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Published: Fri, 02 Feb 2018
Landlord and tenant act 1954
This notice is served in case of all the questions in the initial stages to get full information of the lease and hence is not mentioned again in the subsequent answers where the Landlord and tenant Act 1954 applies.
Under the Landlord and Tenant Act 1954, which was introduced under the Regulatory Reform (Business Tenancies) (England and Wales) Orders 2003, there have been some changes to the law on section 40 notices. This article will be useful reading for landlords and tenants alike.
What Is A Section 40 Notice?
Before landlord and tenant make decisions on whether to renew or end a business lease, a section 40 notice can be served on the other party in order to gather information as to the lease. This information then helps that party to assess the situation and either renew or end the lease.
When Can This Section Notice By Served?
It can be served at any time although it is most common to serve one towards the end of the current lease and certainly within enough time for the other party to respond and for appropriate decisions to be made prior to the expiry of the lease.
Both tenant and landlord must respond within month of the notice being served. Parties must accordingly keep that information up to date for a further six months, if for any reason, it changes. The notice brining the other party up to date must be provided within one month of the party becoming aware of it.
What Information Must The Notice Provide?
A Section 40 notice served by a landlord on a tenant seeking information will require the tenant to state whether there has been a contracting out of any sub-letting or whether a Section 25 or Section 26 notice has been served;
A Section 40 notice served by the tenant on the landlord will require the landlord to state, where there is a superior lease, whether a Section 25 or Section 26 notice has been served.
Assume that your client owns the freehold of each property and is the current landlord of both leases. Your client is happy to grant a new lease for both buildings for 5 years. What action would you recommend and why?
Section 25 Notice: This is for use by a landlord with a commercial lease in England or Wales. The Landlord and Tenant Act 1954 broadly gives business tenants security of tenure – the right to renew the tenancy when it comes to an end. Landlords can oppose renewal of the tenancy for certain limited, specific reasons, for example: failure to pay rent, or if the landlord wants to redevelop the premises or get it back for his own use. Landlords can either apply to the court to end the tenancy, or can oppose the tenant’s application for renewal.
To end a current tenancy and propose terms for renewal or prevent the tenant renewing the landlord would need to send the tenant a Section 25 Notice. There are two different Section 25 Notices depending on whether the landlord is willing to renew the tenancy or not:
Section 25 Notice (opposing renewal)
Section 25 Notice (not opposing – proposing renewal).
However this must be send between 6 to 12 months of the current expiry date of the lease.
In the current scenario the rental value of the property is more than that of the current market rent. So the Landlord can opt for ‘continuation tenancy’ to maximise his earnings. The Act contains rules applying to ‘continuation tenancies’. Where a tenant, on the expiry of a tenancy, becomes a tenant of the property under another tenancy made between the same landlord and the same tenant, the date of commencement of the new tenancy is deemed to be the commencement date of the original tenancy. Meanwhile, when the landlord wants to renew the lease he will be only entitled to a current market rent. So this would mean a substantial loss of income for the landlord. So the landlord who grants a new lease for a period of 10 years will opt for interim rent. Interim rent will be payable from the earliest date which could have been put in the actual s25 notice served by L, or the actual s26 request served by T. It follows that the very earliest date from which it will be possible for interim rent to be payable will be immediately after the end of the contractual term date. Note that the interim rent will be backdated to that date irrespective of whether it is L or T who made the application, and irrespective of when that application was made. (Example included in the Appendix)
Under the new regime, interim rent will be payable from the earliest date which could have been put in the actual s25 notice served by L, or the actual s26 request served by T. It follows that the very earliest date from which it will be possible for interim rent to be payable will be immediately after the end of the contractual term date.
Note that the interim rent will be backdated to that date irrespective of whether it is L or T who made the application, and irrespective of when that application was made. (Examples included in the Appendix)
In general terms, the date for interim rent will be six months after service of the s25 notice or s26 request or, where later, the contractual term date. This backdating means that neither L nor T will get any benefit from manipulating the length of the s25 notice or s26 request (Case Law included in the Appendix).
