The Landlord and Tenant Act 1954 ("the Act") governs the relationship between any landlord and tenant who are parties to a lease afforded protection under the Act. The rights and obligations of the parties run parallel to those detailed in the lease itself.
In the fourth of our series of essential guides for the in-house lawyer, we look at both the legal implications and practical steps necessary for a landlord or tenant to end or continue their relationship under a lease protected by the Act. In a recessionary climate, the ability to work the Act to your advantage is invaluable – every last penny counts.
When does the Act apply?
- There must be a tenancy;
- The tenant must be in occupation of the property;
- That occupation must be for the purpose of the tenant's business;
- The tenancy must not be specifically excluded from the application of the Act.
There are many different situations where the Act may not apply to the lease and as such thorough investigation is required before taking any steps. Terminating (or attempting to terminate) a lease that is afforded protection under the Act, without following the correct procedures, could result in the tenant seeking injunctive relief and damages. The most common circumstances where the Act does not apply are 1) the parties have properly excluded the Act (check the lease); or 2) the granted term is for 6 months or less and the tenant's total period of occupation does not exceed 12 months (if there is a provision to extend).
How can the tenant terminate the lease under the Act?
- Vacate the premises on or before the termination date under the lease.
- Serve notice under Section 27 of the Act (to terminate no earlier than the termination date specified in the lease). The tenant must give three months’ notice and vacate on or before the termination date specified in the Section 27 Notice.
What if the tenant wants to enter into a new lease for the same property?
The tenant should serve a notice under Section 26 of the Act ("the S26 Notice"). The S26 Notice will state that the tenant is terminating the lease and that they request a new lease to begin on a date not less than 6 months and not more than 12 months after the date the S26 Notice is served (but no earlier than the termination date specified in the lease).
The S26 Notice must be in the prescribed form. It should include the terms the tenant seeks in the new lease (including term and rent) although the tenant will not be strictly bound by the terms set out the S26 Notice.
What should the landlord do if the tenant serves a S26 Notice?
If the landlord is happy to grant a new lease:
Prior to 2004 if the landlord was willing to grant a new lease, he was required to serve a counter-notice. That requirement has now been abolished. However, if the landlord is not opposed to the grant a renewal lease it would be wise to instruct professional advisers to start negotiations with the tenant's advisors as to the terms of the new lease. Although the lease will continue until the date specified in the S26 Notice for the start of a new lease, if the parties are not communicating well, or indeed at all, then it may be necessary to issue Court proceedings so that the Court can determine the terms of a new lease.
If the landlord is opposed to the grant of a new lease:
The landlord must serve a counter notice within two months of the service of the S26 Notice. The landlord can only object on the following grounds (and the ground/s must be stated in the counter-notice):
a) The tenant's failure to comply with repair and maintenance obligations.
b) The tenant's persistent delay in paying rent.
c) The tenant is in substantial breach of its obligation under the lease.
d) The landlord has offered the tenant alternative premises.
e) The current lease is a sub-lease of part comprised in a superior tenancy and the landlord is the owner of the reversionary expectant on the termination of that superior tenancy and the landlord could obtain a higher rent if they let the property as a whole.
f) The landlord intends to demolish, reconstruct or carry out substantial work of construction at the property.
g) The landlord wishes to occupy the property itself, either as a business or a residence.
The procedure and the grounds for opposing the grant of a new lease may appear simple but there is a vast array of case law regarding the interpretation of the grounds of opposition that highlight the complexities of this area of law. A wise landlord would always seek specialist legal advice before seeking to oppose the grant of a new lease.
Please see later in this guide for the essential tactics that can be applied so as to ensure the termination of a lease maximises the effect of a falling market.
If the landlord opposes the grant of a new lease under ground f how does he prove his intention?
To rely on ground f, the landlord must do more than merely state that it will demolish or reconstruct the premises. The intention must have moved "out of the zone of contemplation" and into "the valley of decision" (Cunliffe v Goodman ). The landlord must show both a firm and settled intention and a reasonable prospect of achieving that intention. This can be established in many ways. However obtaining planning permission or at the very least passing a resolution at a directors' meeting is likely to be necessary to demonstrate intention at the very least.
