It was as long ago as November 2000 that the government originally announced its intention to consult on the use of the order-making procedure in the (then) draft Regulatory Reform Bill (now the Regulatory Reform Act 2001) to implement a number of detailed improvements to the workings of the Act.

The changes were largely intended to reflect the recommendations made by the Law Commission in 1992 (‘APeriodic Review of the Landlord and Tenant Act 1954 Part II’ (LAW Com No 208)), but also to take into account responses to a subsequent consultation exercise carried out by the previous government in 1996, and further consideration since then.

In its own March 2001 consultation paper, the government emphasised that it considered the (then) current legislative framework to be philosophically sound, and that it had no plans to change it. However, it sought to:

• remove certain anomalies that had come to light, especially those resulting in unequal treatment of the parties;
• ensure that the Act’s procedures were consistent with the new civil justice system;
• reduce the amount of litigation; and
• promote a less adversarial relationship between suppliers and occupiers of commercial property.

Finally, on 1 December 2003 the Minister for Housing and Planning signed the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003 (SI 2003 No 3096). Its provisions came into effect on 1 June 2004.

It is undoubtedly the case that, prior to the reforms coming into force, the statutory process of business lease renewal was one that lent itself heavily to the use of tactics, principally by landlords but in many cases by tenants also. But to what extent does scope now remain for such an approach?

Interim rent

By virtue of s24A(1) of the Act, either the landlord or the tenant may apply to the court for an interim rent to be determined, provided that a section 25 notice has been served or a section 26 request has been made. If one of them has already applied, the other may not unless the earlier application has been withdrawn.

The effect of s24B is that where a section 25 notice has been served, interim rent is payable from the earliest date that could have been specified in that notice for termination of the tenancy; where a section 26 request has been made, interim rent is payable from the earliest date that could have been specified in that request for commencement of the new tenancy.

This was intended to rule out the tactical use of section 25 notices and section 26 requests. It prevents the service of a ‘long’ section 25 notice or the making of a ‘long’ section 26 request as a device for prolonging the payment of an existing rent that no longer reflects open market levels.

The pre-emptive strike has therefore gone. However, because of the need to look at the actual notice or request (as the case may be), the commencement date for payment of the interim rent can still be manipulated and will depend on the date of service of the notice or making of the request. The unwary party may still be caught out.

Termination by the tenant

Section 27(1) of the Act provides that a tenant who, during the currency of a fixed-term tenancy, wishes to prevent a continuation tenancy arising under s24 of the Act (with its consequent continued liability for payment of rent and performance of the tenant’s covenants during that tenancy), may serve no less than three months’ notice in writing on its immediate landlord to that effect. Such a notice must expire on the contractual termination date. No continuation tenancy will arise if such a notice is served.

However, s27(1A) of the Act goes on to provide that s24 does not have effect in relation to a fixed-term tenancy where the tenant is not in occupation of the demised premises at the time when, apart from the Act, the tenancy would come to an end by effluxion of time.

This enshrines in statute the principle laid down by the Court of Appeal in Esselte AB v Pearl Assurance Plc [1997]. In that case it was held that if a tenant has ceased to occupy the premises for the purpose of a business at or before the end of a fixed contractual term, the Act no longer applies. (The conditions set out in s23(1) of the Act are not then met.) No continuation tenancy will arise under s24. Accordingly, no section 27(1) notice would then be required.

The principle was taken a stage further in Single Horse Properties Ltd v Surrey County Council [2002]. There it was held that the same result was achieved even where the landlord had already served a section 25 notice and the tenant had served a negative counternotice and made an application to the court for an order for the grant of a new tenancy before vacating. The situation on the ground at the expiry of the contractual term overrides the effect of s64 of the Act.

As a result, a tenant that wishes to terminate a fixed-term tenancy at the expiration of the term has the choice of serving a section 27(1) notice at the appropriate time or ceasing occupation before the expiry date.

Where there is a tactical advantage in doing so, the tenant is therefore able to deny the landlord any worthwhile period of notice by adopting the latter course of action. This is irrespective of any later date stated in a section 25 notice or a section 26 request, and whether or not the tenant has already applied to the court for an order for the grant of a new tenancy.

Ground of opposition

It is well recognised that the ground of opposition provided to landlords by s30(1)(g) (occupation for the purpose of the landlord’s own business) of the Act furnishes a means by which a landlord may take over the existing business of the tenant and yet be required to pay compensation measured only against the rateable value of the premises – ie arbitrarily, ignoring goodwill and the value of the business generally as a going concern.

For an example, see Skeet v Powell-Sheddon [1988]. In that case, the tenant carried on the business of a private hotel from the premises. The evidence before the court was that the landlord, who had served a hostile section 25 notice, intended to carry on the hotel business in partnership with her husband, and by employing her daughter as manageress. Her opposition was successful. Likewise, in Gatwick Parking Service Ltd v Sargeant [2000] the landlord was able by similar means to take over an existing off-airport car parking service.

Where the landlord is an individual, the ground has also always been available if the business is to be run by a company that they control. Similarly, where the landlord is a group company, it suffices that the business is to be run by another company in the same group.

Since 1 June 2004, the ground is additionally available for use where the landlord is a company and the intention is that the business is to be run by a person who controls that company. The only existing safeguard in all cases is the present ‘five-year rule’. See ss30(2) and (2A) of the Act.