To further maximize interim rent, the lessor might want to consider adopting a quarterly commencement of base rental on the first day of April, July, October and January. By so doing, interim rent could be maximized beyond 30 days under such a provision and could be as long as 89 days.
If the tenant does not continue with the ‘Continuing tenancy’ after 1 year then the Landlord can opt for the following other option. These options are completely viable in both the scenario depending upon the lease whether there is the continuation of the old lease or the singing of the new lease.
Rent review- Rent review would be done at a period of every 3 years and with an upward only provision.
Guarantors- The landlord will also ask for a third-party guarantee of the tenant’s obligations under the lease. This is likely where the tenant is not strong financially. Basically if the tenant defaults the guarantor will have to compensate the landlord for any loss sustained if the tenant breaches the terms of the tenancy. He may also have to take a lease of the premises if the lease is forfeited for tenant’s breach.
Assignment and sub-letting: If the Landlord agrees to transfer the lease from the existing tenant to another tenant. The outgoing tenant has to guarantee performance of the incoming tenant’s obligations.
Service Charges: In addition to paying the rent and the insurance premium tenant has to contribute or (pay the whole amount) towards the cost of repairing and maintaining the structure, the exterior and any facility shared with other occupiers.
Milbanke (Renewal Outside The Landlord And Tenant Act 1954)
A tenant occupying business premises under a lease which excludes security of tenure afforded by the Landlord & Tenant Act 1954 does not have the right to a new lease at the expiry of the contractual term and the landlord becomes entitled to possession of the premises. However, landlords are often willing to grant such tenants new leases, preserving a rental income, especially in the current letting market. Unlike in the case of protected leases, there is no legislative framework which governs the renewal process.
Frequently the contractual term will expire before the new lease is completed and the tenant will remain in occupation whilst negotiations as to the terms of the new lease continue. One of the landlord’s primary concerns will be to ensure that the tenant’s occupation does not develop into a periodic tenancy protected by the Landlord & Tenant Act 1954.
Whether or not such a tenancy is created will depend upon the conduct and intention of the parties. It is therefore essential that the landlord does not take any action which could override the implication that the tenant occupies the property as a tenant at will, which is the likely position where the tenant remains in occupation following the expiry of the contractual term during the course of negotiations. Interestingly, the demand and acceptance of rent will not necessarily be decisive in this respect, but a cautious landlord would not collect any rent once a lease comes to an end.
A tenancy at will may be implied, it is desirable for the parties to sign a formal agreement
documenting their intentions. It is not uncommon for tenants to delay negotiations, possibly in the hope of achieving improved terms or maybe putting off entering into a long term contractual arrangement in these difficult and uncertain trading conditions. In such case a landlord may seek to rely on a little known ancient statutory provision contained in the Landlord & Tenant Act 1730, which entitles the landlord who has served a notice requiring possession (i.e. terminated the tenancy at will) and where the tenant has failed to vacate to require that the tenant pay “double the yearly value” from the date of the notice until the tenant vacates. This will essentially be twice the sum that an occupier would have been willing to pay for the relevant period of occupation. Such threat may have the desired effect in that the tenant concludes the negotiations quickly and completes the new lease to avoid paying double. On the other hand, there is always a risk that the tenant actually vacates and the landlord is left with empty premises and no rental income.
In this case where the rent paid is lower than the market rent the landlord should renew the lease on the basis of the market rent with a upward only rent review provision every 3 or 5 years and should ask for a rent deposit of 1 year in advance. The FRI obligation should be entirely put on the tenant. However, this is hard to negotiate but it if works out it would be in the favour of the landlord.
Assume that your client owns the freehold of each property and is the current landlord of both leases. Your client does not want to grant a new lease on either building.
What action would you recommend and why?
