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Published: Fri, 02 Feb 2018

Free Land Law Essays

Critically
discuss whether the security of tenure and other provisions in the Landlord
& Tenant Act 1954 (Part II) (as amended, including the Regulatory Reform
(Business Tenancies)(England & Wales) Order 2003), currently strike the
correct balance between the interests of landlords and tenants. You should
consider practical considerations as well as purely legal considerations, and
also any proposals for changing the relevant law which have not yet been
enacted.

The
Landlord and Tenant Act 1954 has over the last fifty years proved to be
difficult to deal with and was seen as creating great imbalance between the
rights of the landlords on the one hand and the tenants on the other.
Significant reforms to the Landlord and Tenant Act 1954 came into force on 1
June 2004, introducing procedures and time limits relating to the termination
and renewal of leases of business premises. The reforms are contained in the
Regulatory Reform (Business Tenancies) (England and Wales) Order 2003 – SI 2003
No. 3096 (RRO). As Sahonte and Watson point out The scheme of the Act
essentially remains the same, however, reflecting the Government’s position
that the Act is philosophically sound and fair to both landlord and tenant
whilst underpinning the free operation of the property market. Some will say
that this is a missed opportunity, which may not come again. It is not really
possible to set out in detail the exact nature of all the changes provided by
the Order.

These
reforms seek to redress much of the unfairness in the legislation in an effort
to find a balance between the competing and conflicting interests of landlord
and tenant. Whilst these aims are achieved to a certain degree it is argued
that the act has also created a number of new traps, which affect the balance
of the landlord and tenant relationship.
Although it will be concluded that any amendment to the previous Landlord and
Tenant rules contained within the 1954 act provides a significant step forward
and an improvement in the entire landlord and tenant relationship.

A small
but potentially significant amendment has been made to s23. At present where
the tenant has the lease, but does not carry on the business, there is no right
to a renewal tenancy. This might arise where the tenant controls a company,
which operates the business. Now, where the tenant is a one or more individual,
they will have a right to a new tenancy provided that they control the
occupying company. Similarly where the tenant is a company, protection will
arise where the occupation of the premises is by individuals, which control the
company.

The
procedure for obtaining a court order authorising the parties to enter into a
tenancy, excluding security of tenure or sanctioning an agreement for the
surrender of an existing tenancy, has been abolished. It has been replaced by a
procedure that operates between the parties – and this has to be closely
followed, or the landlord will be at risk of granting a new tenancy that still
enjoys the protection of the original Act.

The legal
costs incurred by the parties in ensuring compliance with the new procedures
are likely to exceed the costs they would otherwise have incurred in obtaining
the sanction of the court. Before the changes, only tenants could make
applications to the court for a new tenancy. Now landlords are able to make
applications too. This new right is particularly valuable where a landlord
wants to bring a tenancy to an early conclusion – for example, in order to
redevelop the premises. The termination of the tenancy provides the opportunity
to apply for the determination “interim rent”, and the new provisions
of will now enable a tenant, as well as a landlord, to apply for such a
determination, so that the rent of over-rented premises may be reduced as from
“the appropriate date”

In the
case of over-rented premises, the landlord cannot postpone the date of a
reduction in rent by serving a s 25 notice to expire at the latest possible date
(12 months after service of the notice), because it is provided by s 24B(2)
that, where a landlord has given a notice under s 25, the “appropriate
date” is the earliest date of termination that could have been specified
in the landlord’s notice. The over-rented tenant can, of course, also obtain
the right to a determination of an interim rent by serving a s 26 request;
however, he may be unaware of this right or any rights relating to interim rent
until prompted to take legal advice by service of a s 25 notice. A solicitor
who thus prompts an interim rent application by an over-rented tenant may have
an unhappy landlord client.

Changes
in the timescales will mean that landlords must now get their strategy worked
out early. Previously, a landlord had to wait up to four months after serving a
section 25 notice to see whether a tenant applied for a new tenancy. Under the
reforms, landlords no longer have to wait and can force the issue and apply to
the court at an earlier date, depending on whether the grant of a new tenancy
is opposed. This is likely to speed up the process. If the tenant does not want
a new tenancy, it should inform the court and the landlord’s application will
then be dismissed. There is potential danger for a landlord who opposes the
grant of a new tenancy and then has a change of mind or is unable to proceed
with the original plan. As the law now stands, this landlord could face a claim
by the tenant for compensation.

Tenants
can now apply for compensation where no application for renewal is made because
of misrepresentation or concealment or an application is withdrawn because of
misrepresentation or concealment.

