Business Tenancies: Landlord and Tenant Act 1954 (“ the 1954 Act”)

The 1954 Act governs the relationship between the vast majority of landlords and tenants of business premises; the rights and obligations afforded by the 1954 Act supplement those set out in the terms and conditions of any lease.

When does the 1954 act apply to a tenancy?

• There must be a tenancy  (as opposed to a licence);
• The tenant must be occupation of the property for the purpose of the tenant’s business; and
• The tenancy must not be specifically excluded from the 1954 Act.

This is not a straightforward area of law and it is recommended that experienced, legal advice is taken before a landlord or tenant takes a decision in respect of his/her business premises. For example, if a landlord were to wrongly terminate a lease protected by the 1954 Act, then he/she would be likely to face a Court injunction and a claim for damages; whereas, if a tenant were to quit business premises without an appreciation of his/her 1954 Act protection, then valuable compensation may be lost.

There are a number of circumstances in which the 1954 Act does not apply, (in addition to specific exclusion of the 1954 Act referred to above); the most typical example of which is where the term granted by the lease is for 6 month or less, (unless the lease provides for an extension of the term) and the tenant’s total period of occupation does not exceed 12 months.

What protection does the 1954 act to afford a tenant?

Subject to the landlord proving a statutory ground for possession, the tenant has a right to a new tenancy of the business premises following the expiry of the term of the old lease.

Notwithstanding the expiry of the term of the current tenancy, a landlord can only seek to terminate a 1954 Act protected business tenancy by the service of a statutory notice providing a termination date not less than 6 months nor more than 12 months to the notice has been served. Following the service of the statutory notice, a landlord can only resist the grant of a new business tenancy, if he/she can prove a statutory ground for possession.

How can a tenant terminate a 1954 act protected lease?

By leaving the business premises on or before the termination date under the lease, or by the service of a statutory notice (to terminate no earlier than the termination date specified in the lease) giving the landlord 3 months notice and by vacating on or before the termination date specified in that notice.

What are the consequences of the 1954 act for a landlord?

In order to terminate a 1954 Act protected business lease, a landlord must first serve a statutory notice providing a termination date of not less than 6 months nor more than 12 months after the notice is served.

Further, a landlord must prove a statutory ground for possession; the most common examples of which are a landlord’s intention to demolish, reconstruct or carry out substantial works of construction to the premises, or his/her desire to occupy the premises, for their own business purposes. If matters cannot be agreed with the tenants, then it is necessary for a landlord to satisfy the Court that it has a genuine intention to do so.

A landlord has to pay statutory compensation to a tenant of business premises, which is a multiplier of the rateable value, on his/her obtaining possession of the premises based on a statutory ground.

If a landlord does not oppose the grant of a new business tenancy to the tenant, then this affords the landlord in opportunity to be paid the current market rent for the premises under the terms and conditions of the new lease. This obviously assumes a rising rental market.
In recessionary times, a landlord will be less keen to terminate leases of business premises, if that will lead to a new lease and a new, lessor market rent. The opposite is obviously true of a tenant, who is likely to be keen to take advantage of any fall in the market rent.

Business Tenancies: Contracting out of the Act 1954

Under Part II of the 1954 Act, a tenant which is in occupation of the premises for the purposes of its business generally has a statutory right to renew its lease at the end of the lease term. The landlord and tenant can, however, agree to “contract out” so that the tenant will not have the benefit of the right to a new lease

For a landlord, the advantage of contracting out is flexibility. When the lease term comes to an end it can readily recover possession of the premises (e.g. in order to redevelop or refurbish them). Alternatively, it can negotiate a new lease with the tenant if that is what both parties wish

If the lease has not been contracted out then the landlord will have much less room for manoeuvre. If it wishes to negotiate a new lease with the tenant it will have to do so against the backdrop of the 1954 Act (because the court has power under the 1954 Act to decide the terms of the new lease if the parties cannot agree the terms themselves). If the tenant wishes to enter into a new lease but the landlord does not, then the landlord will have to satisfy one or more of the statutory grounds set out in the 1954 Act in order successfully to oppose the tenant’s application for a new tenancy. This may not be straightforward and the landlord may have to pay the tenant compensation.

Contracting out therefore has significant benefits for landlords. For their part, tenants are often quite content for a lease to be contracted out, particularly given the current trend towards shorter leases

Procedure for contracting out

Under the 1954 Act as originally enacted, the landlord and tenant had to obtain a court order if they wished to contract out. The court order authorising them to contract out had to be obtained before the lease was granted (or, with an agreement for surrender, before the agreement was made).
In 2004 the old court order procedure was abolished and replaced by a new procedure. The new procedure is set out in The Regulatory Reform (Business Tenancies) (England and Wales) Order 2003 (RRO), which amended the 1954 Act.

A. Procedure for contracting out in relation to a new lease

Landlord’s warning notice

The landlord must serve a warning notice on the tenant. The form of notice is set out in the Regulations and the notice must be in that form or “substantially” in that form. The notice must be served before the lease is granted or, if there is a prior agreement for lease, before that agreement is made. (The point is that the tenant must receive the notice before it becomes contractually bound.) The warning notice informs the tenant that the landlord is offering a lease without security of tenure and explains the rights which the tenant will be giving up if it agrees to a lease on those terms. It suggests that the tenant should take professional advice before making a decision and that, unless there is particular urgency, it should ask the landlord to allow it 14 days to consider. The notice is a formal legal document and there are strict rules under the 1954 Act about how it may be served. It is vital to make sure that the notice is validly served using one of the authorised methods of service or the lease will not be validly contracted out.