Here we have to take into account that there are two types of lease namely the ‘Grantley House’ which is protected by the ‘Landlord and Tenant Act 1954′ and the other is the ‘Unit 2 Milbanke Way, Bracknell, Berkshire which is outside the Landlord and Tenant Act 1954 and that the provisions of sections 24 to 28 of the Act which is related to security of tenure shall be excluded in relation to the tenancy. There are various procedures which are to be taken by the Landlord/ Freeholder of the properties in both the cases if he does not wish to grant a new lease on either of the building. Both of the above cases has to dealt with separately because of the different types of leases they have.
Here in this case where there is no security of tenure, the Landlord prior to June 2004 had to obtain a Court order when he wanted the premises to be vacated. From 1 June 2004 the Landlord & Tenant Act 1954 Part 2 has been reformed by Statutory Instrument to try to modernise and streamline the procedures laid out in the Act. This has affected most business tenancies. The Act provides protection for business Tenants so that they can renew their leases except in stated circumstances. Much of the legislation remains unchanged but the new procedures has affected the granting of new leases where the parties wish to exclude the security of tenure provisions as well as the procedures to be adopted by both Landlords and Tenants when terminating or renewing leases. Previously in order for a tenancy to be excluded from the Tenant’s automatic right to renew a lease at the end of a lease term, it was necessary to obtain a Court Order to agree that arrangement.
From 1 June 2004, the Courts are no longer involved. The Landlord is now required to serve a prescribed form of Notice known as a “Health Warning”. It is notice on the tenant warning him of the consequences of entering into an agreement excluding the protection afforded by Sections 24-28 of the Landlord & Tenant Act 1954 and advising him to take legal advice. The notice must be in a prescribed form. The landlord then has to obtain a written declaration from the tenant that he has received the notice and there must be reference to the exclusion agreement and the notice in the subsequent tenancy agreement or lease. Following service of that Notice there is a 14 day time period for the Tenant to agree to the exclusion of the tenancy, which he will do by signing a simple form of Declaration confirming that he has received and accepts the consequences of the Notice. Alternatively, if the 14 day period is to be waived, the Tenant must sign a prescribed form of Statutory Declaration. The Tenant’s Declaration must be signed before the lease is completed and, as was the procedure previously, the lease itself must make reference to the fact that the parties have agreed to “contract out” of the Act. This procedure avoids the necessity and expense of making an application to the County Court.
So without the security of tenure the Tenant holds no power over the Landlord for lease extension and when the notice has been served the Tenant is obligated to vacate the premises.
Grantley House- The following are the procedure or steps by which the Landlord would not grant the lease extension on the property which is contracted inside the Landlord and Tenant Act 1954.
Property occupied by a tenant for business purposes.
Lease not contracted outside the Landlord and Tenant Act 1954.
Landlord wishes to terminate current lease and oppose the grant of a new one.
Broadly, Part 2 of the 1954 Act gives security of tenure to business tenants in England and Wales. Section 24 of the Act provides that the tenancy should continue unless terminated in accordance with the provisions of the Act, and enables the tenant to apply to the court for a new tenancy. To request a new tenancy and propose terms for renewal the tenant would need to send the landlord a Section 26 Notice. This must be sent between 6 and 12 months before the tenant wants the new tenancy to commence – which itself must be after the normal expiry date of the lease. The landlord must respond to a tenant’s Section 26 request within two months of receiving it if he wishes to oppose the grant of a new lease.
The landlord however, can serve a notice under Section 25 of the Landlord and Tenant Act 1954 on the tenant specifying a termination date of not more than 12 months nor less than 6 months from the date of service and in any event the specified date must not be earlier than the expiry date of the initial fixed term of the lease. In the notice the landlord must specify the reason(s) he objects to a new tenancy being granted. He can only do so on certain specified grounds. The exact wording of these grounds are set out in Section 30(1) of Landlord and Tenant Act 1954 and are reproduced in full in the body of the Section 25 request. They are as follows – (full description included in the Appendix)
Grounds When the tenant fails to comply with the repairing obligation under the present lease.
