s unpack that…

The first question to ask is ‘is there a tenancy’

A lease or an underlease will amount to a tenancy. A fixed term (e.g. for two years) or a periodic arrangement (e.g. monthly) can amount to a tenancy. In many cases a tenancy doesn’t need to be in writing – so an arrangement agreed over a pint of beer in the pub might still amount to a tenancy. And an agreement for lease can amount to a tenancy.

A licence won’t amount to a tenancy. So, we need to broach the subject – ‘what is the difference between a lease and a licence’. Whole books have been written on that topic. But for the purposes of this note….

A lease is the grant of a right to exclusive possession of land for an ascertainable period of time. It is a contractual relationship, but it is also an estate in land (so, if the landlord sells their land, the terms of the lease will continue to bind the new owner). Reference to ‘exclusive possession’ is key. That means that the tenant has the right to exclude the landlord from the premises. That doesn’t necessarily mean that the landlord never has a right to enter the premises. Leases will often specifically allow a landlord to come in (sometimes only after giving notice) to inspect the premises. But it does mean that the landlord can’t just turn up and move in as well.

In contrast to a lease, a licence is simply a permission to do something on someone’s land. It is a personal right or permission. It might be a contract, but it isn’t an interest in land (so, if the licensor sells their land, the new owner will not be bound by its terms).

Note that what the parties call a document does not determine whether it is a lease or a licence. In this instance, labels don’t matter. All that matters is whether there is a grant of exclusive possession of land for an ascertainable period of time. If that test is past then you have a lease, even if the parties refer to it as a licence.

A ‘tenancy at will’ does not amount to a tenancy for the purposes of Part II. A tenancy at will is a tenancy which both the landlord and the tenant can bring to an end immediately without any period of notice being given. People often use them to ‘easily’ get round Part II. But be careful. They can be tricky. In practice, people often end up ‘giving comfort’ by saying that they’ll never end the arrangement without giving a period of notice. That then means the arrangement is not a tenancy at will and suddenly you are back into the realms of a protected business tenancy with security of tenure.

The second question is ‘does the tenant occupy the premises’

Occupation is the sort of word that lawyers can have a great deal of fun with. But, broadly, it requires the tenant to be physically present and have control of the premises. Having said that, in some circumstances, it has been held that simply an intention to occupy or re-occupy may be sufficient. To explain, lets look at two examples.

Example 1: A tenant takes a three year lease of an office block comprising five floors. On each floor there is a self contained office suite and there is a common stair and elevator core connecting all of the floors. The tenant grants two year leases of each of the five self contained office suites.

In that situation, the tenant doesn’t occupy the five office suites because it has granted exclusive possession to other people. For the purposes of Part II, it probably doesn’t occupy the stair and elevator core either because, even if it retains control of them, its business is not running stair and elevator cores.

Example 2: A tenant takes a three year lease of a building. It’s quite old and run down and so the tenant appoints a contractor to carry out some significant decoration and refurbishment works. It intends to move in as soon as those works are concluded.

The tenant would probably be held to be ‘in occupation’ for the purposes of Part II because it does intend to occupy them.

The third question is ‘is that occupation by the tenant for the purposes of its business’

And, to answer that question, the key is ‘what is a business’. Business is defined widely. It doesn’t have to be profitable. The tenant doesn’t have to intend it to be profitable. A members’ club has been held to be a business. A charity’s activities will be a business. A local authority’s activities have been held to be a business. It includes ‘any activity carried on by a body of persons’.

If the tenancy prohibits the use of the premises for business purposes, and that prohibition is breached, then Part II security of tenure will not apply. But if a business use is in breach of planning, but not in breach of the lease terms, then it will be considered a business use for the purposes of Part II. An illegal business, however profitable, will not get a tenant security of tenure under Part II.

The fourth and final question is ‘do any of the specific exclusions apply’

Some types of tenancy are specifically excluded from the security of tenure afforded by Part II. Some of these have their own protections and others just don’t have security of tenure. The excluded types include:

Agricultural holdings and farm business tenancies
Mining leases
Service tenancies (these are tenancies that are granted as part of the tenant’s employment)
Tenancies for six months or less (unless successive short tenancies add up to more than twelve months)
Certain leases of railway property
Leases of certain military establishments
Certain dockyard leases
A home business tenancy (these are tenancies of a dwelling to individuals which require at least one of them to occupy as a home and permits a home business to be carried on but prohibits any other business)
Certain telecommunication leases granted after 28 December 2017
Tenancies that have been contracted out (see below)

So what?

As referred to above, if a tenant does have the benefit of Part II security then, at the end of the contractual term of the tenancy, there is a statutory continuation. Essentially, the tenant is allowed to remain in the premises on the same terms. That statutory continuation will continue until brought to an end in accordance with Part II. For the landlord to unilaterally bring that tenancy to an end it would need to establish at least one of a number of grounds.

