The 1954 Act: Coming up for renewal

Part 2 of the Landlord and Tenant Act 1954 will celebrate its 64th anniversary in 2018. It was last updated 15 years ago. For qualifying business tenancies, and subject to a handful of exceptions, the statutory “security of tenure” regime is intended to provide tenants with the ability to obtain from their landlord a new lease, on broadly the same terms, when their current lease expires. At the outset of their relationship, the parties have an opportunity to exclude the effect of Part 2, and the statute includes measures intended to protect tenants from unwittingly giving away too cheaply their right of renewal. However, sluggish renewal negotiations and court proceedings can often take more than two years to complete. Currently when a great many commercial and retail leases have a duration of just five years, landlords and tenants are having to spend a disproportionate amount of their time and fees dealing with the statutory procedure. The county courts see more than 1,000 1954 Act renewal applications every year, putting considerable strain on the court system and costing businesses millions of pounds in legal costs. Unsurprisingly, many landlords question whether statutory security of tenure is even necessary, bearing in mind that Scottish and many European markets operate successfully without it. Given that it would be a contentious and significant change to the law, a more balanced view is that the existing regime could be improved to reduce costs, enable swift dispute resolution and simplify unnecessarily complicated processes without prejudicing either party’s interests. Between 2015 and 2017, a working group was assembled from organisations representing occupiers and investors from a variety of property markets, to review the operation of the 1954 Act. The group made detailed submissions to the Law Commission, recommending modernisation in the following key respects: streamlining the contracting-out process for excluding security of tenure; fixing the commencement and valuation dates for renewal leases; and handling dispute resolution in a specialist tribunal.  Streamlining the contracting-out process It is widely accepted that the process for excluding the effect of Part 2 of the 1954 Act in relation to a tenancy requires careful navigation to ensure that it is completed successfully. With contracted-out leases comprising a significant proportion of the business leases in England and Wales, it is vital the process is streamlined without compromising the primary objective of ensuring that tenants do not give up their renewal rights unwittingly. The current process – requiring the landlord to serve notice on the proposed tenant, and the tenant to give a declaration that it has received that notice – is meant to ensure that the tenant has obtained all the legal advice it needs before giving up its renewal rights. Of course, there is no guarantee that the tenant will actually take such advice before signing off on the declaration and the lease.  The process is also unnecessarily complex. The notice and declaration must be given in relation to the lease that is to be entered into, which means that if the lease is altered between the date of the declaration and completion of the lease, the process might have to be repeated to ensure the contracting-out is valid. Unsure as to whether the most minor of corrections or cosmetic changes could invalidate the contracting-out, it is typical for parties to have to repeat the already cumbersome process over again. Even where the exchange has been properly carried out, the notice and declaration can easily become separated from the lease over the course of time, meaning that evidence of the lease being contracted-out is lost (causing issues when the lease comes to an end, or the asset is sold). Why should the 1954 Act not simply require that the landlord’s standard warning notice must appear on the face of the lease itself; or at the end, next to the tenant’s signature? It would be difficult for the tenant to ignore the warning notice in those circumstances, and the evidence of contracting-out would form part of the lease and so could not become separated from it. In an era of increasingly standardised lease documents, when registrable leases must include mandatory “prescribed clauses” on the first few pages, the inclusion of the warning notice on the front of excluded business leases would seem to be an uncontroversial addition to the standard document. Allowing more leases to be contracted-out Section 38(4) of the 1954 Act allows the parties to exclude renewal rights in relation to any lease which is for a “term certain”. In Newham London Borough Council v Thomas-Van Staden [2008] EWCA Civ 1414; [2009] 1 EGLR 21 it was held that any purportedly “excluded” lease in which the term is defined as including any period of “holding over” could not be for a term certain, with the result that the right of renewal was not effectively excluded. This appeared to be a wholly unintended consequence of the way that section 38 had been drafted. Although solicitors drafting ex-Act leases since 2008 should have been able to avoid this bear trap, reform of the 1954 Act should include measures to improve the drafting of section 38. Fixing the commencement and valuation dates for the renewal lease One of the most contentious elements when renewing a lease is the new rent, and the majority of 1954 Act cases that reach the county court do so because the rent cannot be agreed. Drawn out proceedings can delay the commencement date for a renewal lease, and hence the valuation date, and in a period of market volatility, this can play into the hands of one or other of the parties.  