There
is also a new form of section 25 notices.
If the landlord is not opposing the grant of a new tenancy, the new s 25(8)
stipulates that the notice shall not have effect unless it sets out the
landlord’s proposals as to:

(i) the property to be comprised in the new tenancy;

(ii) the rent to be payable under the new tenancy; and

(iii) the other terms of the new tenancy.

A
failure on behalf of the landlord to make genuine realistic proposals may
possibly invalidate the notice, although the “important note for the
tenant” in the relevant prescribed form does emphasise that the proposed
terms are no more than “suggestions as a basis for negotiation”.

The
amended act also provides for a new procedure following the service of a s 25
notice. Previously, the landlord had to wait and see whether, within the
specified time limits, the tenant would (i) serve a counter-notice indicating
that he was unwilling to give up possession; and (ii) apply to the court for an
order for the grant of a new tenancy. The requirement for service of a
counter-notice has now been abolished and, more importantly, the statutory
provisions relating to an application to the court are different.

The
Regulations are designed, in part, to avoid the need for unnecessary court
applications. The positive need to issue a court application within the two- to
four-month window from date of service has now gone. The deadline for
applications is now the termination date specified in the s25 notice, or in the
case of a s26 request, the day preceding the date given for the commencement of
the renewal tenancy. The parties can extend the deadline date by written
agreement made before the expiry of the deadline. There may be problems
securing such written agreement. The busy practitioner representing the tenant
may prefer to issue the application within the time limit and then seek a stay
of proceedings if negotiations are in hand. A major change in court applications
is that in respect of notices/requests served on or after 1 June, landlord or
tenant can make the application. Up to now only the tenant could make the
application. This gave the tenant control over the pace of progress, as
sometimes the tenant would issue toward the end of the two- to four-month
period, and then not serve the court papers until towards the end of the
two-month validity period. Now, a landlord who wants to make progress can issue
the court application as soon as he has served his s25 notice, or served his
counter-notice to a s26 request. Other difficulties with the old procedure for
renewal were that only a landlord could apply for interim rent and If a
landlord wanted possession, he could only react to tenant’s application for a tenancy
and could not take the initiative. The strict timescales also proved to be a
trap for the unwary and most court applications were protective and therefore
the old rules raised issue as to unnecessary cost and expense. The new rules
are more even handed as the requirement for tenant to serve counter notice
dispensed with and both parties can apply to the court for the grant of new
tenancy.

The
amended s 24(1) of LTA 1954 enables either the landlord or the tenant to apply
to the court for an order for the grant of a new tenancy. Such an application
may be made at any time between the service of the s 25 notice and the end of
the “statutory period” as defined in the new s 29A of LTA 1954
(being, in a case where the landlord has given a notice under s 25, the date
specified in the notice as the date at which the existing tenancy is to come to
an end). However, this time limit is not absolute; it may be extended from time
to time by agreement between the landlord and the tenant in the circumstances
set out in the new s 29B. The first such agreement must be made before the end
of the statutory period, and must specify an agreed period during which an
application may be made, expiring after the end of the statutory period.
Further extensions may be agreed, but any such agreement must be made before
the end of the period specified in the current agreement. It has been clear
since Kammins Ballrooms v Zenith Investments
that the parties could agree to waive the time limits under the Act, but few
dared risk it. A new section 29B explicitly allows the parties to agree to
extend the period for applying to the court, provided they do so before the
current period expires.

There
are changes of timing and substance. The commencement date for interim rent
will be the earliest date that could have been specified in the s25 notice or
s26 request irrespective of the date actually specified. This means that in
practice the date for commencement will be the contractual termination date or
six months after the date of service of the notice/request, whichever is the
later. An application to fix the amount of interim rent may be made by either party
in respect of notices served on or after 1 June 2004. If an application is
made, interim rent will run from the commencement date for it, irrespective of
the actual date of the application.

The
amount of interim rent will now generally be the amount of the new rent in
those cases where the tenant is taking a renewal tenancy of the whole of the
demised premises. There are now several different bases of valuation 
Prior to the enactment of the new legislation the interim rent derived from a
valuation based on a tenancy from year to year. This is generally considered to
produce a rent somewhere between 10 to 15% less than the open market valuation.
This basis will continue where the renewal application is opposed. However
where renewal is uncontested (subject to certain exceptions) the interim rent
will be the same as the rent for the renewal tenancy. The exceptions are
complex, but are designed to allow an adjustment if unfairness would result –
specifically where market rents change between the effective date for payment
of the interim rent and the date of commencement of the renewal tenancy, or
significantly different terms are agreed for the renewal tenancy as compared to
the previous one.