The relevant date for the Court to determine whether the landlord has an intention to redevelop is that of the substantive hearing and not any earlier hearing such as a summary judgment application (Somerfield Stores Ltd v Spring (Sutton Coldfield Ltd (in administration) ). InBetty's Cafes Ltd v Phillips Furnishing Stores Ltd , Betty's Cafes,the landlord, passed a resolution authorising the development during the hearing. It was held that the timing of the resolution was sufficient to show the landlord had the requisite intention to redevelop the premises. However, a prudent landlord would pass a resolution before the hearing and if at all possible before opposing the grant of a new lease.
If the landlord opposes the grant of a new lease, will the tenant be entitled to compensation?
Depending on which grounds of opposition the landlord seeks to rely, the tenant may be entitled to compensation.
Grounds a, b and c are fault based (i.e. the landlord is opposing the grant of a new lease on the basis that the tenant has breached an obligation in the current lease). If the landlord is successful, then the tenant wouldn't be entitled to any compensation. In the case of ground d, there is no loss to the tenant because suitable alternative accommodation has been provided. However, grounds e, f and g are based on the needs of the landlord. The tenant may therefore be entitled to compensation.
The tenant may also claim compensation from the landlord if the tenant has not applied for a new tenancy, or has not been granted a new tenancy, because the landlord has misrepresented facts to the tenant or the court or concealed material facts.
Section 37A of the Act allows for the tenant to claim compensation from the landlord if they misrepresent the facts and as a consequence a new lease is not granted. Such misrepresentation may occur early in negotiations and without any application being made to Court. A simple letter accompanying a S25 Notice opposing the grant of a new lease, indicating the landlord's intention to redevelop (ground f), was held to be a misrepresentation after the landlord changed their mind but did not inform the tenant of such. The Court ordered damages based on the difference in rent between the assumed market rent for the original premises and the rent for the new premises (Inclusive Technology v Williamson ).
How can the landlord terminate the lease?
The landlord can serve a notice under Section 25 of the Act ("the S25 Notice"). The S25 Notice will state that the landlord is terminating the lease on a date not less than 6 months and not more than 12 months after the date the notice is served (but no earlier than the termination date specified in the lease). The S25 Notice must also state whether the landlord is willing or opposed to the grant of a new lease.
The grounds for opposing are set out above and are the same as those the landlord can rely on when faced with a S26 Notice. The S25 Notice must be in the prescribed form. It should include the terms the landlord requires in the new lease (including term and rent) although the landlord will not be bound by the terms set out the S25 Notice.
Who constitutes the 'landlord' in respect of any Section 25 Notice served?
A tenant is required to serve a S26 Notice on the “competent landlord” and any S25 Notice must be served by the competent landlord.
Section 44 of the Act defines the "landlord" as the owner of the freehold or the landlord lowest in the chain of tenancies who has a tenancy which will not come to an end within 14 months by effluxion of time and no notice has been given which will end the tenancy within 14 months. It is usually the owner of the immediate reversion but you should carry out detailed checks which may include:
- Service of a Section 40 request under the Act. This places a duty on the landlord and tenant to share information with each other. A response provided pursuant to such a request should be given within 1 month. The duty to notify if any of the answers change continues for a period of 6 months after service.
- A Land Registry search. You should be mindful of the registration gap (the date of the deed of transfer, until completion of the registration). A landlord can only serve a S25 Notice once they have been registered as owner of the legal estate. A S26 Notice served on the landlord as registered at the Land Registry is likely to be effective during the registration gap since the legal estate does not pass until the transfer is registered. However, the safe course of action would be to serve on both the old landlord (transferor) and new landlord (transferee). A landlord should wait to serve any S25 Notice until they have been registered as owner of the legal estate.
Failure to correctly serve a Notice will result in it being void.
What happens if the parties can't agree the terms of a new lease by the date given in the Notice for the old lease to terminate/new lease to commence?
