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Background:
The parties to a business lease are able to contract out of the security of tenure provisions of Part II Landlord and Tenant Act 1954 (the "1954 Act") so that the lease will come to an end on the expiry of the contractual term. Before 1 June 2004, the parties had to obtain a court order authorising the exclusion of security of tenure.
The application to court for the order had to be made jointly by the persons who "will be the landlord and the tenant in relation to a tenancy" (s.38(4) 1954 Act). Since 1 June 2004, it is no longer necessary to obtain a court order to exclude the security of tenure provisions of the 1954 Act. Instead, the landlord serves a health warning and the tenant makes a declaration before entering into a lease or an agreement for lease. The new provisions are contained in the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003.
In Receiver for the Metropolitan Police District v Palacegate Properties Limited Ch 131, the court considered the validity of an order where the terms of the draft lease in relation to which the order had been granted changed between the date of the order and the grant of the lease. The court said that the purpose of the contracting out procedure in the 1954 Act was to ensure that the tenant understands that he is foregoing protection. It indicated that wholesale changes to a draft lease were unacceptable. The lease actually granted should bear a substantial similarity to that before the court when the order authorising the exclusion of the lease from the security of tenure provisions of the 1954 Act was made. In particular, changes material to the need for protection could nullify the authority granted, for example in relation to the length of the term.
In Brighton and Hove City Council v Collinson [2004], the court had to consider whether a lease granted to a party not named as the tenant in the court application was validly excluded from the security of tenure provisions of the 1954 Act.
Facts:
The council agreed terms to grant a lease to a company of which two brothers were directors. The brothers would stand as sureties to the lease. It was agreed that the lease would be contracted out of the security of tenure provisions of the 1954 Act. In the court application, the council was named as the landlord, the company as the tenant and the brothers as sureties. The court order authorised the grant of a lease by the council, as applicant, to the company and the two brothers who were separately identified as the respondents.
However, the parties subsequently decided that the lease would in fact be granted to the two brothers, not the company. No further court order was obtained and the lease recited the court order that was granted in respect of the company and the two brothers.
At the expiry of the lease, the brothers argued that the lease was not excluded from the security of tenure provisions of the 1954 Act, as there was no court order in respect of the grant of the lease to them personally. The brothers also claimed that, on the wording of s.38 (4) of the 1954 Act, the judge had no jurisdiction to authorise the grant of a lease to the brothers. Section 38(4) requires the application to court to be made jointly by "…the persons who will be the landlord and the tenant in relation to a tenancy…"). However, in relation to the application which had been made, the person "who will be the tenant" was the company, not the brothers. The High Court upheld the brothers’ claim and the landlord appealed to the Court of Appeal.
Decision:
The Court of Appeal allowed the appeal and held that the court order was valid. It saw no need to construe the 1954 Act in an over-technical way when a sensible business reading can provide a more sensible result. The change of tenant was no more than a technical change for tax purposes. There was no reason why a court application could not be made which included those who might be the landlord and might be the tenant. The key point was that the brothers knew that there was an exclusion. The application was by people who, in the end, were both the landlord on one side and the tenants on the other, even though the brothers, who ended up as tenants, were named as sureties in the application. The court rejected the argument that the court had no jurisdiction to grant the order because the application had to be made by the persons "who will be the tenant" and it was the company which was named as tenant in the application. Construing the application as a whole, it could be taken to have included the brothers as possible tenants as well as the company.
Comment:
A key factor in this decision was that the party that ended up as tenant was also a party to the application and so was aware that the lease would be excluded from the security of tenure provisions.
It is safer to ensure that the contracting out procedure has been followed by the parties who will actually be the landlord and the tenant. Under the new procedure, this means that where the identity of the tenant changes after service of a landlord’s health warning, a fresh warning should be served before the lease is granted. Agreements to grant excluded leases should also prohibit assignment of the agreement to ensure that the lease is granted to the party upon whom the warning notice has already been served.
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