The tenant is repeated late in paying the rent which is due.
There is some other substantial breach by the tenant of the terms of the existing lease.
The landlord is willing to provide suitable alternative premises.
The current lease is a sub lease of part and the landlord would be better served if he leased the entire premises as one unit.
The landlord intends to demolish the premises in such a way that it could not be done with the tenant in occupation.
The landlord intends to occupy the premises for his own business and residence.
(If the landlord uses this ground, the court can sometimes still grant a new tenancy if certain conditions set out in section 31A of the Act can be met.)
An example of a case where the court accepted the landlord’s evidence that he intended to redevelop notwithstanding planning difficulties: Yoga for Health Foundation v Guest  All ER(D) 81 (Dec); New Law Journal, 17 January 2003
(g) That on the termination of the current tenancy 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.
(The landlord must normally have been the landlord for at least five years to use this ground.)
(Two recent cases included in the Appendix)
If the landlord relies on grounds (e) (f) or (g) then he will have to pay the tenant compensation if he is successful. The tenant then needs to make an application to the court for a new tenancy before the termination date specified in the Section 25 notice. The landlord and the tenant can agree to extend this deadline. If they do agree to extend it then the tenancy is automatically extended to cover that period. If the tenant fails to make the application to the court then the tenant’s right to a new lease will be lost.
Assume you are acting for tenant of the buildings who wants to take new leases for 10 years. What action would you recommend and why?
1. The current rent of 2 Milbanke Court is based on £18.00 per square foot and the market rent is around £20.00 per square foot.
2. The current rent of Grantley House is based on £21.00 per square foot and the market rent is around £18 per square foot, and
Negotiation Of Lease Inside The Landlord And Tenant Act 1954 (Grantley House)
A lease within the 1954 Act can continue after the end of the contractual term unless the Landlord brings it to an end by serving a Section 25 Notice to Determine or the tenant beings it to an end by serving a Section 26 Notice Request for a New Tenancy. Both notices must give, not more than twelve not less than six months notice and expire no earlier than the end of the contractual term.
If the tenant’s premises are under-rented at the end of the term and he is confident that the landlord has no redevelopment plans for the premises and no other grounds for opposing renewal, it may well suit him to wait for the landlord to serve his Section 25 Notice. The landlord cannot increase his rent until he serves a Section 25 Notice on the tenant. Service of that Notice will then enable the landlord to increase his rent six months after the date of his Notice by means of an interim rent application even if his Section 25 Notice specifies a later date for termination.
If the premises are over-rented, the Tenant can take the initiative and bring the tenancy to an end at the end of the contractual term by serving a Section 26 Request requesting a new tenancy from the Landlord. The Tenant can apply for an interim rent from a date six months after the Landlord serves him notice if the premises are over rented.
Section 34 (1) is also very helpful for the Tenant in negotiating a new lease and in this case reducing the rent and bringing it at par to the market rent. The act is included in the Appendix.
The Act requires the court to hold a mirror up to the open market at the date of decision.
The Act imports the requirement of reasonableness. The editors of the Handbook of Rent Review comment on this, at page 404: (Included in the Appendix)
This was confirmed by the Court of Appeal in the case of Giannoukakis v. Saltfleet Ltd, (Included in the Appendix)
The Tenant can also negotiate to put in the following terms in his new tenancy Lease. This would help the tenant be in a better position than the previous lease. They are as follows-
Break Clauses – The current market gives tenants great scope for negotiating a break clause with their Landlord in the renewal lease. The tenant can have a break clause after every 3 or 5 years. In practice, landlords will strongly resist a claim for an upwards and downwards rent review. But such a claim may well enable you to negotiate a breakclause or breakclauses in the renewal lease.
Rent Free Period- The Tenant can also ask the Landlord to give him certain rent free period because he is renewing his lease for another10 years and also owing to the current market position and could be the expenditure incurred by him on the repairs of the building owing to the building poor condition.
