Getting to grips with security of tenure

Why do landlords shifting into the commercial sector need to be aware of the provisions entitling tenants to security of tenure?

Residential landlords have been subject to a torrent of recent legislation, policies and guidelines. This deluge has resulted in a proposition that is simply far less attractive than it once was. Landlords are seeking different opportunities with many now looking at commercial property as a viable option. Comparably higher financial yields combined with lease terms of years rather than months, looks like the way forward. Landlords should consider, however, the security of tenure granted to business tenants by Part II of the Landlord and Tenant Act 1954 and how it affects their ability to deal with their premises as they may wish on lease expiry

The post WWII legislation was implemented to provide an element of statutory protection to business tenants who were looking for security and consistency at a time when commercial property was relatively scarce.  At its heart is the objective of preventing a landlord from extracting any premium on the new rent from a tenant who wants to stay put.  The Regulatory Reform (Business Tenancies) (England and Wales) Order 2003, ironed out a number of procedural traps but the key principles have remained as they were at its origin.

Security of tenure

In broad scope, the statutory right allows tenants of premises from which business is carried out to remain in the property following the expiry of the original lease term. The tenant holds the option to remain in the premises on the same terms with the lease continuing until (in the absence of forfeiture or agreed surrender) one of the following notices is served:

• the landlord serves a Section 25 Notice indicating their wish to either grant or terminate the lease and therefore occupation;
• the tenant serves a Section 26 Notice seeking the grant of a new lease; or
• the tenant serves a Section 27 Notice to terminate the lease.

Where the tenant remains beyond the end of the term, the period is known as ‘holding over’ and the provisions give a tenant a right to renew his lease on the same terms as his existing lease, at the market rent for the property at the date of the renewal. If both parties are content to continue, a new lease will be agreed subject to reasonable modernisation, and the relationship will continue.

Grounds for landlord to refuse renewal

There are many reasons why a landlord may wish to terminate the relationship and demand vacant possession, but, as the nature of security of tenure suggests, this can be difficult to achieve.

The landlord only has a limited number of grounds to refuse to grant a new lease to the business tenant, and those grounds must be proved. These can be widely classified by the following categories:

• fault grounds – a breach of the lease, like non-payment of rent, disrepair or other breaches of the lease; and
• non-fault grounds – most commonly a landlord’s intention to redevelop or to occupy the premises itself.

The provisions place the burden on the landlord to prove that it is able to make out one of the very specific grounds for opposing renewal. The ground or grounds for opposing renewal that the landlord seeks to rely on must be clearly set out in his Section 25 notice and he must be able to prove his ability to rely on this ground or grounds at the point of trial.

A tenant can frustrate a landlord’s ability to recover possession by disputing the landlord’s entitlement to rely on the chosen grounds or ground. As a result, it is commonplace to agree to exclude the statutory renewal machinery from the lease (contract out), thereby avoiding the issue in its entirety. This is particularly common where the landlord requires flexibility as he may have alternative plans for the premises in the future. However, contracting out may have an effect on rent.

Contracting out

There are strict guidelines, which begin with the landlord serving a prescribed form of notice on the tenant. The tenant must make a declaration to confirm that he has received the notice. The contracting out agreement must then be referred to in the lease itself.

A note of caution to landlords who have agreed to contract out: at the expiry of the term, the tenant no longer has a right to remain in the premises and vacant possession must be provided. If the tenant remains in the property and the landlord knowingly allows this to continue and accepts rent, the tenant may inadvertently gain the benefit of security of tenure unless, for example, a ‘tenancy at will’ is agreed while a new lease is negotiated. A prudent landlord ought to be cautious about accepting rent following expiry of the lease until the position is confirmed, as accepting rent can be an indicator that the landlord has granted a new tenancy.

Summary

Excluding security of tenure can have benefits for the landlord. If security is excluded, the landlord can choose whether to offer a new lease on different terms or obtain vacant possession. A landlord may wish to sell the property or possibly seek an alternative tenant who will accept better terms. On the face of it, this may seem an obvious decision for the landlord, with many choosing to contract out. However, if the proposed tenant is a company which has a good payment record then allowing the tenant the protection of act may result in a steady rental income stream for a long period. The natural benefit to the landlord is that he can command a higher rent or more commitment from potential tenants.

On the other hand, tenants may find it more difficult to find a landlord willing to offer security of tenure and as a result leases are often more attractive.

While this article only scratches the surface , landlords should be aware of the basic premise of security of tenure. Not only does it have significant ramifications if applied incorrectly, it also results in significant inconvenience in terms of cost and time lost for both parties. Landlords should seek expert legal advice about the options and should consider these carefully in the context of both the identity of the tenant and the landlord’s future intentions for the premises.