What is the position of a protected business tenant under a fixed-term contractual tenancy who, for whatever reason, wishes to give up its premises at, or shortly before, the end of the contractual term? (A business tenant with a periodic tenancy simply has to give a contractual notice at the appropriate time). The fixed-term tenant will obviously be concerned to know that all liability, other than that accrued to date, will terminate with the expiry of the contractual term. How is this now to be achieved? We first need to look at the statutory continuation tenancy.

The continuation tenancy

If a tenant under a fixed-term contractual tenancy has the protection of the Landlord and Tenant Act 1954, its tenancy continues, by virtue of s24(1), beyond the expiry of the contractual term. Once this continuation tenancy has sprung, it may then only be terminated by a means expressly recognised by the Act. (These include steps not involving any specific procedure under the Act, for example surrender and forfeiture).

Termination

The principal means recognised may be summarised as follows:

(1) The service by the landlord of a notice under s25 to terminate the tenancy, save where s64 of the Act is later engaged.

(2) The making by the tenant of a request under s26 for a new tenancy, save again where s64 of the Act is later engaged.

(3) The service of notice to quit (and this includes a break notice) by the tenant, unless that notice was given before the tenant had been in occupation in right of the tenancy for one month.

(4) The surrender of the tenancy.

(5) The forfeiture of the tenancy.

(6) The forfeiture of a superior tenancy.

(7) The service of notice in writing by the tenant under s27(2) of the Act.

(8) The elapsing of three months following the date when an application to the court has finally been disposed of. This is pursuant to the operation of s64 of the Act.

(9) An agreement in writing between the landlord and the tenant for the grant of a future tenancy of the holding, or of the holding and other land. This is pursuant to the operation of s28 of the Act.

As a separate matter, the continuation tenancy will not, of course, spring where the tenant has served a valid notice in writing on the immediate landlord under s27(1) of the Act, or has ceased to occupy before the expiry of the contractual term in reliance upon s27(1A) of the Act (discussed later in this article).

The continuation tenancy is in respect of the whole of the property comprised in the contractual tenancy, and not just that part occupied by the tenant. Its terms are those of the contractual tenancy, other than any relating to termination. Subject to the right of either party to apply to the court for an interim rent to be ordered under s24A, the continuation tenancy will be at the existing rent.

Are there any problems?

A number of points do need to be made in this context:

(1) A tenant who has already made a request for a new tenancy under s26 is expressly prevented from serving a section 27(1) notice by the provisions of s26(4) of the Act.

(2) Section 27(1A) was inserted by the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003 to clarify the decision of the Court of Appeal in Esselte AB v Pearl Assurance Plc [1997]. In this case, the contractual term of the tenancy expired on 15 February 2003. The tenant gave up occupation of the premises on 6 December 2002. As a precaution, the tenant served a section 27(2) notice (see below) on the landlord to expire on 24 June 2003. The tenant paid rent up to 15 February 2003. The landlord contended that rent was due up to 24 June 2003.

The Court of Appeal found for the tenant, holding that the tenancy determined on the expiry of the contractual term on 15 February 2003. The continuation provisions of s24(1) clearly operate in relation to ‘a tenancy to which this Part of the Act applies’. The Court’s reasoning was that this wording is expressed in the present tense and, consistently with the purpose of the legislation, cannot be construed so as to include the past. If the tenant ceases occupation before the expiry of the contractual term, the requirement for business occupation of at least part of the premises under s23(1) is not met, and there is no tenancy to which the Act applies. Consequently, s24(1) is not engaged.

(3) In most cases, the tenant who has made the decision not to renew should be advised to serve notice under s27(1), rather than rely upon s27(1A) in case, by chance, it finds itself still in business occupation after the term expiry date. It is now made quite clear by s27(2) that once the continuation tenancy has sprung it will not come to an end merely on the tenant ceasing to occupy.

(4) Tactically, a landlord should consider service of an early section 25 notice. This is likely, in practice, to result in lengthier warning of any intention on the part of the tenant to leave. It would then also be open to the landlord to make its own application to the court under s24(1)(a) for an order for the grant of a new tenancy.

(5) In the case of lettings being negotiated, it also may be desirable for the landlord to seek a covenant from the tenant to give, say, six months’ notice in writing to the landlord where it does not desire the continuation tenancy to arise, together with a covenant to pay liquidated damages in the case of breach. This would improve the landlord’s position, though commentators have suggested that such a provision might be rendered void, notwithstanding that it does not strictly involve ‘an application or request’ for the purposes of s38 of the Act. (6) Where the tenant relies upon s27(1A), it is immaterial that the landlord has previously served a section 25 notice purporting to terminate the tenancy on a date later than the contractual expiry date. This should follow from the decision in Sight & Sound Education Ltd v Books Etc Ltd [1999]. Here the tenant had vacated the premises two days before the expiry of the contractual term, relying upon the principle established in Esselte. It was held that the business tenancy ended on the expiry of the contractual term, notwithstanding that the landlord had previously served a section 25 notice that stated a termination date some five months later. The judge decided that factual events on the ground overrode the s25 ‘deemed extension’ of the expiry date. (7) Equally, it should be immaterial that the tenant has already applied to the court for the grant of a new tenancy. In Surrey County Council v Single Horse Properties Ltd [2002], the contractual term of a 25-year lease expired on 24 June 2000. The landlord served a section 25 notice, purporting to terminate the business tenancy on the same date. The tenant served the appropriate counternotice, and on 21 March 2000 applied to the court for a new tenancy. The landlord served an answer, and directions were given by consent with a view to a trial in September or October 2000. However, on 13 June 2000, the tenant vacated the premises and three days later handed the keys back to the landlord. The issue between the parties was whether liability for rent ceased with effect from 24 June 2000, or whether the tenant remained liable for rent until a date three months after the date on which the court application was finally disposed of, ie struck out. The tenant relied upon the principle laid down by the Court of Appeal in Esselte. The landlord contended that s64 of the Act governed.