Tenant’s declaration or statutory declaration

Having received the landlord’s warning notice, the tenant must make a simple declaration or statutory declaration. The declaration must be made before the lease is entered into or, if there is a prior agreement for lease, before the agreement is made. If the landlord’s warning notice has been served not less than 14 days before the lease or agreement will be entered into, then the tenant must make a simple declaration. If the warning notice has been served less than 14 days in advance then the tenant has to make a (more formal) statutory declaration. The forms of simple and statutory declaration are set out in the Regulations and the declaration or statutory declaration made must be in the relevant form or “substantially” in that form.

The form of simple declaration states that:

• the tenant is proposing to enter into a tenancy;

• the tenant proposes to agree that the tenancy will be excluded from the security of tenure provisions of the 1954 Act;

• the landlord has served a warning notice on the tenant at least 14 days previously; and

• the tenant has read the notice and accepts the consequences of entering into the agreement.

The form of statutory declaration is very similar, but omits the reference to the 14 day period.

The intention behind the legislation was that a simple declaration would be used in the majority of cases, and that a statutory declaration would only be used in cases where the lease or agreement for lease had to be entered into urgently.

The thinking behind the requirement for a statutory declaration where the landlord’s warning notice has been served less than 14 days in advance was that the imposition of the more onerous requirement for a statutory declaration in these circumstances would help protect the tenant. (A statutory declaration has to be made before an independent solicitor or commissioner for oaths and involves payment of a fee, whereas there are no formalities for a simple declaration).

A problem with assuming that the landlord’s warning notice will be able to be served at least 14 days in advance in most cases is that this does not accord with commercial reality. Leases and agreements for lease often have to be entered into urgently. The difficulty with using the simple declaration is that it is inherently inflexible. It will only satisfy the procedural requirements if the warning notice has been given at least 14 days in advance of the tenant becoming contractually bound. The problem is that at the time when the declaration is made the parties will not necessarily know when the lease will be completed (or the agreement for lease will be made). Even where parties expect at the outset that there will be a 14 day gap, circumstances can change and the lease or agreement may need to be entered into more quickly than at first thought. The statutory declaration avoids these problems so our policy is always to use a statutory declaration.

There were initially some concerns that a statutory declaration might technically be invalid for the purposes of contracting out if it transpired that the landlord has in fact served the warning notice 14 days or more in advance
(i.e. if the circumstances were such that a simple declaration should have been made). However, in the Court of Appeal decision in Chiltern Railway Co Ltd -v- Patel (2008). It was held that a statutory declaration was valid for the purposes of contracting out, even though it had been made more than 14 days after the landlord’s warning notice was served.

Agreement to contract out to be contained in or endorsed on the lease or agreement for lease

The final requirement is that the lease must contain or have endorsed on it:

• a reference to the landlord’s warning notice;

• a reference to the simple or statutory declaration (as appropriate); and

• the agreement to contract out, or a reference to it.

(In practice, where there is a prior agreement for lease, the agreement to contract out will be contained in the agreement for lease and a reference to the agreement to contract out will be included in the lease.)

B. Procedure for contracting out in relation to an agreement to
surrender a lease

If a lease is not contracted out of the 1954 Act then the tenant will generally have a statutory right to renew the lease at the end of the term, as explained previously. If the landlord and tenant later want to enter into an agreement for surrender of the lease they must comply with the procedure for contracting out. This is because, by entering into an agreement to surrender, the tenant will be agreeing to give up its statutory rights. If the contracting-out procedure is not complied with then the agreement to surrender will be void.

Note that the need to contract out only applies where there is an agreement to surrender before the actual surrender actually takes place. In some cases the parties will proceed straight to a deed of surrender without a prior agreement, or there will be a surrender by operation of law. In such cases the surrender will be valid and the requirement to contract out does not apply.

The procedure is similar to the contracting out of a new lease

C. Sureties and guarantors

In many cases tenants entering into new leases will provide a surety or guarantor who will be party to the lease and will guarantee performance of the tenant’s obligations under the lease. Surety covenants commonly contain an obligation on the surety to take a new lease from the landlord at the landlord’s request if the lease is forfeited or if the tenant goes into liquidation and its liquidator disclaims the lease. In drafting terms, the obligation to take a new lease is usually framed as a conditional agreement for lease which will become unconditional if and when the landlord serves notice on the surety or guarantor requiring it to take a new lease. If the lease containing the surety covenant is contracted out then the landlord will usually want any new lease granted to the surety to be contracted out as well. In order for the new lease to be validly contracted out, the contracting-out procedure needs to be complied with in relation to the surety before the original lease is entered into. The reason is that, as explained above, the original lease contains the conditional agreement for grant of the new lease to the surety and the Regulations require the contracting-out procedure to be complied with before the prospective tenant (in this case the surety) becomes contractually bound.

Note that this applies not just to an original tenant’s surety, but also to a surety for a new assignee and to an assigning tenant entering into an authorised guarantee agreement (AGA) where the surety covenants concerned include the obligation to take a new lease. In each case, the contracting-out procedure needs to be complied with before the document containing the conditional obligation to take the new lease is entered into. In the case of an assignee’s surety this is likely to be the licence to assign, and in the case of an assigning tenant giving an AGA it will be the licence to assign (if the AGA is incorporated into that document) or the AGA itself (if it is entered into on a stand-alone basis).

Some landlords take the commercial view that the time and expense of complying with the contracting-out procedure in relation to sureties is not warranted in view of the relative rarity of a surety being required to take a new lease. However, as the law stands, the only way to be sure such leases are contracted out is to comply with the contracting-out procedure in relation to the surety before the surety covenants are entered into.

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Anthony Best
Partner
PRINCE EVANS SOLICITORS LLP
abest@prince-evans.co.uk Tel – 020 8567 3477