Extent of the holding

Under s32 of the Act, the tenant is only entitled to a new tenancy of the ‘holding’ – ie those parts of the property comprised in the current tenancy that it occupies for the purposes of a business, or for those and other purposes. The court is required to designate the property comprising the holding by reference to circumstances existing at the date of the order for the grant of a new tenancy. The tenant’s occupation, therefore, need not be exclusively for business purposes. It follows also that the tenant may well be able to ‘enlarge’ the holding before the date of the order.

In Narcissi v Wolfe [1960] the tenant had been granted a lease of the basement and ground floors of a building together with the three upper floors. He used the basement and ground floors as a restaurant, and sub-let the three upper floors. Later, the sub-tenant of the first floor left and the tenant occupied that floor as temporary storage space for food and furniture. It was held that the holding, for the purposes of the new tenancy, comprised the basement, ground and first floors.

While in opposed cases s37(3A) requires compensation in such circumstances to be calculated at different rates in respect of the separate parts occupied by the tenant, and so remedies the unfairness demonstrated by the decision in Edicron Ltd v William Whiteley Ltd [1984], it still remains open to the tenant to adopt this tactic.

Applications to the court

Section 24(1) of the Act now enables either the landlord or the tenant to apply to the court for an order for the grant of a new tenancy, and s29(1) empowers the court to order the grant of a new tenancy on the application of either. (Previously, it was the tenant who had the ability to dictate when an application was made and served.) There is also provision to avoid the problems that would arise from two applications being made.

Furthermore, with the repeal of s29(3) in its earlier form, the two-month bar on the making of a court application has gone. The changes have therefore put the parties on a more even footing, and a landlord keen to see a new tenancy granted can prosecute the renewal themselves from an early stage as claimant.

Quite separately, s29(2) allows the landlord to apply to the court for an order for the termination of the current tenancy without renewal. They must have served a hostile section 25 notice or a hostile counternotice (within the two-month time limit) to the tenant’s section 26 request. Section 29(4) goes on to provide that if the landlord establishes any of their stated grounds of opposition, the court must order the termination of the current tenancy, in accordance with s64, without renewal. This is obviously of particular benefit to a landlord who has proposals for redevelopment or own occupation.

Section 37 compensation

Sections 37(1A), 37(1B) and 37(1C) of the Act set out three ‘compensation cases’ – ie situations in which an order for a new tenancy is precluded and the landlord becomes liable to pay compensation to the tenant. These are:

37(1A) – where the tenant applies to the court for the grant of a new tenancy but the court is precluded from making an order only by reason of one or more of grounds (e), (f) and (g);

• 37(1B) – where the landlord applies to the court for an order to terminate the tenancy and the court is precluded from making an order for the grant of a new tenancy only by reason of one or more of grounds (e), (f) and (g); and
• 37(1C) – where the landlord in its section 25 notice, or counternotice to the tenant’s section 26 request, states opposition to renewal on one or more of grounds (e), (f) and (g) only, and either no application is made to the court by the tenant to renew, or by the landlord to terminate, or such an application is made but is subsequently withdrawn.

Tactically, it will still remain to the landlord’s advantage – if the circumstances entitle it to do so – to state in its section 25 notice, or counternotice to the tenant’s section 26 request, one or more of grounds (a), (b), (c) and (d) in addition. In such event, the tenant will only be able to pursue a claim for compensation if it applies to the court or – as the case may be – defends the landlord’s application and the matter proceeds to judgment.

A tenant that is defeated is entitled to apply to the court for a certificate stating the ground on which the court has been precluded from ordering the grant of a new tenancy (see s34(4) of the Act).

Higher rate compensation

To achieve the higher rate of compensation under s37(3) of the Act, the eligible period of occupation is 14 years immediately preceding the termination of the tenancy. By virtue of s37(7), this means the date specified in the section 25 notice as the termination date or the date specified in the section 26 request as the commencement date for the new tenancy. The calculation is made backwards from that date.

In Sight & Sound Education Ltd v Books Etc Ltd [1999] the tenant lost that entitlement by vacating the premises on the expiry of the contractual term on 28 September 1997. The termination date stated by the landlord in the hostile section 25 notice was 25 February 1998. It was immaterial that by the time the tenant vacated, 14 years’ occupation had already accrued.

The court was, understandably, unwilling to construe the statutory provisions to mean ‘14 years ending with the termination date or the date of expiry of the contractual term (if earlier)’. The tenant was entitled to compensation at the lower rate only.

Had the tenant stayed on, a continuation tenancy would have arisen under which rent and other outgoings would have been payable. This would then have reduced the value of the compensation to the tenant. The statutory provisions are therefore capable of working unfairly where a ‘long’ section 25 notice is served and there is likely to be a claim to compensation at the higher rate.

Conclusion

The changes to the Act have clearly reduced the scope for using tactics in business lease renewal, and they would certainly not appear to have created obvious new opportunities. However, it must be said that the reforms have nevertheless left both landlords and tenants some ability to exploit the revised state of the law.

Edicron Ltd v William Whiteley Ltd [1984] 1 WLR 59

Esselte AB v Pearl Assurance Plc (1997) 20 EG 124

Gatwick Parking Service Ltd v Sargeant [2000] 2 EGLR 45

Narcissi v Wolfe [1960] 1 Ch 10

Sight & Sound Education Ltd v Books Etc Ltd (1999) 43 EG 161

Single Horse Properties Ltd v Surrey County Council (2002) 14 EG 26

Skeet v Powell-Sheddon (1988) 40 EG 116

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