The Court of Appeal found for the tenant, holding that the effectiveness of a section 25 notice is to be judged, not at the date of service, but at the contractual expiry date of the lease. In the present case, applying the Esselte principle, there was no tenancy to which the Act applied. (Section 24(1) was not engaged since the tenant had ceased to occupy the premises.) The section 25 notice was accordingly of no effect, and so s64, which otherwise provides for termination of the tenancy three months after final disposal of the court application, was not brought into play.

Less timely termination

What then is the position of the tenant who has neither served a valid section 27(1) notice, nor sought to rely upon s27(1A) of the Act, so allowing the continuation tenancy to spring? As we have seen, such a tenant cannot terminate its future liability simply by giving up occupation of the premises. Section 27(2) now says so. The only statutory means it has of bringing the continuation tenancy to an end is service of a notice under that last provision.

Section 27(2) enables a tenant occupying under a fixed-term contractual tenancy, which has already been continued under s24(1), to give its immediate landlord a minimum of three months’ notice in writing to terminate the continuation tenancy. The tenancy will then end on the date stated in that notice for termination. Notice may be served before the expiry of the contractual term, for example within the last three months of the contractual term, by which time it is too late to serve a valid notice under s27(1) of the Act.

Section 27(3) goes on to provide for any rent that has been paid by the tenant in advance, and which relates to a period falling after the date stated for termination, to be recoverable by the tenant on an apportioned basis.

What are the problems with this?

Three points need to be made in this context:

(1) The tenant should be able to serve a valid section 27(2) notice, notwithstanding that the landlord has previously served a section 25 notice specifying a later termination date than that stated in the section 27(2) notice. The governing principle would appear to be that section 25 notices and section 27 notices are not intended to be mutually exclusive. In Long Acre Securities Ltd v Electro Acoustic Industries Ltd [1990] the contractual term of the lease term expired on 25 March 1988. On 3 March 1988 the landlord served a ‘late and long’ section 25 notice, purporting to terminate the tenancy on 1 March 1989. On 4 March 1988 the tenant served a section 27(2) notice on the landlord purporting to terminate the tenancy on 24 June 1988. The Court of Appeal held that the tenancy ended on 24 June 1988.

While the Court of Appeal in Esselte effectively overruled its earlier decision in this case on the principal issue, commentators regard this limb of the decision as still binding.

(2) However, if the tenant has already made a request for a new tenancy under s26, it is then expressly prevented from serving a section 27(2) notice by the provisions of s26(4) of the Act.

(3) It is unclear whether a tenant can serve a valid section 27(2) notice after having made an application to the court for the grant of a new tenancy, following service by a landlord of a section 25 notice. On balance, it seems unlikely. Applying the principle laid down in Single Horse, on the expiry of the contractual term the validity or otherwise of the landlord’s section 25 notice would fall to be judged. Given that there would still be a tenancy to which the Act applied at that point, the section 25 notice would have to be regarded as valid. Section 64 would then be engaged, and the tenancy would not terminate until three months after final determination of the court application. In practice, however, the tenant would presumably simply discontinue the proceedings and the net financial result would be more or less the same.

Conclusion

Despite the reforms made to the Act by the Order, uncertainties still exist in this area, and it remains necessary to refer back to earlier case law. In practice, however, problems will probably only arise where the tenant suffers a change of heart at a late stage, and decides at that point to leave rather than to renew.

Timely termination by the tenant

There are two statutory means of achieving this:

(1) Section 27(1) enables a tenant to terminate its contractual fixed-term tenancy by giving its immediate landlord written notice, at least three months prior to the date on which the term is due to expire, that it does not wish the tenancy to continue. No continuation tenancy under s24(1) will then arise.

(2) Section 27(1A) allows the tenant simply to give up occupation of the premises before the expiry of the contractual term. Again, no continuation tenancy under s24(1) will then arise.

Case references

Esselte AB v Pearl Assurance Plc [1997] 2 EG 124

Long Acre Securities Ltd v Electro Acoustic Industries Ltd [1990] 06 EG 1039

Sight & Sound Education Ltd v Books Etc Ltd [1999] 43 EG 161

Surrey County Council v Single Horse Properties Ltd [2002] L&TR 38

John Martin is director of property law research at Pinsents.  © Property Law Journal