The changing needs of business tenants often require them to relocate when their leases expire. Premises may have become too small, too expensive or poorly located. In these circumstances, a tenant with a fixed-term tenancy will want to ensure that any statutory continuation of the tenancy (and of the tenant’s obligations) beyond the contractual expiry date of the lease is minimised or prevented altogether. This article considers the existing provisions of s27 of the Landlord and Tenant Act 1954, the changes made by the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003 (the Order) and some of the implications for both landlords and tenants.

Position of a tenant under a lease which has not yet expired

Section 27(1) (which is unchanged by the Order) allows the tenant under a fixed-term tenancy to serve notice on its landlord to prevent a statutory continuation tenancy arising under s24. The tenant may then leave the premises at the expiry of the term without further liability under the lease (save for beaches of covenant outstanding at that date). The tenant must give its landlord notice of its intention to vacate the premises at least three months before the lease expires. There is no prescribed form of notice and a simple letter will suffice. Section 27(1) is permissive; failure to serve such a notice will not necessarily mean a statutory continuation automatically arises. Astatutory continuation can be prevented by other means, the simplest being that identified in Esselte AB v Pearl Assurance Plc [1997]. Here the Court of Appeal held that since occupation for business purposes is essential for a continuation tenancy to arise, no such tenancy can arise if the tenant has given up occupation when the tenancy expires.

The Order effectively adds this decision to s27 with effect from 1 June 2004, by a new s27(1A).

Section 27(1A) states as follows:

Section 24 of this Act shall not have effect in relation to a tenancy for a term of years certain where the tenant is not in occupation of the property comprised in the tenancy at the time when, apart from this Act, the tenancy would come to an end by effluxion of time.

This presents a tenant with two options. A tenant intending to vacate premises when a fixed-term expires can either:

(1) notify its landlord of that intention under s27(1); or

(2) give up occupation before the term expires, thereby bringing itself within s27(1A).

If there is no requirement that a tenant notifies its landlord under s27(1), what advantages are there to doing so? If it relies on s27(1A), it can save itself the cost and effort of serving a notice. The tenant can also leave the landlord in a state of uncertainty, not knowing until the day after the contractual expiry date whether or not there is a statutory continuation.

In the right circumstances and particularly if the tenant wishes for commercial reasons to conceal its intentions from its landlord, reliance on s27(1A) will be the tenant’s preferred option. However, in some circumstances a tenant might be well advised to consider a section 27(1) notice.

When is s27(1) a better option?

Where the tenant is likely to have further dealings with the landlord after it has left the premises, s27(1) may be a better option. Such dealings might arise if the landlord is likely to serve a schedule of dilapidations or if the tenant requires a rent deposit to be returned. This would also apply if the tenant is likely to take a lease from that landlord in the future, or if a reputation for disregarding the commercial pressures facing landlords could be disadvantageous to the tenant.

If the tenant anticipates any difficulty in vacating the premises on time, it may find that a landlord that has been notified of its proposals three months before may be more sympathetic to the grant of a short-term licence to occupy than one which has not. A notice under s27(1) would also be advisable if the tenant had by correspondence or by its actions previously indicated to the landlord an intention not to vacate the premises at the expiry of the term. In Surrey County Council v Single Horse Properties Ltd [2002], the tenant had applied to the court for a new tenancy but then vacated the premises while the proceedings were still pending. The Court of Appeal considered the possibility that, had the tenant done this without informing the landlord, it might have been estopped from claiming that it was no longer in occupation.

A tenant whose lease will shortly expire must therefore consider its options carefully, rather than assuming that s27(1A) will be appropriate in all cases.

Matters to consider with s27(1A)

If a tenant chooses to rely on s27(1A), it might also be well advised to notify its landlord when it has left the premises. This might reduce or avoid the difficulties indicated above. How and when the tenant notifies the landlord that it has vacated will depend on the circumstances of the case. It is suggested, however, that unless there are good reasons to delay notifying the landlord, the tenant’s conduct should be fully disclosed to the landlord as quickly as possible.