In addition, subject to following certain procedures, the tenant is entitled to request a new lease. The landlord is only able to reject that request if it can establish at least one of a number of grounds.

So, next up, we look at what those grounds are.

The Grounds

Ground (a): the premises are in disrepair

Section 30(1)(a) of the 54 Act states that a landlord is entitled to oppose a tenant’s request for a new tenancy “where under the current tenancy the tenant has any obligations as respects the repair and maintenance of the holding, that the tenant ought not to be granted a new tenancy in view of the state of repair of the holding, being a state resulting from the tenant’s failure to comply with the said obligations”.

Obligation to repair: Most business tenancies will include some level of repairing obligation on the tenant. In this context, repair is construed widely and would include a simple obligation to decorate. Maintenance and restoration are also caught.

Holding: Usually, the holding and the premises will be one and the same thing. But a difference will arise if the tenant only occupies part of the premises for its business purposes. In that case, the holding is the part of the premises occupied by the tenant for its business. The landlord will need to show disrepair in that part of the premises for this ground to apply.

Disrepair: The landlord will need to prove disrepair. Trivial matters that could easily be remedied (such as a failure to paint the woodwork) probably won’t be enough. In reality, the landlord is likely going to have to show that the disrepair adversely impacts the value of its interest in the premises. And, clearly, the disrepair complained of needs to amount to a breach of a tenant’s obligation. Even a significant structural problem won’t be sufficient if the tenancy doesn’t make the tenant responsible for fixing it.

This ground is discretionary. Even if the landlord proves all of the above, the Court is entitled to exercise its discretion and allow the tenant a new lease anyway. The Court will look at what is ‘fair’ in the circumstances. And, in particular, will want to satisfy itself that, probably, if the tenant gets its hands on a new tenancy it won’t repeat its bad behaviour on repair in the future.

Ground (b): there are arrears of rent

Section 30(1)(b) of the 54 Act states that a landlord is entitled to oppose a tenant’s request for a new tenancy if “the tenant ought not to be granted a new tenancy in view of his persistent delay in paying rent which has become due”.

Rent: Rent usually means more than just the fixed annual, quarterly or monthly rent figures. Service charges and other payments are also often ‘reserved as rent’ and, if they are, they’ll also count in this regard.

Persistent delay: To rely on this ground, the landlord will need to show there is a persistent delay. A single payment being made a week late won’t be enough. Lots of payments being a little late or a few payments being a lot late might be enough – but the Courts have not been consistent - so it’s impossible to say with certainty.

Again, the ground is discretionary. So just because the landlord proves that there has been ‘persistent delay’ doesn’t mean the Court will always agree that the tenant should be kicked out. Again, the Court will look at what is fair in the circumstances. They will, in particular, want to be satisfied that, if the tenant gets its hands on a new tenancy, it won’t repeat its bad payment behaviour.

Ground (c): there are other substantial breaches

Section 30(1)(c) of the 54 Act states that a landlord is entitled to oppose a tenant’s request for a new tenancy if “the tenant ought not to be granted a new tenancy in view of other substantial breaches by him of his obligations under the current tenancy, or for any other reason connected with the tenant’s use or management of the holding”.

Grounds (a) and (b) focus on repair and rent only. Ground (c) then goes beyond that. There are, in fact, two alternative lines of attack for the landlord to use under Ground (c).

The first is to show that there have been breaches of the tenant’s obligations under the tenancy. Those breaches need to be substantial. So trivial or minor breaches are unlikely to be sufficient.

The second is to show that a new lease should not be granted because of a reason connected with the tenant’s use or management of the holding. This is a more ‘nebulous’ line of argument for the landlord to take. Examples have included:

Where the tenant’s use of the premises was not in breach of the tenancy but the local authority had taken action for breach of planning.
Where there was no actual breach of the tenancy but the landlord and tenant had been embroiled in litigation on and off for sixteen years.

As with grounds (a) and (b), ground (c) is discretionary – so, even if the landlord proves the ground, the Court can still decide that the tenant should get a new lease anyway – if it thinks that that is the ‘fair’ thing to do. To a large degree, in exercising that discretion, the Court will be looking at how they think the tenant will behave in the future and if they will be a ‘better tenant’.

Ground (d): suitable alternative accommodation has been offered

Section 30(1)(d) of the 54 Act states that a landlord is entitled to oppose a tenant’s request for a new tenancy if “the landlord has offered and is willing to provide or secure the provision of alternative accommodation for the tenant, that the terms on which the alternative accommodation is available are reasonable having regard to the terms of the current tenancy and to all other relevant circumstances, and that the accommodation and the time at which it will be available are suitable for the tenant’s requirements (including the requirement to preserve goodwill) having regard to the nature and class of his business and to the situation and extent of, and facilities afforded by, the holding”.

