When the Regulatory Reform Order (RRO) took effect on 1 June 2004, making substantial changes to the Landlord and Tenant Act 1954, there was an audible groan from landlords and their advisers. Although the new contracting-out procedure was generally seen as a good thing, it seemed, yet again, that it was tenants who would benefit most from this latest set of legislative changes.

Landlords’ advisers had previously enjoyed a moment of victory when tenants (or their advisers) failed to serve counternotices and/or failed to apply to court for new tenancies within the time limits. The court’s strict approach to the time limits resulted in landlords feeling that the tenant-friendly renewal process was counter-balanced if tenants slipped up.

That said, the new procedure set out in s29(2) of the 1954 Act (see box below) was, in fact, more than just a gesture in the landlord’s favour.

Say a landlord has a row of run-down shops, numbered 100 to 105, each unit let individually on 1954 Act-protected leases terminating at different times over a five-year period. If the landlord decides that it wants to redevelop the premises and to create luxury apartments over the top, increasing its yield substantially, it will need to manage this process very carefully. The landlord and agent will start to formulate the redevelopment plans years before any of the contractual terms expire. Under the old regime, the landlord would have had three options:

• offer surrender terms to all the tenants;
• enforce lease terms strictly in the hope of successfully forfeiting a lease; or
• wait for the contractual terms to expire and then serve section 25 notices (either collectively or separately) and defend a renewal claim on ground (f).

None of these options were particularly attractive. The surrenders might well prove incredibly expensive. A successful forfeiture would be unlikely, and contested renewal proceedings would involve long delays and high legal and surveying costs (see box below, Redevelopment difficulties, for the problems that might be faced).

Section 29(2) allows a landlord to apply to the court for termination of a tenancy without renewal. It still has to wait for the contractual term to expire, but once it does, it can apply for a termination order the day after serving its section 25 notice. The court must order the termination of the tenancy if the landlord can establish a mandatory ground of opposition. The grounds have remained unchanged, and are set out in s30(1). Where the ground is proven, the tenant remains entitled to compensation on quitting, by virtue of s7.

In practice, there are still a large number of landlords who, despite opposing a renewal, do not apply for an order under s29(2). However, landlords who have serious redevelopment plans are beginning to take advantage of the new procedure. Two recent cases illustrate the approach that the courts have taken.

Standard Life Investment Funds Ltd v Speciality Retail Group Plc

In the Standard Life case the tenant was late in filing its defence and the landlord applied for default judgment before the defence was filed. Instead of it being dealt with administratively, as with monetary claims, the case was referred to a judge, who was unsure as to whether he could order default judgment in an application under s29(2).

The issues were as follows:

Was a default judgment available at all?

Default judgment is available in most types of proceedings by virtue of CPR Part 12. There are, however, exceptions, and whether default judgment is available in 1954 Act proceedings depends on whether the claim is issued as a Part 7 or Part 8 claim.

Uncontested lease renewals are Part 8 claims and default judgment is not available (CPR 12.2(b)).

Contested lease renewals and applications by landlords under s29(2) for possession are Part 7 claims, with the result that default judgment might be available. Whether or not it is available depends on the other exceptions.

The Practice Direction to CPR 12 at 1.3 provides:

Other rules and practice directions provide that default judgment under Part 12 cannot be obtained in particular types of proceedings. Examples are... (5) possession claims.

Possession claims are universally brought under Part 55. Universally, that is, unless the application is made under s29(2) of the 1954 Act. If the application made by Standard Life had been made under CPR Part 55, then default judgment would have been prevented by CPR 55.7(4). However, as the claim was issued under Part 56, and as there is no exception preventing default judgment in Part 7 claims made under Part 56, then default judgment was available.

It may be that the CPR will be amended to confirm whether or not default judgment should be available where landlords apply for possession under s29(2).

Can a tenant avoid a default judgment by filing a defence after the application for judgment in default is made?

It being clear that default judgment was technically available, the tenant argued that the landlord was prevented from obtaining judgment because by the time the (on-notice) application was heard, the tenant had in fact filed a defence.

The court found against the tenant. The court rejected the argument that the tenant should be permitted to serve a defence late, provided that it was with the court before judgment was entered. This would have provided court staff with an administrative nightmare, created uncertainty for all concerned and would have allowed tenants an unnecessary further crack of the whip.

Did the judge have any discretion at all?

The tenant submitted that the prejudice to it in granting a default judgment outweighed that to the landlord, and that judgment should be denied. The landlord claimed that the court did not have any discretion, as default judgment (as distinct from summary judgment) was an administrative function. The landlord also argued that the tenant would, by virtue of s64 of the 1954 Act, gain a further three months from the date of the default judgment in which to vacate and relocate its business. The court accepted the landlord’s submissions.

