The government announced in March that the Law Commission will undertake a review of the Landlord and Tenant Act 1954 (1954 Act). Commissioned by the Department for Levelling Up, Housing and Communities, the review is expected to be wide-ranging and consider options for reform with a view to creating a legal framework that is fairly balanced and widely used.
A cornerstone of the 1954 Act is “security of tenure”: the right for certain business tenants to remain in occupation of their premises unless and until the lease is either terminated or renewed in accordance with the legislation. The 1954 Act was brought in to address the imbalance in bargaining power that existed between landlords and tenants arising from the shortage of commercial property following the Second World War. However, the market forces that existed then do not (for the most part) exist today. Many people feel that the 1954 Act, which was last updated nearly 20 years ago, needs reform to reflect today’s more mature commercial leasehold market.
The Law Commission aims to publish its consultation paper by December 2023 and in the meantime we consider what we might expect from the review.
Landlords and tenants can, and often do, agree to exclude (or “contract out” of) the security of tenure protection afforded to business tenants by the 1954 Act. The procedure for contracting out was simplified in 2003 to avoid the need for court involvement but remains convoluted: the landlord must serve a warning notice on the tenant and the tenant must then either make a simple or statutory declaration before the lease is completed. Unlike simple declarations, a statutory declaration must be witnessed in front of an independent solicitor or commissioner for oaths. Many will agree (on both sides of the coin) that this procedure needs to be simplified and creates unnecessary pitfalls, and the Law Commission might consider:
- Replacing the warning notice and simple / statutory declaration requirement entirely with standardised statements in the lease itself; or
- Keeping the warning notice but only requiring simple declarations to be made and without the 14-day “cooling off” period currently required for simple declarations; or
- If declarations are to stay, providing guidance on the use of electronic signatures and virtual witnessing in front of independent solicitors to account for modern communication and working practices; or
- Somewhat radically, turning the procedure on its head and requiring parties to expressly “contract in” to the 1954 Act.
Grounds for opposition: redevelopment and ESG
As ESG targets become an increasingly prominent focus for the property industry, many will feel that the 1954 Act does not align with the government’s ESG ambitions nor the Minimum Energy Efficiency Standards (MEES). In anticipation of the government raising the minimum EPC rating in the near future, MEES will become increasingly important regarding lease negotiations and renewals to ensure properties meet the minimum standards. Approximately 8 per cent of commercial properties in London have an EPC rating of E or below, which are now unlawful to continue to be commercially let without being able to demonstrate an exemption. As such, multiple properties will require energy efficiency upgrades and improvements to comply with government requirements.
The 1954 Act currently allows landlords to oppose lease renewals if they intend to demolish or reconstruct the property (Ground F). However, many will feel that Ground F does not align with the government’s ESG commitments because it does not include a landlord’s intention to conduct an energy efficiency upgrade within its remit. As such, landlords cannot refuse consent to renew 1954 Act leases on the ground that the property does not meet minimum EPC standards. The Law Commission may consider widening Ground F to include energy efficiency upgrades, or at least give the court power to order a renewal of the tenancy while requiring the tenant to give the landlord access to conduct these energy upgrade works.
If the government’s aim is for the security of tenure framework to be one that landlords and tenants use, rather than contract out of, the Law Commission might call for the recognition within the 1954 Act of the acceptability of turnover rents. Turnover rents enable landlords and tenants to share in the risk and reward of a business, and so a statutory recognition of turnover rents may also align with the government’s broader efforts to regenerate struggling high streets. As it currently stands, courts do not have express statutory powers to order turnover rents in protected lease renewals, notwithstanding that they are now commonplace (particularly in the retail sector) and even more so following the pandemic. The Law Commission may take the view that a more modern 1954 Act is one that expressly grants jurisdiction for courts to order turnover rents where a party makes a compelling case for this on renewal. Indeed, the Property Litigation Association’s recent survey of its members found that 70 per cent of respondents agreed that tenants should have the right to renew their tenancy based on turnover rents.
Alternative Forums for Dispute
Historically, the courts have been the avenue for dealing with 1954 Act renewals and disputes. However, this is often a lengthy process and regularly delays lease renewals. The Property Litigation Association’s members’ survey revealed that only 47 per cent agreed that courts should be involved in the renewal process, the courts being cited as the main cause of delays in renewal negotiations.
In order to streamline this process and reduce delays, the Law Commission might consider the following as alternatives to court proceedings:
- Pre-Action Protocol: similar to the dilapidations protocol, there could be a requirement for experts to meet prior to the expiry of leases to facilitate the parties reaching an agreement regarding renewal terms in an attempt to avoid court proceedings. However, it is suggested there would need to be costs sanctions regarding non-compliance to ensure this is a fruitful exercise;
- First-tier Tribunal: following the success of The Renters Reform Bill’s pilot scheme, 1954 Act court proceedings could be dealt with by the First-tier Tribunal (FTT). The use of the FTT has proven successful as FTT judges are more specialised in property claims and often have surveyors on the panel. It is noted that the FTT could deal with the more straightforward unopposed lease renewals, with the more complex cases remaining in the County and High Courts; or
- Arbitration: one solution could be to transfer the 1954 Act renewal process from the remit of the courts to a forum similar to the pandemic rent arrears arbitration scheme. However, the Law Commission would need to consider: (i) how it would adequately resource an arbitration scheme including the appointment of specialist arbitrators and valuers, and (ii) whether the arbitration process should be public (rather than confidential) to ensure consistency.
Although there are legitimate concerns that reforming the 1954 Act could cause further complexity and inevitably more litigation, most will agree that the 1954 Act requires modernisation. There will be many challenges bringing the 1954 Act into the 21st century while continuing to balance the interests of landlords and tenants and the property industry will eagerly await the Law Commission’s consultation at the end of the year for its thoughts on what reform might look like.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, June 2023