The Law Commission is currently consulting on the much-awaited reforms to the Landlord and Tenant Act (‘the 1954 Act’) and the security of tenure regime for commercial leases.
The new laws have the potential to affect a range of businesses. Whether it be a local retail shop in the town centre or a company who occupies a block of offices, it is very common for businesses to occupy their premises under tenancies, as opposed to outright freehold ownership.
Current Law
Under the 1954 Act, a business tenant has an automatic right to remain in occupation at the end of the lease term and renew their tenancy. This principle is known as ‘security of tenure’.
The Act operates in two fundamental ways:
(1) The ‘opt-in’ mechanism
- Unless it has been mutually agreed between landlord and tenant that the tenant’s statutory right to security of tenure is excluded from the lease and the ‘opt-out’ procedure has been followed, then the tenant can remain in occupation of the property beyond the lease term.
(2) The ‘opt-out’ procedure
- This requires the landlord to serve a notice on the tenant to confirm that the tenant will not have any statutory rights to remain in the property once the lease ends.
- The tenant must make a formal declaration to confirm that they accept that they are giving up their rights to security of tenure.
- The declaration given by tenants takes two forms: (i) simple or (ii) statutory.
Landlords can oppose a renewal of a protected tenancy on certain specified statutory grounds (such as its intention to occupy or redevelop the property). However, in practice, landlords find it extremely difficult to rely on the set criteria and often cannot oppose a renewal of a protected tenancy.
The issue
As the Law Commission explains, the security of tenure regime ‘was introduced by Part 2 of the 1954 Act following the Second World War. The legal framework is, therefore, nearly 70 years old’.[1]
The issue is that the 1954 Act is not adapted for the modern commercial leasehold market. It places not only too much administrative burden on both landlords and tenants, but the opt-out procedure (also known as ‘contracting out’) is costly, complex, and can be detrimental for both parties if not followed correctly. One common issue found in practice, for example, is how the Act delays lease completion. This can have profound effects on how parties operate their businesses.
The November 2024 Consultation
The Law Commission’s initial consultation in November 2024 addresses two crucial questions: (i) should the security of tenure regime be retained?, and (ii) if it is retained, how the Act will be changed to support landlords and tenants to reflect current market demands.
The consultation presents four different models in which security of tenure could operate:
- Mandatory security of tenure – this removes the possibility of ‘contracting out’ of the Act and restores the pre-1970 model.
- No security of tenure (abolition) – tenants would have no statutory right to a renewal tenancy. This is very extreme.
- A contracting-in model – this is a reversal of the current regime.
- A contracting-out model – this is, for the most part, the same as the current model.
The Law Commission invites all stakeholders – from business tenants, landlords, investors, developers and occupiers alike – to respond to its Consultation Paper. The consultation deadline is 19 February 2025 and can be visited here.
Next steps
The outcome of the consultation could be pivotal for the commercial property market.
If you have any questions in relation to the above, please do not hesitate to contact the Duane Morris Real Estate Team for more information.
Further information
The November 2024 consultation details are available here:
- The Law Commission’s Business Tenancies 1 Consultation Summary.
- The Law Commission’s Business Tenancies 1 Consultation Paper.
[1] https://lawcom.gov.uk/project/business-tenancies-the-right-to-renew/.