Implications of the decision

The decision in Standard Life seems to be the first default judgment under the new s29(2) of the 1954 Act. Although the tenant did obtain leave to appeal, it is understood that the case has since settled. There are a whole host of new traps for unwary landlords and tenants in the light of this decision:

• Tenants and their advisers need to ensure that they are diligent in responding to Part 7 applications made by their landlords for possession under s29(2).
• Landlords’ advisers must ensure that they carefully diarise deadlines for reply in section 29(2) cases, to avoid missing the opportunity to obtain a default judgment.
• Tenants who apply for a lease renewal having received a section 25 notice or counternotice to a section 26 request confirming that the renewal will be opposed, will arguably be able to apply for default judgment if the landlord fails to answer in time.
• Landlords need to ensure that, having set out a ground of opposition to the lease renewal, they do not miss the deadline for their answer.

Felber Jucker & Co Ltd v Sabreleague Ltd

This case covers the age-old problem of what to do when a party changes their mind after serving a notice.

The landlord served a section 25 notice confirming that it would oppose any application for a renewal and specifying ground (f). The landlord then decided to defer its plans to redevelop, but by this time the tenant had decided to go and wanted its compensation in the sum of approximately £94,000.

Once a section 25 notice has been validly served, it cannot be unilaterally withdrawn. There is a possible argument, that was not considered in Felber because neither party alleged bad faith, that the landlord’s notice might have been invalid under Stradbroke (Earl) v Mitchell [1991] (an Agricultural Holdings Act 1986 decision). On the Stradbroke basis, a notice can be held to be invalid if a ground has been specified in bad faith. But, even if the landlord in Felber had tried to rely upon Stradbroke to show that its notice was invalid and that it could therefore withdraw it, it is unlikely that the court would have allowed the argument to succeed, because this would have enabled Felber to take advantage of its own bad faith. The argument did not arise, however, and this remains a moot point.

The landlord was unable to withdraw its section 25 notice. Could it have applied under s24 for a new lease? There seems to be nothing specific in the legislation that would prevent a landlord from applying for a new lease where it has served a section 25 notice opposing renewal. But, if the landlord had done so, it is unlikely that its application would have progressed very far once it became apparent that the tenant did not wish to take a new tenancy – and the application would not have extinguished the landlord’s obligation to pay compensation, as the obligation arises as soon as a hostile section 25 notice specifying ground (e), (f) or (g) is served.

The landlord concluded that the only way that it could avoid losing its tenant and paying compensation as a result of its section 25 notice (on which it no longer intended to rely) was to apply under s29(2) for a termination order and then to fail to produce any evidence in support of the application. The plan was that once the landlord had failed to prove ground (f), the court would automatically order a renewal under s29(4)(b) (the crucial words being ‘it shall make an order’ – see box above), which would have had the effect of preventing the tenant from claiming its compensation. Unsurprisingly, the court did not allow the landlord to take advantage in this way and ruled that the landlord had sought to abuse the legal process.

Comment

The landlord in Felber found itself in an unattractive position. The legislation and case law do not allow a landlord to withdraw its notice unilaterally. This has to be fair to allow the tenant certainty and to permit it sufficient time to relocate. On the other hand, whilst a landlord is entitled under s24 to apply for a new tenancy, it seems that the court will not order one if the tenant does not require it. Again, this seems fair to the tenant.

The standard advice to landlords seeking to rely on the mandatory grounds for possession so that they can redevelop has generally been that the settled intention to redevelop only has to be shown at the time of trial. This must, however, be preceded in all cases with confirmation that if the landlord changes its mind after serving its section 25 notice, it will not be able to compel the tenant to stay and will have to pay compensation based on a multiple of the rateable value of the holding. In practice, therefore, the settled intention needs to be formed in the landlord’s mind before it even serves its notice. It is the evidence to support that settled intention that it will need to find for trial.

Time for a review

As promised at the outset of the reforms, the ODPM has set up a panel to review how the reforms are working in practice, and whether any further changes are required. The impact of these cases will almost certainly be considered during the course of the review, as the ODPM is keen to know whether any improvements are required to make the renewal process more efficient and effective.

The review of the RRO by the ODPM is to be welcomed. That said, it took decades of discussion and consultation before the 1954 Act was reformed in 2003. Practitioners would be wise not to hold their breath in the hope of further immediate reform.  © Property Law Journal