What is ‘security of tenure’?
In the case of commercial property leases/business tenancies, security of tenure is effectively a statutory right which allows the tenant to renew its tenancy at the end of the contractual term.
The security of tenure provisions are contained within Part II of the Landlord and Tenant Act 1954 (“LTA 1954”). Note importantly that the LTA 1954 applies to business tenancies only and is not applicable to leases of residential property.
It is important for both landlords and tenants to be aware of security of tenure. From a landlord’s perspective, if they are unaware of the implications of granting a tenant security of tenure then he/she may unknowingly grant a tenancy to a tenant for a longer period than they had initially envisaged (given that a tenant with security of tenure will have a statutory right to have a new lease granted).
From a tenant’s perspective, it is important to be aware of security of tenure and the protection it offers given that without it, a tenant could be forced to vacate a property at the end of the contractual term. The tenant being asked to vacate could involve the loss of goodwill which the tenant may have developed during the contractual term, which may be detrimental to both the tenant’s financial position and to its businesses’ reputation.
Commercial landlords more often than not choose to “contract out” of Part II of the LTA 1954 (i.e. refuse to grant tenants security of tenure) because, if they do not do this, the tenant will have a statutory right to a lease renewal at the end of the contractual term, with the landlord only being able to oppose the renewal on certain limited grounds. “Contracting out” is explained in further detail below.
When will the LTA 1954 apply?
A tenant of a business lease will have a statutory right to a lease renewal at the end of the contractual term provided that it satisfies the criteria contained within section 23 of the LTA 1954. This provided as follows:
“Subject to the provisions of this Act, this Part of this Act applies to any tenancy where the property comprised in the tenancy is or includes premises which are occupied by the tenant and are so occupied for the purposes of a business carried on by him or for those and other purposes”.
Note importantly that the LTA 1954 is retrospective in its effect, meaning that a tenancy will qualify for statutory protection if the criteria contained within section 23 of the LTA 1954 is satisfied, even where the lease was granted prior to 1954.
The qualifying criteria as set out in section 23 of the LTA 1954 can be compartmentalised as follows:
- Is there a tenancy?
- Does the tenancy relate to premises?
- Are the premises occupied for the purpose of a business?
- Is the business carried on by the tenant?
- Does the tenancy fall within any of the specific exclusions?
If the first four conditions are met and the tenancy does not fall within any of the specific exclusions, the tenant will have a statutory right to a lease renewal at the end of the contractual term. We briefly deal with each condition below:
Is there a tenancy?
Section 69(1) of the LTA 1954 defines a tenancy as being created immediately or derivatively out of the freehold.
The following will qualify as a tenancy under the LTA 1954:
- A lease;
- An underlease (i.e. a sublease – which is a lease between a tenant and a subtenant);
- An underlease granted in breach of the headlease (the headlease being the lease directly between the landlord and tenant);
- An express or implied periodic tenancy;
- An agreement for lease; and
- An agreement for underlease.
The following will not qualify as a tenancy under the LTA 1954:
- A licence; or
- A tenancy at will, whether express or implied.
A tenancy will be created if the document (i.e. the lease) satisfies all of the following:
- It grants the tenant exclusive possession of the property in question;
- The lease is for an ascertainable period of time; and
- The lease reserves a rent.
Does the tenancy relate to premises?
To benefit from the protection of the LTA 1954, a tenancy must relate to premises. Note that there is no definition of premises in the LTA 1954, however it is clear from case law that the term ‘premises’ should be given a wide meaning. As such, previous case law has determined that the term is not confined to buildings, but can also include open land (see the case of Bracey v. Read ).
To qualify for protection, the premises must be capable of being occupied.
Are the premises occupied for the purpose of a business?
In order to come within the protection of the LTA 1954, the tenant must occupy the premises for the purpose of a business. There are two aspects to this requirement:
- Occupation; and
Again, the LTA 1954 does not provide a definition as to what constitutes ‘occupation’, however the general use of the term implies a physical presence and control of the premises. The tenant will only be entitled to the part of the premises that it occupies. If a tenant voluntarily vacates the premises, all circumstances must be considered to determine whether it is no longer in occupation for the purposes of the LTA 1954. For example, if a tenant vacated so fitting out works could be carried out, it is unlikely that it will be deemed to have given up occupation, as an intention to occupy will still be present.
Section 23(2) of the LTA 1954 affords the term ‘business’ a wide definition. It includes a trade, profession or employment. If the tenant is a “body of persons”, business includes “any activity”. It is not necessary that the business is carried on for profit and a trading activity which is carried on for the purposes of making a profit will be a business for the purposes of the LTA 1954 even if that profit cannot be distributed because the tenant is a not-for-profit organisation.
A members’ club is also carrying on a business for the purposes of the LTA 1954, even if it only trades with its own members.
Section 23(2) of the LTA 1954 specifically states as follows:
“In this part of this Act the expression “business” includes a trade, profession or employment and includes any activity carried on by a body of persons, whether corporate or incorporate”.
A “body of persons” can include:
- A company;
- A limited liability partnership (LLP);
- A local authority; and
- A sports club.
Although the premises must be occupied for the purpose of a business, the actual business does not need to be carried on there, but the use of the premises must further the tenant’s business.
Premises will be occupied for the purpose of a business if they are in the course of being fitted out for future business use by the tenant.
Is the business carried on by the tenant?