Grounds (a), (b) and (c) all arise where the tenant has behaved ‘badly’. Ground (d) can arise even if the tenant has been as ‘good as gold’ but the landlord just wants them out and it has found them somewhere else to go.

It is for the landlord to prove that the alternative accommodation is suitable and, amongst other things, that the move would not be detrimental to the tenant’s business. The new accommodation does not need to be identical to the old, but it would be easier for the landlord if they can show it is of similar size, has similar or better services and the location is such that the tenant’s business won’t be adversely impacted (e.g. by a drop in passing trade if it is passing trade they rely on).

Some tenants may be easier to relocate than others. A national chain might be able to set up in any part of a town and expect the local citizens to know its business. A little bistro may have built up a very loyal, but very local, set of customers and they risk losing that goodwill if they move more than a few doors away. At the end of the day, those are the landlord’s problems – if the tenant is difficult to relocate that will mean it is more difficult for the landlord to resist a tenant’s request for a new lease under this ground.

Slightly surprisingly, this ground is not discretionary. If the landlord proves that it has offered suitable alternative accommodation on suitable terms then the Court is required to block the tenant’s application for a new lease of the old premises.

Ground (e): it’s a subletting of part and possession of whole required

Ground (e) is a bit of a mouthful – so bear with us on this one.

Section 30(1)(e) of the 54 Act states that a landlord is entitled to oppose a tenant’s request for a new tenancy “where the current tenancy was created by the sub-letting of part only of the property comprised in a superior tenancy and the landlord is the owner of an interest in reversion expectant on the termination of that superior tenancy, that the aggregate of the rents reasonably obtainable on separate lettings of the holding and the remainder of that property would be substantially less than the rent reasonably obtainable on a letting of that property as a whole, that on the termination of the current tenancy the landlord requires possession of the holding for the purpose of letting or otherwise disposing of the said property as a whole, and that in view thereof the tenant ought not to be granted a new tenancy”.

So, lets try and translate that a bit. To go for this ground the superior landlord is going to have to demonstrate each of the following.

Firstly, that the existing tenancy is an underlease of part granted out of a headlease interest. So, for example, where someone has taken a lease of a whole building and granted an underlease of one floor. This ground applies where it is the undertenant of that one floor asking for a new lease.

Secondly, that the landlord opposing the new tenancy is the superior landlord not the tenant’s direct landlord. We’ve not really got into this complication in edition of IT’S THE LAW (and we’re not going to because life’s too short). But just be aware that if an undertenant’s underlease is a protected business tenancy, and the lease of its direct landlord isn’t long enough, then the tenant’s right to ask for a new tenancy may involve a right to ask their landlord’s landlord for a new tenancy – because it’s their landlord’s landlord who has a long enough interest in the building to actually grant the new tenancy.

Thirdly, that the combined rents that might be charged for letting the holding and the rest of the building separately is significantly less than could be charged for letting the building as a whole.

Fourthly, that the superior landlord wants to get the building back so that it can grant a single lease (or dispose) of its whole interest.

The good news is that this ground is rarely used – at least partly because it’s so difficult to follow. So, if you’ve got this far, we suggest you just park this ground and hope you never have to come back to it. And the other good news is that we only have two more grounds to go and both of those are a lot simpler than ground (e).

Ground (f): the landlord has an intention to redevelop or reconstruct

Section 30(1)(f) of the 54 Act states that a landlord is entitled to oppose a tenant’s request for a new tenancy if “on the termination of the current tenancy the landlord intends to demolish or reconstruct the premises comprised in the holding or a substantial part of those premise or to carry out substantial work of construction on the holding or part thereof that he could not reasonably do so without obtaining possession of the holding”.

Essentially, this ground can be used where a landlord wants to do significant works to their building and, realistically, needs the premises back in order to carry them out. That often applies where the landlord wants to demolish the building – but the works don’t need to be that major. It is important for the landlord to establish that they do actually need the premises back in order to implement the works. If the terms of the current tenancy give the landlord sufficient rights to enter the premises and carry out the works in question then they will not ‘need the premises back’ and so the ground would not be established.

The landlord will need to provide a degree of evidence that it does actually intend to proceed with the works. Just saying that it may fancy doing them at some point in the future will not be enough. It will need to show that it has a settled intention and has taken relevant steps to proceed (such as applied for relevant planning permission, secured necessary funding or drawn up detailed technical plans). Conversely, it will need to demonstrate that there are no hurdles in the way that it is unlikely to be able to overcome (e.g. planning has been refused or it has failed to raise the required funds). The more realistic and advanced the landlord’s plans, the more likely they will be successful in arguing that this ground applies.

And note that it is the landlord who must intend to proceed with the works. This ground gets tricky if the landlord intends to sell the building and it’s their buyer who actually intends to carry out the works.