A landlord faced with un-let premises might challenge the tenant’s claim that it is no longer in occupation. If the tenant anticipates that the landlord will make such a challenge, it might be advisable for it to have the fact that it has vacated independently verified on or before the contractual expiry date.

The landlord’s perspective

It has already been seen that s27(1A) allows a tenant to put its landlord in an uncertain position. How can a landlord avoid this?

A landlord that anticipates that a tenant will rely on s27(1A) at the expiry of a contractual term might consider:

• Raising with the tenant the question of what the tenant expects to do when the lease expires. A tenant might be quite open about its plans to relocate and the landlord is saved the time and expense of doing anything further.
• Serving a section 25 notice. If the landlord opposes the grant of a new tenancy, a tenant that requires one will need to take the appropriate steps. The difficulty comes if the landlord does not oppose the grant of a new tenancy or if, as in Single Horse, the tenant initially applies for a new tenancy and then changes its mind. In either case, the landlord is still left not knowing what the tenant intends to do. In these circumstances, regular inspections of the property by the landlord or the landlord’s managing agents for signs of relocation might be the most effective way of establishing the tenant’s intentions.

Position of a tenant under a lease which has expired

Where a tenant continues to occupy premises after the contractual expiry date, a continuation of that tenancy will arise under s24. The procedure by which the tenant brings that statutory continuation to an end differs substantially from the procedure by which it can prevent it ever arising under s27(1A).

Section 27(2) states that:

… tenancy granted for a term of years certain which is continuing by virtue of s24 of this Act shall not come to an end by reason only of the tenant ceasing to occupy the property comprised in the tenancy…

A tenant cannot therefore simply vacate the premises as it can where the tenancy has not yet expired.

Where a tenancy is continuing by virtue of s24 of the Act, the tenant may serve three months’ notice to terminate that statutory continuation. Until 1 June 2004, that three-month period had to expire on one of the usual quarter days. This could be disadvantageous for a tenant. For example, a tenant that served notice on 30 September could only terminate the tenancy on the March quarter day in the following year. It is committed to paying the rent and performing the other covenants in the lease for almost six months after the service of the notice.

The Order changes this with effect from 1 June 2004. Atenant may now give not less than three months’ notice to bring the tenancy to an end ‘on any day’. Not only could this result in considerable financial savings for tenants in this position, but it will also prevent the variable notice periods created by the requirement that notice expires on a quarter day.

It should be noted that s27(3) provides that where a tenancy is terminated under s27(2), the rent will be apportioned. In addition, there are transitional provisions in Article 29(2) of the Order.

Commentary

We have therefore seen that the changes which the Order makes to s27 provide greater flexibility for tenants whose tenancies are shortly to expire, and reduced notice periods for tenants whose tenancies have already expired. The decision in Esselte has been brought into the Act and landlords should be aware of the uncertain position into which they can be placed.

Similarly, the new provisions of s27(2) mean that the landlord of a tenant that is holding over can be served with three months’ notice to expire on any day. It can no longer require a statutory continuation to continue until a quarter day.

Although perhaps not the most discussed changes made to the Act by the Order, the changes to s27 will have significant implications for landlords and tenants. They will need to consider the cost consequences of different options, the tactics most suitable for their particular circumstances and – most importantly – they will need to be carefully advised accordingly.

Summary

• The introduction of s27(1A) confirms that tenants whose terms have not yet expired can prevent continuation tenancies arising by simply vacating the premises before the termination date.
• Tenants need to consider carefully whether they wish to rely on s27(1A) or whether a notice under s27(1) might be more advantageous to them.
• Landlords need to be aware that tenants who rely on s27(1A) are likely to simply leave on or before the termination date leaving them with un-let premises.
• The changes made to s27(2) allow a tenant whose tenancy is continuing by virtue of s24 to terminate that continuation by not less than three months’ notice, expiring on any day. The notice need not expire on a quarter day.

Case references

Esselte AB v Pearl Assurance Plc [1997] 1 EGLR 73

Surrey County Council v Single Horse Properties Ltd [2002] 4 All ER 143

Michael Poulsom is a solicitor in the commercial property department of Shakespeares.  © Property Law Journal