Author: Alison Mould
This article is taken from the latest edition of Fladgate’s Footfall Update. Please email the marketing team on firstname.lastname@example.org to be added to the mailing list for future updates.
A good working knowledge of the basics of the Landlord and Tenant Act 1954 is never a bad thing when you are a tenant or an occupier of a property. Knowing your basic rights can often benefit you greatly in discussions with landlords, investors, funders, etc.
The 1954 Act itself was introduced to help tenants. At the end of the Second World War commercial property was at a premium, particularly in London and other key areas. Commercial tenants found that when they reached the end of the term of their lease, despite having been model tenants and having built up substantial goodwill in the premises in question, landlords chose to let to other tenants who were perhaps a better covenant strength. The 1954 Act was therefore introduced to protect those tenants and to entitle them to a new lease on similar terms to their existing lease, subject to a market rent.
To balance the equation landlords were, however, given seven grounds upon which they could oppose a tenant’s lease renewal. Three were tenant fault grounds, three were not, and the seventh was that similar accommodation was being made available in the locality to which the tenant could move and trade successfully.
To rely on any of the grounds of opposition the landlord must either serve a hostile notice at the end of the term of the lease, or alternatively serve a counter-notice within two months of receiving a request for a new tenancy from the tenant. There is an awful lot of case law in support of the grounds of opposition and the test for the landlord to meet is clear.
The three “fault” grounds are grounds where the landlord is able to rely on the tenant’s fault in its compliance or otherwise with the terms of the lease.
If the tenant has failed persistently to repair and maintain the property, then the court can rule, under ground (a) of section 30(1), that the tenant ought not to be granted a new lease due to the state of the property resulting from the tenant’s failure to comply with its repairing obligations.
Ground (b) allows a landlord to oppose a lease renewal if the tenant has persistently delayed in paying rent. Similarly, ground (c) allows a court to decide that the tenancy should not be renewed if the tenant has committed substantial breaches of its obligations under the current lease.
However, a landlord cannot simply rely, for example, on ground (b) if the tenant has delayed paying its quarter’s rent only once. The Act is clear, the delays must be persistent. Further, the courts have established that the landlord must also have been proactive in pursuing the rents as and when they remained unpaid. Courts are very against tenants being given mixed messages. A landlord cannot, therefore, let the quarter day pass and sit back for three or four months without pursuing the rent and then object to the renewal of the tenancy on the ground that the tenant was persistently late in paying rent. The landlord must have pursued the rent via proceedings or otherwise on a regular basis if it is to be able to succeed in objecting to a lease renewal on the basis of ground (b).
Grounds (a), (b) and (c) allow a landlord to oppose a lease renewal without having to compensate the tenant financially at the end of the term. Often these grounds are relied upon in conjunction with other grounds in the hope that a landlord can succeed in opposing a lease renewal without having to pay compensation.
Ground (d) is the one that is used least frequently and, sadly, upon which there is the least case law. If the landlord either owns, lets or is able to secure suitable alternative accommodation, the terms of which are reasonable having regard to the terms of the tenant’s current tenancy, and is able to offer that accommodation to the tenant before either serving a hostile notice or serving a counter-notice, then the tenant will not be entitled to renew its lease and can either accept that reasonable offer of suitable alternative accommodation, or its current lease will simply determine. In this situation, compensation is again not payable if a landlord is successful on this ground.
Whether or not the new property is suitable for the tenant’s requirements is a subjective test and when offering property the landlord must ensure that it protects the tenant’s goodwill, having regard to the nature and class of the tenant’s business and to the situation and extent of any facilities afforded by the current tenancy. Whilst compensation is not payable, the landlord does have to pay the tenant’s reasonable removal costs.
In relation to the final three grounds, grounds (e), (f) and (g), statutory compensation is payable by the landlord to the tenant if it is successful in opposing a lease renewal on one of these three grounds. Statutory compensation is one x the rateable value of the property. That increases to twice the rateable value of the property if the tenant has been in occupation, or carrying on the same business, for a period of 14 years or more. If the tenant’s lease started 20 years ago and it has been in occupation for the whole of that period, then the tenant would be entitled to twice the rateable value by way compensation. If, on the other hand, for example a similar operator had taken a lease 25 years ago and that lease had been assigned, and assigned, and assigned, then the current tenant would be entitled to occupation even if it had not been in occupation for those 25 years, but had been carrying on the same business as the previous tenants for a period of 14 years or more.
Ground (e) is rarely relied upon, as it requires the property to have been sublet and for the landlord to be able to show that if it was able to let the property as a whole that would be more beneficial than the current subletting scenario.
Ground (f), however, is the ground that is most frequently relied upon.
Ground (f) is regularly referred to as “redevelopment”. In fact, the test is much, much more stringent. Ground (f) uses the words “demolition or reconstruction”. Simply redecorating and taking out a couple of partition walls is not going to be enough for the landlord to oppose a lease renewal on ground (f).
The landlord would have to prove to the court that it intends to demolish or reconstruct the premises or a substantial part of those premises, or to carry out substantial works of construction on the property or on a part of it, and that it could not reasonably do so without obtaining possession. As you can see, there are a lot of tests to pass. The works must be in the nature of demolition or reconstruction and those works must be taking place in all or a substantial part of the premises in question, or the landlord must be carrying out substantial works of construction on the property or a part thereof. Finally, the landlord must be able to show to the court that it could not reasonably do what it intends to do without obtaining possession of the property. If the works are possible working around the tenant, then the court will allow the tenant to renew its lease and possession will not be secured.
If a tenant receives a notice relying on ground (f), then it should immediately ask the landlord for evidence of its intention to demolish and/or reconstruct. That evidence should be fairly substantial. The landlord should already either have proposals for a planning application, have submitted a planning application, or have planning permission. Contractors should, perhaps, have been lined up. Professional consultants should already have been instructed, particularly if the building is a listed building or is in a conservation area. Surveyors should have been instructed; plans should have been drawn. In the current climate the tenant should also ask the landlord to show that it can afford to undertake the development in question. Funding is very difficult and it may well be that whilst the landlord has great plans for the property, it cannot actually finance them.
Finally, ground (g) is “owner occupation”. If the landlord has owned the property for five years or more then it can oppose a lease renewal request from the tenant on the grounds that it is going to occupy the property for business or residential purposes.
If a tenant receives a section 25 notice, hostile or otherwise, from a landlord it should take legal and surveying advice. Service of a notice may not only oppose or encourage a lease renewal, but it also can affect the rent payable, as it entitles the landlord to interim rent.
Thankfully in 2004 when amendments were made to the 1954 Act, interim rent, which is the current market rent for the premises, can now be more or less than the passing rent. Previously, it had to be the same as or more than the passing rent. Thankfully tenants now reap the rewards of a poor market and interim rent can be less than that which is currently paid at the expiry of the contractual term if a section 25 notice is served by the landlord or a section 26 request is made by the tenant. If a tenant is in a falling market and its lease is reaching its contractual termination date, then it would be sensible to serve a section 26 request as early as possible, simply to trigger a rent reduction by the introduction of interim rent.
Despite substantial amendments in 2004, the 1954 Act is still a minefield of dates, complicated calculations, notices and counter-notices. However, the Act did and does protect tenants and should be used accordingly.
Alison Mould, Partner, Fladgate LLP (email@example.com)