The lease continues until the day before the date stated in the Notice for a new lease to commence (S26 Notice) or the day stated in the Notice for the lease to terminate (S25 Notice) ("the Relevant Date").
The parties can agree to extend the time for negotiations under Section 29(B) of the Act. There is no limit to the number of times an extension can be agreed. However, parties are only likely to agree to an extension if negotiations are progressing. It is essential that the agreement to extend the time is correctly documented. If any agreement to extend time is not documented correctly the tenant may find that their lease expires and consequently they have no right to a new lease. It is strongly recommended that only someone legally qualified deals with any requests for extensions of time.
If the parties have not extended time under Section 29B or have not completed a renewal lease by the Relevant Date, then a right to a renewal lease can only be preserved if an application to Court is made. The tenant can apply for the grant of a new tenancy and the landlord can apply for either the terms of the new tenancy to be determined or for the termination of the current tenancy if its grant has been opposed. This works on a first come first served basis; two applications cannot run in tandem. If the application is not made to court by the Relevant Date or if appropriate the date agreed pursuant to Section 29B, the lease will terminate on that date. There is no obligation or indeed legal right for the tenant to subsequently remain in occupation nor is the landlord required to grant the tenant a new lease on any terms.
The parties do not have to wait until the Relevant Date approaches before issuing proceedings. Either party can issue proceedings at any time after a S25 Notice has been served or after 2 months when a S26 Notice has been served (unless the landlord serves a counter-notice; in these circumstances proceedings can be issued anytime after the counter-notice is served).
What if the parties fail to reach an agreement?
If the parties cannot agree the terms and complete a renewal lease by the Relevant Date (or within any extended period agreed pursuant to Section 29B) then court proceedings must be issued in order to preserve any right to a new lease. If you are instructing external solicitors you should contact them in good time to ensure that there is time to draft and issue the proceedings.
Does the tenant continue to pay rent at the same level as before if lease renewal proceedings are issued?
This is highly relevant within a recessionary climate.
Either party can ask the court to fix the rent that the tenant has to pay whilst negotiations for the new tenancy are continuing; this is known as the 'interim rent'. Although a separate application for interim rent can be made, in practice the claim is usually included as part of the Particulars of Claim or Acknowledgement of Service.
Two different bases of valuation exist:
A If respect of a non-contractual renewal where the tenant occupies the whole of the demised premises and a new tenancy is granted by the landlord or ordered by the court; or
B Every other case.
Basis B is standard. The interim rent is that that is reasonable for the tenant to pay whilst the current tenancy continues (earliest date that could have been specified in the S25/S26 notice). So the rent is that what would be determined by the court for a yearly tenancy granted on the same terms as the current tenancy at the start of the interim rent period. Note that the court has regard to income from any sub-tenancy.
Basis A is more complicated. The principle rule is that the interim rent is the same as the rent under the new tenancy. This rule is displaced if either party persuades the court that:
- the rent under the new tenancy differs substantially from rent that would have been determined under the Act if the new tenancy had started at the start of interim rent period instead ; or
- that the terms of the new tenancy differ from the terms of the current to such an extent that the rent under the new tenancy would be found by the court to differ substantially from that under the current tenancy.
What is the effect on a sub-tenancy of the service of a Notice?
If a landlord serves a S25 on their immediate tenant, or if the tenant serves a S26 Notice on the landlord, the effect of either Notice will be to terminate that tenancy. The landlord will then become the competent landlord of any of the intermediary landlord’s sub-tenants. If they wish to terminate their tenancies they will have to serve a S25 Notice on the relevant sub-tenant (now tenant).
In summary, it is essential that a correctly drafted notice is served on the right parties and at the right time in order to ensure that a lease is correctly terminated and, if applicable, that a renewal lease can be agreed. There is no room for error. Failing to follow the correct procedures could result in timely and costly litigation which could have been avoided. We are able to advise your client on the best way to minimise costs and risk and to maximise their position, whether as landlord or tenant.This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.