The Landlord and Tenant Act 1954 (the Act) is the dominant legislation that governs the vast majority of commercial leases in England and Wales. It has long been the source of dispute and gamesmanship between landlord and tenant. Last year the Act was reformed (pursuant to a regulatory reform order). In conjunction with these reforms, the court process was also amended. This year we are about to experience the biggest rise in the non-domestic business rate for many decades. Changes can create traps but also opportunities.

Rates and 1954 Act compensation

On 1 April 2005 the 2005 Business Rates Revaluation came into effect, amending the rateable value (RV) of all commercial premises in England. If a commercial landlord is planning to serve a section 25 notice under the Landlord and Tenant Act 1954 to terminate a business tenancy and then redevelop the premises, it should have effected this before 1 April 2005. Otherwise it may have to pay up to 29% more in compensation to the tenant.

Tenants are entitled to compensation if the landlord serves a section 25 notice under the Act relying upon one of the statutory grounds. This usually arises when the landlord wishes to redevelop the premises or occupy the premises for its own business.

The amount of compensation payable to business tenants under the 1954 Act is calculated by reference to the RV of the premises at the date of the section 25 notice. On 1 April the estimated total RV increased by 17% in England (according to figures released by the Office of the Deputy Prime Minister). In London the RV for shops is likely to increase by an average of 26%.

If the tenant has been in occupation for up to 14 years then it is entitled to compensation equivalent to the RV of the premises. However, if the tenant has been in occupation for more than 14 years it is entitled to twice the RV.

When serving a notice to terminate under s25 of the Act, the landlord must give between a minimum of six months’ and a maximum of 12 months’ notice. If a landlord has decided to wait until after the end of March to serve its notice, this could be an expensive mistake. One word of caution is that for some properties the RV may have declined. Prudent landlords will conduct a search of the rating list and ascertain the RV before serving notice. If this opportunity has been missed then the landlord is likely to pay compensation at a far higher rate.

Section 24 – tenant’s right to stay

Section 24 of the Act allows a tenant protected by the Act to remain at the property after the contractual term, on a statutory extension. The statutory extension continues until the tenancy is terminated by one of the methods under the Act. Such methods include service of notices pursuant to s25 or s26.

Part 56 – new procedure

Like section 25 notices, section 26 notices can be served 6-12 months before the termination date stated in the notice, and so could be served as much as one year before the contractual termination date in the lease.

A section 25 or section 26 notice served after 1 June 2004 falls within the new procedure under Part 56 of the Civil Procedure Rules. For the first time, these Rules allow the landlord to make an application to court for a new tenancy, meaning that landlords can now be claimants under a lease renewal procedure. In the past only tenants were allowed to make this application.

New position on costs

The fact that a notice can be served so far in advance of the contractual termination date, and that the landlord can now be the claimant, has given rise to a potential new position on costs – a position which is potentially beneficial for tenants but could cause problems if acting for a landlord.

The situation might arise where, following a section 25 or section 26 notice, the landlord makes an application to court when there is still time left under the contractual term. This could happen up to 12 months prior to the contractual expiry of the lease.

In that situation, the landlord is the claimant. It leaves the landlord open to the risk that the tenant could progress the lease renewal proceedings but subsequently rely on s27(1A) and vacate at the termination date (see box on page 4).

If the tenant does this, it is open for the tenant to argue that the landlord must file a notice of discontinuance. The landlord would then be liable for the tenant’s costs.

This is a reversal of the position under the old procedure whereby if the tenant decided to vacate on an unopposed lease renewal it was liable for the landlord’s costs. It arises out of the fact that the landlord can now make an application to court – it is no longer always the tenant who is the claimant.

The position is beneficial to tenants who can potentially, while the contractual term still exists, continue to protect their position under the lease renewal procedure, and then rely on s27(1A) to vacate just before the contractual termination date and get their costs.

Once the contractual termination date expires, a tenant who wants to vacate must serve a section 27(2) notice. It could still argue that the landlord should be liable for its costs, but this is less likely to receive the court’s sympathy, as the landlord can rightly say it was entitled, by that time, to know the tenant’s intentions.

The risk to the landlord is that it could issue proceedings and then find itself liable for the tenant’s costs if the tenant decides to vacate on the contractual termination date. This is untested in court but worth bearing in mind whenever advising a landlord about issuing proceedings before the contractual termination date.

Potential arguments

A landlord in this situation could try to use the following arguments:

Estoppel, where a tenant has acknowledged service and complied with directions. The tenant’s response would be that it was simply protecting its position, as it is entitled to under the Act, until making a decision on whether or not to stay. The tenant would argue that it should not be forced into making an early decision simply because the landlord has chosen to issue proceedings, and that it had no choice but to follow the procedure the landlord had initiated under Part 56.

That it issued because no progress was being made in the negotiations for the terms of the new lease. This will depend on the facts of each case, but a landlord may be hard-pressed to show a need to issue proceedings for lack of negotiation when the original term has not even expired.

That it issued proceedings because the property was under-rented and so it wanted the new tenancy to commence as soon as possible. This argument would be highly likely to fail because of s24. The landlord is at liberty to make an application for interim rent in cases where the premises are under-rented. The landlord would not be prejudiced by interim rent, which is, under the new Rules, assessed at the market rate.

That the tenant is vacating and so the claimant should be awarded its costs. A tenant would argue in response to this, and all of the above arguments, that, in issuing in advance of the contractual termination date, the landlord/claimant was taking the risk that the tenant may simply vacate at the contractual termination date, as s27(1A) expressly permits.

The landlord's position

The position may seem harsh on a landlord. However, with all of the above arguments, it must be remembered that the costs are as a result of the landlord’s application. The new rules extend the deadline by which an application must be made, and even allow extensions. The purpose is to encourage parties to negotiate without the need for going to court. In contradicting this position by making its application early, the landlord risks being penalised in costs.

The tenant's position

The tenant’s position, of course, is dependent on them vacating the property by the contractual termination date. This means ensuring that there is no longer business occupation under s23 at the contractual termination date.

Practical considerations

In practice, the only time a landlord should realistically feel it appropriate to make an application to court is in an opposed lease renewal. In that case, the landlord may wish to progress proceedings quickly, to ensure that the matter is dealt with as near as possible to the contractual termination date, so that it can, for example, start its demolition works.

In doing so, the landlord should be advised, however, that the tenant may vacate under s27(1A), and the landlord may be liable for the tenant’s costs as a result. In an opposed lease renewal, the landlord may well have been liable for the tenant’s costs in any event.

An early application to court by a landlord should not be necessary in an unopposed lease renewal, as a landlord suffers no prejudice by a statutory extension under s24. If a landlord makes an application to press a tenant into a decision, costs may follow.

Summary

This costs argument has not been tested in court and costs are always the court’s discretion. It is likely that a judge, faced with these arguments, would look at the conduct of each party. As a minimum, however, solicitors advising a landlord to issue proceedings before the contractual termination date should also be advising the landlord of the tenant’s rights under s27(1A) and the potential costs consequences.

Were the court to adopt this approach to costs, it would deter landlords from issuing proceedings unnecessarily early and would effectively police the procedure, to ensure it was complied with in the spirit of the Rules. © Property Law Journal