The tenant must be carrying on the business at the premises (not a party other than the tenant). In certain circumstances, the business can be carried on vicariously through a party other than the tenant. If the business is carried on vicariously, any notice must still be served on, or on behalf of, the actual tenant.
Does the tenancy fall within any of the specific exclusions?
Section 43 of the LTA 1954 specifically excludes from protection certain tenancies. These include:
- Agricultural holdings;
- Mining leases;
- Service tenancies;
- Tenancies for terms of six months or less; and
- Home business tenancies.
What is the significance of the tenant being granted security of tenure?
If the LTA 1954 applies then a business tenancy protected by that Act will not terminate automatically at the end of the contractual term. Provided that the tenancy satisfies the qualifying criteria in the LTA 1954 at the contractual expiry date, the tenancy will continue under section 24(1) of the LTA 1954, effectively on the same terms and at the same rent, until it is validly terminated in one of the ways specified by the LTA 1954.
If the tenancy meets the qualifying criteria of the LTA 1954, the tenant is entitled to a lease renewal of the tenancy and the landlord can only oppose the lease renewal on certain grounds.
It is important to note that there are various ways to terminate a tenancy which has the protection of the LTA 1954 without renewing the lease. Either the landlord or the tenant can initiate the termination.
Termination of the lease initiated by landlord
After the end of the contractual term, a business tenancy will continue under section 24(1) of the LTA 1954 unless it is terminated by one of the prescribed methods. Some can be applied before or at the end of the contractual term; others can be used after the end of the contractual term.
Termination without lease renewal procedures initiated by the landlord include:
- Termination by landlord’s section 25 notice (explained in brief detail below);
- Serving a counter-notice opposing a tenant’s section 26 request for a new lease (not elaborated upon in this blog); and
- Termination by forfeiture (not elaborated upon in this blog).
A landlord that wants to oppose a lease renewal can serve a section 25 notice, which must be in the prescribed form, specifying the grounds under section 30(1) of the LTA 1954 that it intends to rely on. There is a separate prescribed form for use where the landlord is not opposed to the grant of a new lease. This form should be used if the landlord proposes to terminate the current lease and propose terms for the grant of a new lease.
If the landlord wishes to oppose the grant of a new tenancy on any of the grounds contained within section 30(1) of the LTA 1954 (for which see further below), the landlord’s notice must include all of the required information, for example, the notice must:
- Be addressed to the tenant;
- State the name of, and be served by, the competent landlord. The tenant’s immediate landlord is not necessarily the competent landlord;
- Include the address or description of the property to which the notice applies. A section 25 notice must terminate the entire tenancy and cannot purport to terminate only part of the demised premises. Therefore the section 25 notice must specify all the premises demised by the tenancy, even if the tenant is no longer in occupation of the whole premises. The description of the premises must make it sufficiently clear to a reasonable tenant that the landlord intends to terminate the entire tenancy, or the notice will not be valid;
- Specify a termination date; and
- Specify the ground(s) of opposition under section 30(1) of the LTA 1954 that the landlord wishes to rely on.
Grounds of opposition contained within section 30(1) of the LTA 1954
A landlord can oppose the tenant’s right to renewal on any of the following grounds contained in section 30(1) of the LTA 1954:
- The demised premises are in disrepair (Ground (a));
- The tenant has persistently not paid the rent (i.e. there are rent arrears) (Ground (b));
- If the tenant has substantially breached his obligations under the current tenancy, or for any other reason connected with the tenant’s use or management of the holding (Ground (c));
- 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 (Ground (d));
- Where the tenancy was created by a sub-letting (Ground (e));
- Where the landlord intends to demolish or reconstruct the premises comprised in the holding or a substantial part of those premises 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 (Ground (f)); and
- Where 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 (Ground (g)).
Termination of the lease initiated by the tenant
Termination procedures initiated by the tenant include:
- Termination by ceasing business occupation by the end of the contractual term (section 27(1A) LTA 1954;
- Termination by section 27(1) or section 27(2) notice;
- Termination by tenant’s notice to quit (section 24(2) (a) LTA 1954);
- Surrender (section 24(2) LTA 1954.
What is the effect of “contracting out”?
A landlord and tenant are entitled to exclude the provisions of Part II of the LTA 1954 by following a statutory procedure before the tenant becomes committed to take the lease (section 38A LTA 1954). This is a complex area of law and is not elaborated upon in this blog post. We would always recommend seeking professional advice if you are a landlord/tenant that is entering into a lease and the parties are intending to contract out of the security of tenure provisions contained within Part II of the LTA 1954.
As a general rule, section 38(1) of the LTA 1954 forbids any contracting out of the effects of the LTA 1954. However, section 38A (1) allows “the persons who will be the landlord and the tenant in relation to a tenancy to be granted for a term of years certain” to agree that sections 24 to 28 of the LTA 1954 will be excluded in relation to the tenancy. Note importantly that the proposed tenancy must be for a term of years certain and the correct procedure for contracting out must be followed.
The effect of contracting out is that:
- The tenant has no right to remain in the property at the end of the lease;
- The tenant must leave the property at the end of the lease unless the landlord chooses to offer a new lease;
- The tenant has no right to compensation from the landlord on leaving the property at the end of the lease; and
- The tenant has no right to ask the court to fix the rent or the terms of the lease if the landlord chooses to offer another lease.
From a landlord’s perspective, the repercussions of “contracting out” could be that:
- The lease itself will not have much capital value;
- The lease may not be attractive to any prospective new tenants; and
- The lease may not be attractive to company buyers.