The
court has discretion to vary the amount where there are special circumstances.
This might arise where the amount of the new rent would have been substantially
different if it had reflected market conditions at the commencement of the
interim rent period. In other cases, the amount of interim rent will be
determined in accordance with the existing method.

An
amendment to s27 of the Act confirms the decision arrived at in Esselte AB v
Pearl Assurance,
to the effect that a tenant may vacate prior to the contractual termination
date, and incur no continuing liability, as tenant, even if an application has
been made to the court. The amendment to s27(2) provides that a tenant holding
over under the Act may now give three months’ notice to terminate, and this
does not now have to expire on a quarter day.

Section
40 is amended under the new regime this section allows landlord and tenant to
find out information from the other such as who has an interest in the
property & details of the interest and during the last 2 years of tenancy
and replies must be received within one month. The old regime had no teeth and
provided no penalty for non-compliance this is amended in the new provision,
which obligates the parties during a six-month period and to give notice of
transfer, passes responsibility of continuing compliance to successor. The new
section also provides the court with the jurisdiction to order compliance and
award damages.

Perhaps
the biggest change can be felt under the new rules of contracting out. There
were many disadvantages of the old system such as the fact that there was a
need for consent orders for excluded tenancies and agreements for surrender.
The old system was also bureaucratic, Cumbersome Time-consuming, Expensive.
This coupled with the fact that the process was administrative process rather
than a judicial one made the whole system almost impossible to work with. He
rate of refusal was low and was of doubtful effectiveness.

The new
procedure is much different from the old system and in fact schedule 1 of the
prescribed form explains the key benefits which the tenant gives up and these
are listed as, security of tenure, right to compensation, power of court to fix
rent and the importance of taking professional advice. The new rules provide a
14 day cooling off period, and that the notice be served on the
tenant. The Tenant must sign a simple declaration that he or she has
received the health warning notice and accepts the consequences of entering
into the agreement. The new rules also provide an alternative of statutory
declaration – where the parties don’t want to wait 14 days. In both cases a
reference to the health warning notice, and to the declaration or statutory
declaration needs to be contained in or endorsed on the Lease (or agreement to
surrender).

The practical advantages to this system
are that it is less expensive as there is no court fee of
130 documentation more straightforward. The health warning is in plain
English, and ensures that the tenant really is given some idea of what he or she
is giving up which has proved to be quite important. It is suggested that this
scheme is also likely to operate much more speedily than the old system.

These
advantages aside there appears to be a great many pitfalls and traps evident
with this new system. Serving the notice appears to be the first of these.
Notice is to be served on the tenant – does this mean that as well as sending
the package to the tenant’s solicitors, the notice should be served separately
on the tenant?  Clearly if the notice is to be relied on, there must be
evidence of the service of the notice.

The tenant may wish to give authority to
its solicitor to accept service, but if a landlord wishes to rely on this he
should seek written evidence of that authority.  Alternatively the landlord
may send the notice in duplicate requesting the tenant to acknowledge receipt
by signing and returning the duplicate copy.

The notice contains very little detail
about the proposed transaction – simply the name of the parties and their
addresses.  It doesn’t even require the property to be identified, let
alone the terms of the tenancy.

Under paragraph 3 of Schedule 2 the
declaration to be made by the tenant is to be made “before the tenant
enters into the tenancy to which the notice relates”.  The landlord
will need to be satisfied that, if there have been changes to the original form
of tenancy; the original notice still applies to the tenancy finally agreed.

Under the old arrangements for court
order, case law
only if the change went to the fundamental terms of the tenancy would the court
order be ineffective.  While it is likely that the new law will take
account of decisions such as this, until the law is tested, there will be no
certainty.  The safest course where there are significant changes may be
to adopt the statutory declaration route. An alternative may be to include an
express reference in the lease provision acknowledging that the lease is
excluded to the specific notice (& its date) with confirmation that the
notice does apply to the tenancy granted by the lease.

