The 1954 Act: in or out?

The Landlord and Tenant Act 1954 (the Act) has been in existence for more than 60 years and, with the exception of some amendments made by the Law of Property Act 1969 and then the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003, has remained largely unchanged. The Act was introduced to protect business tenants so that there were statutory renewal rights at the end of the term and the tenant was not completely at the whim of the landlord. At that time, most commercial leases were very long – 30, 40, 50 or even 100 years. The situation is very different now, with the average length of commercial leases being approximately seven years. So has tenants’ need for protection changed and should landlords be relieved from this layer of complication in a post-Brexit world? Market forces On larger lettings, and for many offices, the tenant’s investment in relation to fitting out will often be very substantial, so renewal rights can be extremely important to a tenant, in order to keep protecting its business interests by guaranteeing a new lease, or at least compensation for any valid refusal of one. In the strong market which has prevailed particularly in central London over recent years, there has been a tendency for leases of both small and large areas of space to be excluded from the Act. There are examples of major landlords which have a declared policy not to create new lettings protected by the Act, even if the rents in question are substantial. This trend may change somewhat if and when the market becomes less strong, because landlords will be more keen to deal with tenants with the best covenants, even if that means granting leases inside the Act. This would be an improvement for tenants compared with the situation over recent years, where a landlord faced with a prospective tenant insisting on having its lease granted within the Act would no doubt have a long list of prospective alternative tenants prepared to accept a lease outside it. Benefits for tenants The benefits for tenants of protection under the Act have not changed over the years, in that this will usually mean that their improvements will be disregarded from the assessment of rent on a statutory renewal, and also that the tenant is entitled to a new lease on similar terms and conditions to the previous lease and at the market rent. Furthermore, there will be statutory compensation if a tenant is prevented from taking a new lease under the so-called “no fault” grounds under section 30 of the Act (at sub-paragraphs (1)(e), (f) and (g)). This can be substantial and is calculated on the basis of 1 x rateable value if the tenant has occupied the premises for less than 14 years, or 2 x rateable value if the tenant’s occupation has been 14 years or more. Benefits for landlords While landlords may prefer the great flexibility which the lack of 1954 Act protection gives them at the end of a tenant’s lease – effectively akin to an open-market negotiation – there are some advantages for landlords that retain the protection. For example, if the terms for the new lease have not been agreed by the end of the contractual term, the tenant will merely hold over and continue to pay the old rent pending a negotiated agreement – without the risk of a new periodic tenancy being created. Difficult situations often arise with leases outside the Act, where there is a danger of the unintentional creation of a new protected tenancy, the terms of which may become uncertain over time. In these instances, typically the landlord will set up a short-term licence in order to continue to collect rent from the tenant or a tenancy at will arrangement. Both of these are far from ideal. The fact is that section 30 of the Act gives the landlord the ability to recover possession from an unsatisfactory tenant which has persistently delayed in paying its rent or has committed other substantial breaches of the lease. At the same time, the landlord has the ability to oppose renewal in appropriate circumstances, such as if suitable alternative accommodation can be offered or the landlord wishes to carry out a substantial refurbishment or redevelopment of the property or if the landlord wishes to occupy itself (see Planning to use it yourself?). Not going anywhere There have been many suggestions over the years that we do not need the Act and it should be abolished. Nevertheless, it has remained in place. The Act arguably retains a sufficient balance between the interests of tenants and landlords to achieve a sensible level of operation within the open market. Any landlords in the post-Brexit world facing tenants who are insisting on 1954 Act protection should therefore take some comfort and perhaps focus on letting properties to tenants with the best covenants, rather than focusing on having a totally “free hand” at the end of a lease. After all, the Act provides a framework for lease renewal negotiations, the ability for the court to fix the new rent if it cannot be agreed by negotiations (or the parties can agree to refer the issue for determination by a surveyor under PACT), and enables the tenant ultimately to walk away if it cannot afford the new level of rent. The Act has stood for more than six decades and we suspect it will be around for many more years to come. Emma Humphreys is a partner at Charles Russell Speechlys and Paul Krendel is a partner and head of the professional services team at Levy Real Estate