Rent Review – The existing Lease contains rent review provisions that review is likely to be upwards only. However, there is case law which does support a tenant’s claim for an upwards/downwards rent review on renewal, particularly where the existing tenancy has no rent review provisions. Furthermore, the Code of Practice on Commercial Leases exhorts landlords to “offer alternatives to upward only rent reviews priced on a risk adjusted basis”. The Following are the Case Laws to support this.
Upward/ Downward Rent Review Case Laws: (Included In The Appendix)
The Tenant can further negotiate the rent based on several different types of rent. It would be a great bargain for him if he is able to get it.
Open market value
The rent goes up or down (or stays the same) depending only on the market value at the review date.
A ‘turnover rent’ is normally either a combination of a base rent and an element reflecting the tenant’s turnover, or a simple percentage of turnover.
The rent is ‘index linked’, i.e. normally it changes from year to year in line with an agreed index such as the Retail Price Index.
Using A Surveyor/ Valuor To Process The Rent Review
The most effective way to assess an open market rent and have all the variables taken into account, is to have professionals deal with the process. It’s usual for both parties: the landlord and the tenant to appoint their own property surveyors to process the rent review. Surveyors have the necessary expertise, the contacts and the market knowledge to accurately assess a fair market rent, the give correct weighting to the lease clauses and to reach agreement with the other party.
PACT: The RICS and the Law Society jointly run a scheme known as “Professional Arbitration on Court Terms (PACT)” under which a solicitor or surveyor will be appointed to act as an arbitrator or independent expert. The scheme applies to unopposed lease renewals under the 1954 Act. It is highly flexible and allows the parties to decide which of the following aspects of the case are to be determined by a third party instead of the court:
The interim rent
The new rent
Other terms of the lease
The detailed drafting of the lease
A combination of these.
The parties may also decide the third party’s capacity – arbitrator or expert. In some cases it will be appropriate for the third party to act as arbitrator an in others as an expert. The issues are determined in accordance with the appropriate provisions of the 1954 Act. So the Tenant can consult them for any disputes on lease renewal clauses.
Negotiation Of Lease Outside The Landlord And Tenant Act 1954 (Milbanke)
Ideally when a Tenant is renewing his lease for a period of another 10 years when he is already holding a lease of 5 years outside the Landlord and Tenant Act 1954, It makes sense if he goes for a lease which is protected by the Section 24 to 28 (Security of Tenure) of the Act. In this case the Tenant does not hold any rights of renewal of lease because it is contracted outside the Act. It is completely at the disposal of the Landlord. He holds no security of tenure and if he renews the lease inside the Landlord and Tenant Act 1954 for 10 years he is liable to receive compensation if the Landlord does not hold true to the terms and conditions of the lease as per the Section 30(1) of the Act. Moreover if the Tenant takes the lease inside the Act and stays in possession of the property for another 10 years making in total 15 years and requests the Landlord for a lease extension before the Landlord serves him with a Section 25 notice, than the Tenant is liable to receive a compensation. The compensation due to the tenant would be at a rateable value by the multiplier of two because the tenant was in occupation of the property for more than 14 years.
However, if the Tenant still wants to contract outside the Act then he can negotiate on the following terms of the Lease.
Rent Free Period- The Tenant can also ask the Landlord to give him certain rent free period because he is renewing his lease for another10 years and also owing to the current market position and could be the expenditure incurred by him on the repairs of the building owing to the building poor condition
Mutual Break Clause- In this condition the tenant can negotiate that he only needs to serve a notice only 3 months in advance instead of the existing 6 months period whereas, the landlord’s condition for mutual break remains the same at 9 months.
The tenant should demand a lower rent of which he is paying of 18 pounds per sq ft or an equivalent rent because he is ready to contract outside the security of the Landlord and Tenant Act 1954. The tenant here also has the advantage of a poor market condition and so he would be in a relative stronger position than usual. The landlord may be keen to retain a tenant and therefore offer a new lease at a sensible term and not take advantage that the lease is contracted outside the Act which would have been the case in a buoyant market.
