Business Tenancies: The Right to Renew

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Business Tenancies: The Right to Renew

Author: Alun Edmunds

Key Contact: Jennifer Butcher

The Law Commission is expected to publish a consultation paper this Autumn which will ask key questions on reform of  the “right to renew” business tenancies. It intends to consider how business tenants’ right to renew their tenancies, often referred to as “security of tenure”, could potentially be modernised to better suit the needs of the commercial landlords and tenants of today.

The legal framework around security of tenure is 70 years old and has not been substantially updated for over 20 years. A lot has changed in that time, including the commercial leasehold market, which has been moulded by a variety of factors including global events and crises, government policy changes, Environmental, Social and Governance (ESG) factors, and the development of online services and AI technology, to name a few.

Business tenants currently have a statutory right to renew their tenancy at the end of the contractual term in the lease if Part 2 of the Landlord and Tenant Act 1954 (the Act) applies and the parties have not contracted out of the security of tenure provisions.

Part 2 of the Act was introduced in recognition of the vulnerability that business tenants face where they have built up substantial goodwill conducting their business from a particular leasehold premises, but are then forced to leave that premises at the end of the leasehold term. Relocating can also often have a major impact on the value of a businesses’ stock and equipment. To try and negate this, Part 2 of the Act introduced a right to business tenants to renew their tenancies, at a full market rent.

Under the Act a business tenancy will continue under the existing terms of the lease until terminated in accordance with the Act. Where a termination under the Act is initiated, tenants are provided a right to renew their lease, following service of a statutory notice by either the landlord or the tenant (save for in certain cases where a landlord has a statutory right to oppose the grant of a new lease (for example where it can satisfy an intention to redevelop or occupy the property itself)).

However, many feel that parts of the Act have failed to keep pace with modern commercial practices. Landlords and tenants complain that the security of tenure provisions of the Act are burdensome and lack clarity. Consequently, those burdened by the Act can find transactions are delayed and costly, whilst others simply choose to contract out of the Act.

The Law Commission is tasked with conducting a wide review of Part 2 of the Act, and they have indicated that the consultation will emphasise:

  1. Shifting from a legal framework that is widely opted out of to one that is widely followed;
  2. Ensuring current legislation properly aligns with other legislative frameworks and government policies such as the “levelling up” and “net zero” agendas; and
  3. Promoting a productive and beneficial commercial leasing relationship between landlords and tenants. There is a particular focus on reducing the obstacles in the way of quick changeovers of high street retail premises wherever possible

One possible way of creating a legal framework that is more commonly used that has been mooted to be under consideration is to widen its scope. Currently, the security of tenure provisions of the Act do not apply to leases of six months or less or those that have been expressly contracted out. Therefore, one question the Law Commission may look to consider as it seeks to increase the general use of the Act, is whether it would be appropriate, in light of landlords and tenants current liberty to contract out of the Act, to increase the type of leases to which the Act will automatically apply and reduce the space to contract out.

However, some are concerned that making it more difficult to contract out of the Act will bring with it new problems for the market. For example, could commercial landlords become hesitant and less open to new acquisitions without the current freedom to contract out or enter short term leases without the security of tenure provisions applying.

The complexity of the Act and the breadth of case law that has emerged as a result over the last 70 years is another significant concern for users of the Act. The Law Commission may therefore look to consider how it could be simplified or consolidated. Some have even called for the multiple common law principles that have developed to be codified in the Act.

However, simplification and codification could have the unintended consequence of sprouting a whole new body of case law testing the new rules.

The commercial leasehold sector therefore eagerly awaits the Law Commission’s initial consultation paper due to be published this Autmn. It is hoped that it will provide the first indication of what the commercial leasehold landscape may look like in years to come.

The Real Estate and Property Litigation teams at Acuity are keeping up to date on the Law Commission’s consultation and will be on hand to answer any queries or concerns you may have in relation to the paper or your business tenancy.

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