General Background
The basic principle of Part II of the Act is that it bestows upon business tenants an automatic right to remain in the property at the end of a lease term, this right being known as “security of tenure” – this is subject to the landlord’s right to oppose a new tenancy (there are seven grounds of opposition upon which a Landlord may rely in this regard) and further provided that the parties had not agreed to exclude the security of tenure provisions of the Act at the grant of the lease.
Part II of the Act applies to any tenancy where the property “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”.
When does Part II of the 1954 Landlord and Tenant Act apply
Quite simply there are 3 requirements:
- The Tenant must be occupying the property for business purposes.
- The form of letting agreement must be a lease and not a licence (the provisions of the ruling in Street and Mountford are considered in the following paragraph).
- Finally the tenancy must not be specifically excluded from the 1954 Act.
If these are in effect and provided that the term of the lease is not for 6 months or less then Part II of the 1954 Landlord and Tenant Act will apply to that letting.
Street v Mountford [1985] UKHL – Lease versus Licence
Street v Mountford sets out principles to determine whether someone who occupied a property had a tenancy (i.e. a lease), as opposed to a licence. In simple legal terminology, a lease is the grant of a right to exclusive possession of premises for a specific period of time, and a licence is a personal permission for a licensee to use a licensor’s property, preventing this use from being deemed trespass.
The outcome in the ruling was that if a letting agreement granted exclusive possession, for a fixed or periodic term at a rent then whatever that letting agreement may be called it will, at law, be deemed to be a lease.
The relevance of this case to the Act is very significant as the Act only applies to leases and not to licences therefore if the occupier is holding the property under a licence, Part II of the Landlord and Tenant Act 1954 will not apply and accordingly the occupier will not have security of tenure. This is a very important consideration whether you are a Landlord i.e. so as not to inadvertently give security of tenure to a Tenant or conversely for a Tenant by entering into a licence when the desired intention was to enter into a lease, with assumed security of tenure at the end of the term (all things being equal / “ceteris paribus”!).
Finally, this is a very short and brief consideration of the issues raised by this ruling, indeed there is considerable subsequent caselaw and the fact that the distinction is still being tested today despite the Street v Mountford case being nearly 40 years old illustrates the significance of this ruling to both Landlord and Tenants.
From an investors point of view – Why is the Act important?
This is an extremely important and significant consideration for any party proposing to acquire a commercial building which is subject to and with the benefit of a commercial letting in England and Wales because if there are tenants, occupying the building for the purposes of their business with the benefit of the provisions of the Act this can have a very adverse effect on the value and also the potential future uses of that building. Such rights can very seriously impede the ability of the property owner to obtain vacant possession of the building in the case of proposed redevelopment, or alternatively vacant possession may be obtained but after considerable financial compensation to the Tenant(s)
The warning is hopefully clear, it is extremely necessary to clarify at an early stage whether any of the business tenants occupying the building enjoy such rights and whilst this is something which may be addressed in the marketing material it will also form a very important part of the due diligence conducted by the investor’s legal adviser.
Continuation
If the security of tenure requirements of the Act are complied with, the lease is not contracted out and the Tenant remains in occupation of the premises for the purposes of its business, then the lease will not automatically terminate on the expiry of its contractual term. The lease will continue automatically on the same terms until the necessary notice is served (by either the Landlord or the Tenant) to implement the formal lease renewal/termination processes.
The 7 grounds upon which a Landlord may object to the grant of a new lease which has the benefit of Security of Tenure pursuant to the Act
Section 30(1) of the Act states seven grounds upon which a Landlord can oppose the grant of a new lease to a Tenant who would be entitled to a renewal lease at the end of the contractual term.
These are:
(a) the Tenant has obligations in relation to repair and maintenance under the current lease and the property is in disrepair;
(b) there has been a persistent delay in the payment of rent;
(c) the Tenant has been/is in breaches of other terms of the existing lease;
(d) the Landlord is able to provide suitable alternative accommodation;
(e) the tenancy was created by a sub-letting;
(f) the Landlord intends to demolish or reconstruct the property and it is not possible without the landlord recovering possession;
(g) the Landlord intends to occupy the property or part of the property for the purposes of its own business or as its residence.
(some of these grounds if proven and relied upon will entitle the Tenant to compensation and further in some circumstances even if one of these grounds is proven, this may also not defeat a Tenant’s application for the grant of a new lease – a detailed review of the provisions and implications of Section 30 (1) Act is beyond the scope of this article but Hanne & Co would be delighted to assist any party in relation to this section of the Act).
Renewal / Termination process
The Act imposes very strict procedures both in terms of the form of notices and also time deadlines, failure to adhere strictly to the legislation in this regard will result in either party losing rights granted to them under the Act, which would of course have very serious implications.
The procedure for requesting or objecting to a new lease under the Act is beyond the scope of this article but Hanne & Co would be delighted to assist any Landlord or Tenant in this regard.
How can Hanne & Co’s commercial property lawyers help?
Whether you are a Landlord or Tenant (or indeed a lender whereby a property, as security for a loan, is held subject to and with the benefit of a commercial lease) and you wish to consider the implications of the 1954 Landlord and Tenant Act on the grant of a new lease or on the termination of an existing lease, Hanne & Co have non-contentious and contentious property lawyers who would be delighted to assist and advise you in relation to all provisions of the Landlord and Tenant Act 1954.