The tenant can look for different properties in the surroundings and can try to put external pressure on the landlord for a lease renewal. The tenant can also ask for a repairing and maintenance obligation and building insurance costs to be bored by the landlord or a 50/50 contribution by both. This is very unlikely but owing to the current market condition could work for the tenant.
The tenant can also ask for an advance payment of compensation.
The tenant can also create a ‘Periodic tenancy’ where, the landlord continues to demand the rent and the tenant continues to pay the rent and the landlord accepts it for at least a year after expiry of the lease. If this occurs then the tenant can claim a renewal rights under the 1954 Act, which means the tenant could serve a S.26 Notice requesting a new tenancy within the Act. The only way landlord could end the periodic tenancy would be to serve a S.25 Notice and if he wants the possession then he should be able to satisfy the conditions one or more on the ground of opposition of the 1954 Act.
Example 1: the contractual term expires 1 March 2005. L serves s25 notice on 6 January 2005 giving 6 January 2006 as the termination date. The earliest date that L could have given as the termination date is 6 July 2005 (ie six months’ notice). Whilst on a strict interpretation of the Act the interim rent will be payable from and including 6 July 2005, this does not make sense since the tenancy is continued under the s25 notice until Midnight on 6 July. Accordingly, the suggestion is that interim rent will be payable from 7 July 2005.
Example 2: the contractual term expires 1 March 2005. L serves s25 notice on 6 January 2005 giving 6 January 2006 as the termination date. The earliest date that L could have given as the termination date is 6 July 2005 (ie six months’ notice). Whilst on a strict interpretation of the Act the interim rent will be payable from and including 6 July 2005, this does not make sense since the tenancy is continued under the s25 notice until Midnight on 6 July. Accordingly, the suggestion is that interim rent will be payable from 7 July 2005.
Case Law For Interim Rent
For example, in Amplicon, Inc. v. Marshfield Clinic, 786 F Supp. 1469 (WD Wis 1992), the Court expressly held that the interim rent provision was enforceable despite the lessee’s claim that it was fraudulently misled with respect to application of the interim rent provision. The Court found interim rent had never been discussed by the parties prior to execution of the lease. Regardless, the Court invoked the parole evidence rule and the integration provision in the lease to find the interim rent provision enforceable.
Section 30 (1) Full Description
(a) where under the current tenancy the tenant has any obligations as respects the repair and maintenance of the holding, that the tenant ought not to be granted a new tenancy in view of the state of repair of the holding, being a state resulting from the tenant’s failure to comply with the said obligations;
(b) That the tenant ought not to be granted a new tenancy in view of his persistent delay in paying rent which has become due;
(c) That the tenant ought not to be granted a new tenancy in view of other substantial breaches by him of his obligations under the current tenancy, or for any other reason connected with the tenant’s use or management of the holding;
(d) That 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;
(e) Where the current tenancy was created by the sub-letting of part only of the property comprised in a superior tenancy and the landlord is the owner of an interest in reversion expectant on the termination of that superior tenancy, that the aggregate of the rents reasonably obtainable on separate lettings of the holding and the remainder of that property would be substantially less than the rent reasonably obtainable on a letting of that property as a whole, that on the termination of the current tenancy the landlord requires possession of the holding for the purposes of letting or otherwise disposing of the said property as a whole, and that in view thereof the tenant ought not to be granted a new tenancy;
(f) that on the termination of the current tenancy 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 and that he could not reasonably do so without obtaining possession of the holding;
Two cases that remind us that the purpose of the judicial gloss is only to ensure that Landlord satisfies the court as to intention and that the burden is not a particularly heavy one:
Dolgellau Golf Club v Hett  2 EGLR 76 – intention to take over and run a golf course – no schemes, no indication of likely cost, no real idea of finances. Yet application for new lease refused.
Gatwick Parking Services Ltd v Sargent  2 EGLR 45 – don’t overdo the pl
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