Whilst
the amended Landlord and Tenant Act goes some way in addressing the inequality
between Landlord’s and Tenants it is argued that it does not go far enough, and
that the recommendations contained within The Code of Practice for Commercial
Leases, particular those on upwards only rent review, go further. The
government in April 2002 published the Code of Practice. The code contained
various recommendations in relation to commercial lease provisions, including a
recommendation that alternatives to an upwards only rent review (UORR) should
be offered to tenants.
The consultation paper sets out six options on UORRs. The first of these is
that there should be no change and it is unlikely that this will be the option
chosen by the government. The second proposal is to ban UORR’s. The proposal
is that requiring rents to be reviewed on an upward or downward basis would
prohibit UORRs. Review provisions that enabled the landlord but not the tenant
to initiate a review would also be prohibited. Rent reviews that operate by way
of agreed fixed increases or indexation would not be caught by this proposal.
The third option proposed is to Ban UORRs but allow a floor of initial rent.
This is a variation of the second option above, whereby the legislation
requires upwards or downwards reviews, but with a minimum rental level set at
the initial rent. It might also provide for a maximum increase. The fourth
option is to allow a tenant to break where a rent review would lead to higher
rent than market levels. While allowing a tenant to break would give tenants
the ability to avoid paying more than the open market rent, it would be at the
cost of relocating to and fitting out other premises. Also, it would no doubt
lead to disputes and litigation over the meaning of open market rent and the
validity of a tenant’s break notice. The fifth option is to apply a statutory
limit on lease length. The difficulty with this suggestion is that many
tenants require longer leases because of high fitting-out costs and the
certainty of being able to trade from a particular location, and a maximum
length of lease will not be acceptable to such tenants, unless the lease
includes an option to renew on certain terms. The final option that is proposed
is to make option pricing compulsory, although this option appears to be
impractical and difficult in practice to enforce and police. The British
Property Federation (BPF)
believes that only the first three options will come under serious
consideration.

The BPF
feels
that this is no longer an argument on behalf of small businesses for ‘fairer’
lease terms but, rather, an HM Treasury-driven argument based on UK
competitiveness and the feeling that UORRs are in some way ‘unfair’. Many
tenants would welcome such a change as UORRs hamper the flexibility of the UK
economy and dissuades inward investments.

The
reforms will have a major impact on court business. Early widespread opinion is
that it is likely to increase litigation. A dilatory approach can no longer be
adopted in applications for lease renewals. Applications used to be issued and
then matters left, and only resurrected when negotiations failed. Under CPR
Part 56, these applications are subject to active case management. An enormous
amount of time and effort has been invested in updating the Landlord and Tenant
Act 1954.While many of these changes are to be welcomed, the net effect in the
short term will be to increase litigation, as new issues fall to be determined.
Associated costs for both landlords and tenants will also increase while the
parties come to terms with the new regime. Whether or not the new regime will
result in a balancing of the costs and a balancing of the rights for landlord
and tenant remains to be seen, it would certainly seem that a clear attempt has
been made to improve the situation. It is argued that this is an admirable attempt
but that it does not go further enough in addressing the balance. The
proposals for the amendments to the upwards only rent reviews sounds more
promising and it would certainly help recreate the balance between landlord and
tenant perhaps more noticeably than the current proposals do although again it
is difficult to envisage the practical reality. It is certainly the case that
all areas of business and commercial tenancies were in need of a radical
overhaul and any improvement made to the act is arguably is an improvement and
goes someway to readdressing the balance between landlord and tenant.

Bibliography

Esselte
AB v Pearl Assurance[1997] 1 WLR 891; [1997] 02 EG 124

Kammins
Ballrooms v Zenith Investments [1971] AC 850

Receiver
of the Metropolitan Railway v Palacegate 2000 3 WLR 159

Legislation Regulatory
Reform (Business Tenancies) (England and Wales) Order 2003 – SI 2003 No. 3096

Landlord
and Tenant Act 1954

Garner
S & Frith A, (2004) A Practical Approach to Landlord and Tenant, Oxford
University Press

Joyce
J, (2005), Business Tenancies: The New Law: A
Practical Guide to The Changes To The Landlord And Tenant Act 1954 Part II,
Sweet and Maxwell

Thompson M, (2003) Modern Land Law, Oxford University Press

Williams D, (2002) Business Tenancies, Estates Gazettes Ltd

Journal Articles Cantor
J,(2004) Practices Points: In With The New, Out With The Old, Law Society
Gazette 101.25 (29)

Hickman
N, (2004) Benchmarks: Big Changes For Business Tenancies Law Society Gazette
101.3 (36)

Furber
J, (2004) The New Regime of Business Tenancy Renewal New Law Journal
154.7130 (196)

Raymond
L and Boulton A, (2004) Commercial Lease Shake Up, New Law Journal 154.7145

Sahonte
R & Watson B, (2004) Business Tenancies – Renewal Revisited – A Review of
the New Legislation, – article from Sahonte R & Watson B, (2004)
Business Tenancies – Renewal Revisited – A Review of the New Legislation, –
article from

Cantor J,(2004) Practices Points: In
With The New, Out With The Old, Law Society Gazette 101.25 (29)


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