Even if the landlord establishes that it does intend to and will be able to carry out the works and that the current tenancy would not give them sufficient rights to do so, the tenant may still be able to wangle a new tenancy if it agrees either (i) provisions in the new tenancy which give the landlord sufficient access rights or (ii) that the new tenancy will be of only part of the original holding and the bit that it has given up is sufficient to enable the landlord to undertake the works.

Again, surprisingly, this is not a discretionary ground. If the landlord proves the ground is met (and the tenant hasn’t wangled a new tenancy as referred to in the preceding paragraph) then the Court is obliged to refuse the tenant’s application for a new lease.

Ground (g): the landlord intends to occupy the premises themselves

And last, but not least, we come to ground (g). Drum roll.

Section 30(1)(g) of the 54 Act states that a landlord is entitled to oppose a tenant’s request for a new tenancy if “on the termination of the current tenancy the landlord intends to occupy the holding for the purposes or partly for the purposes of a business to be carried on by him therein or as his residence”.

Special rules apply where the landlord will occupy by way of agents, if the landlord is part of a group and its another group member who will occupy or if the landlord is a trust or a partnership.

This is not a discretionary ground. If the landlord establishes that it is met, the Court must block the tenant’s request for a new tenancy. But for this ground to apply the landlord must have owned the building for at least 5 years.

Show me the money

So far, we have discussed the fact that at the end of the contractual term of a protected business tenancy there is a statutory continuation and, in addition, the tenant can request a new lease. The landlord can only get the tenant out by bringing that statutory continuation to an end, and/or refusing such a request, if it establishes at least one of seven grounds (and, in the case of some of those grounds, the Court exercises its discretion).

In addition to those rights, Part II may also give the tenant a right to compensation. Compensation is due to a tenant when it leaves if:

the Court has authorised the ending of the statutory continuation; and/or
the tenant has been blocked from securing a new lease based solely on no fault grounds.

The no fault grounds are grounds (e), (f) and (g). The theory here is that the tenant has done nothing wrong. It has lost its ability to stay in the premises not because it is a bad tenant but because the landlord wants the premises back for its own reasons. The tenant could have been the best tenant in the world, but it is still being required to leave. So, it should be compensated.

It's just a matter of maths

The amount of compensation due to the tenant is calculated by applying a multiplier to the rateable value of the holding. The multiplier is set by statutory instrument and has, for several decades now, been set at one. That basic level of compensation will be doubled if the tenant (and any predecessor) has been in occupation for the purposes of the same business for fourteen years or more.

Forget / don't forget

It’s important not to forget that the tenant may also have rights to compensation by virtue of other legislation. For example, the Landlord and Tenant Act 1927 gives certain tenants certain rights to certain compensation in relation to certain alterations they might have carried out to the premises. But those are whole different ball games and not the subject of edition – so forget about them for the time being.

In, out, shake it all about

Subject to some details, tenants and landlords are free to agree to ‘contract out’ of the provisions of Part II. That means that they can agree that Part II does not apply and that the tenant will not have the Part II rights. That means that when the contractual term comes to an end:

there is no statutory continuation,
the tenant is not entitled to request a new tenancy and the landlord is not obliged to grant one (even if one of the grounds apply),
because there is no continuation and no entitlement to a new tenancy, the tenant is not entitled to compensation.

The ability to contract out only applies to fixed term tenancies and not periodic but, otherwise, it’s not particularly difficult. Having said that there is a very precise procedure to be followed and if that precise procedure is not precisely followed then the tenancy will be ‘inside the act’ even if that is not what the landlord and tenant had intended. That can cause the landlord headaches. Big headaches.

The detailed details

You’ve probably had enough by now, so we will draw this edition to a close. Whilst, above, we have discussed the high level principles of Part II we have not got into the nitty gritty of procedure. Part II has lots of provisions about notices being given. Lots of notices. There are notices if the tenant wants to call for a new lease. Notices where the landlord wants the statutory continuation to end. Warning notices to be given by the landlord if the landlord and tenant want to contract out. Oodles of notices. If you are considering granting or taking a business tenancy or if you are a landlord or tenant under one where the end of the contractual term is on the horizon, give us a call.

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Contact

For more information, please contact Dan Moan, Neil Toner or Victoria Schofield.

Dan Moan Partner

Real Estate & Projects 020 7880 4336

Neil Toner Senior Consultant

Real Estate & Projects 020 7065 1823

Ben Hillhouse Solicitor

Real Estate & Projects 020 7880 4241

Tel: 020 7628 7576

www.devonshires.com

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Article created: 19/09/2023

This is one of a series of leaflets published by Devonshires' Real Estate & Projects Department aimed at our developer and commercial property clients. No action should be taken on the matters covered by this leaflet without taking specific legal advice.