As a matter of law, the commencement date is prescribed by section 33 as being either the expiry of the landlord’s section 25 notice or tenant’s section 26 request or, if proceedings have been commenced, three months after trial or after proceedings have been discontinued. When lease terms were 15 or 20 years on average, a relatively small movement in the commencement date might not have meant much to the parties. But with modern leases having an average lease term closer to five years, the impact is relatively far greater. It does seem, however, that in the vast majority of cases, landlords and tenants have no regard to section 33 when deciding the commencement date of the new lease. More often, the lease commences on a date shortly after its terms have been agreed between the parties, or the lease commencement is backdated to the day after the previous lease term expired. A number of practical problems can flow from leaving the parties to agree between themselves what the commencement date should be. Ignorance of the effect of section 33 might be depriving parties of certain rights. For instance, a tenant taking a new five-year lease backdated to the end of the previous lease will find their lease coming to an end much sooner than the tenant whose five-year term only starts three months after the proceedings have been settled. Importantly, the commencement date under section 33 is also the valuation date for ascertaining the renewal rent. Without the commencement date being anchored by section 33, the valuation date therefore drifts. This makes it more difficult for the expert valuers to agree on the basis for valuation and to agree the new rent. Valuation advice obtained at an early stage in the negotiations is likely to become less reliable with the passage of time, as the commencement date for the renewal lease slips further into the future, which can be a particular problem during periods of market volatility. What is the solution? Fixing the commencement and valuation date at an early stage in the statutory process would take away at least one reason for the parties to string out the negotiations and delay the dispute resolution process. Knowing that the date has already been fixed would provide a focal point for the rent negotiations, and would narrow the points of debate for the parties and the court. So reform of the 1954 Act should provide for the commencement and valuation date to be fixed at an early stage in the process, and the group recommended it should be either: (a) the first day immediately following the end of the contractual term of the existing lease; or (b) the first day immediately following the date of expiry of a statutory section 25 notice or section 26 request. This would also have the effect of reducing the number of satellite disputes over the level of the interim rent payable by the tenant prior to the new rent coming into effect and could significantly reduce the 1,400 or so interim rent applications that the courts deal with each year. Swift dispute resolution by property specialists For the reasons discussed above, changes to the way in which the lease commencement and valuation dates are fixed could lead to swifter dispute resolution and fewer court cases, but there will still be many instances in which key terms cannot be resolved between the parties.  There are a host of reasons why landlords and tenants find the current court process unsatisfactory: court fees are rising, and professional costs can be significant; the timetable can be long; and the overstretched court service unresponsive. When renewal disputes come to trial, the county court judges are rarely experts in landlord and tenant law and property valuation. Cases are often settled on the steps of the court, specifically to avoid the often unpredictable or inconsistent outcomes of renewal judgments.  As this article goes to press, a pilot scheme is being launched in the County Court in Central London under which lease renewal cases within that court’s jurisdiction will be referred automatically to the Property Chamber of the First-tier Tribunal. There, the dispute will benefit from a more streamlined set of directions before being determined (potentially within as little as 12 weeks) by a specialist tribunal. The success of that pilot will depend largely on the ability of the court service to deploy sufficient resources to the FTT, but landlords and tenants have welcomed the opportunity to have 1954 Act disputes resolved quickly in a specialist forum by a tribunal that understands the industry better. That said, valuable time and resources would be saved if landlords and tenants had more of an incentive to engage in alternative dispute resolution (ADR) instead of commencing court proceedings as soon as the points of dispute between them have been identified. Professional Arbitration on Court Terms (PACT) has been endorsed by the Law Society and RICS for many years, but it is a voluntary alternative to county court proceedings that is adopted in a disappointingly small number of cases. Even a compulsory direction requiring the parties to consider PACT has limited effect if the parties are unwilling to engage in meaningful ADR. Rent is often the sticking point between the parties, whether the last remaining term to be agreed or the point that can unlock settlement of all remaining disputes. The current process makes it all too easy for the parties to adopt polarised positions on rent, with reality only coming to bear on the negotiations when valuation reports have been exchanged and when the trial date is just around the corner. Compulsory “early neutral evaluation” of the renewal rent could be the answer. Within a matter of weeks of the parties having set out their respective positions on the terms most likely to impact on rent (lease duration, break options and so on), and with the valuation date fixed, an independent expert could provide the parties with a “without prejudice save as to costs” opinion of what rent the court or tribunal would determine at the final hearing. The evaluation would not be precise at that early stage, and might even comprise a limited number of alternative values to reflect the fact that the term, break option and other relevant factors are yet undecided, but it would give each party a sense check before they embark on expensive litigation. What is more, if a party chooses in spite of the early neutral evaluation to pursue up to trial a claim for a plainly unrealistic rent, the court could bear the expert’s evaluation in mind when assessing which party should pay the other’s litigation costs. Final word The Law Commission welcomed these recommendations with enthusiasm, and promoted them to be adopted in the 13th Programme of Law Reform, together with proposed amendments to the Landlord and Tenant (Covenants) Act 1995. Unfortunately, with Brexit occupying so much of parliament’s time, the recommendations were put on the back burner, but reform may yet receive parliamentary attention as part of a later raft of law reform which is intended to streamline business practices in the UK post-Brexit. With a fair wind and support from the industry, these practical improvements to the 1954 Act could lead to a significant reduction in the time and resources that the parties and the courts have to devote to the lease renewal process in future. Tim Reid is a senior associate in the real estate disputes team at Hogan Lovells and John Duxbury is the head of UK asset management at M&G Real Estate