Law Commission consults on reform of security of tenure for business tenancies in England and Wales

A year after its expected arrival, the Law Commission has published its consultation paper (with summary) seeking views on potential reform to Part 2 of the Landlord and Tenant Act 1954. There is widespread recognition that the current regime, which confers the right for business tenants to renew their lease on the same terms (unless particular processes have been followed or conditions are met), is in need of modernisation.

At this stage, the consultation seeks input as to whether the recognised issues would be better resolved by making tweaks to improve the existing model or whether full scale replacement is appropriate. Four high-level alternative models for reforming the regime have been suggested, one of which would be to keep the existing model, subject to further reforms

An adjunct to the proposed models is the issue of scope – whether the types of business tenancy or premises that benefit from security of tenure should be reduced. Opinions are sought on various suggestions and the Commission is keen to obtain insights into how the changes might impact the market.

Current position

Many business tenancies are currently "contracted out" of the statutory security of tenure provisions, meaning that the lease will end on expiry of the specified term.

The current process for contracting out (while simplified 20 years ago) is cumbersome and there are circumstances where a landlord can find that a tenant has obtained security of tenure despite this not being the intention of the parties, including where a tenancy is deemed to have arisen by implication.

The consequences of errors are incredibly significant for a landlord, affecting plans and redevelopment opportunities for a property. While vacant possession of premises which benefit from security of tenure can be obtained in certain circumstances, including in connection with tenant breaches and redevelopment plans, it is often necessary for parties to undertake costly, complex and uncertain litigation proceedings.

On the other hand, tenants are understandably reluctant to spend large sums of money on premises that they may be required to vacate. In addition, certain types of business use, such as shops and restaurants, benefit from customer recognition and the goodwill associated with a particular location. One of the key drivers behind the original legislation to protect tenants was the injustice of a landlord being able to effectively benefit from the tenant's trading success and relet to a similar business.

Abolish security of tenure?

Abolition would avoid the costs, delays and uncertainty associated with the current statutory procedures for excluding security of tenure and recovering possession of premises protected by the regime.

Tenant requirements for security can be met through the negotiation of contractual tenant renewal options or longer terms with break rights where relevant. This would shift the burden to tenant advisers to ensure that, where appropriate, such renewal processes were incorporated.

A contractual arrangement has the ability to offer greater flexibility for parties to update the terms of the renewal lease, comparing favourably with the fairly rigid boundaries imposed by the case law interpreting the current legislation. Landlord and tenant relationships have fundamentally changed in recent years, becoming more collaborative, and there have been novel types of clauses introduced in newly negotiated leases, such as those aimed at improving the sustainability credentials of a building. Such updates, which often involving adjusting burdens on a party, are difficult to accommodate within a legislative framework.

Contracting-in regime?

An alternative to abolition, but which continues to put the onus on tenant advisers to identify where security of tenure should be considered, is to provide an ability to opt in to a statutory regime.

This model removes contracting-out burdens for both landlords and tenants and is likely to help avoid leases becoming protected due to process failings. Tenants who do not obtain advice in relation to their lettings may be disadvantaged by such a system, although arguably, the "natural" understanding of a lease is that it will end on the final day of the specified term. As advisers would be required to identify the need for renewal options, it would seem unnecessary to provide a statutory regime rather than allowing parties to agree a contractual arrangement.

Contracting-out regime?

The Commission has indicated that its preliminary aim is "creating a legal framework that is widely used rather than opted out of, without limiting the rights of parties to reach their own agreements" suggesting it currently leans towards retaining the current model in some form.

Reforms to the detail could include contracting out becoming a simple statement on the face of the lease, and a simplification of court processes. This would have the benefit of being a "known quantity", while eliminating some of the more irksome aspects of the regime. However, more significant changes would be required to address "accidental" secure tenancies, allow full modernisation of renewal leases, avoid hindering redevelopment opportunities and addressing certain valuation anomalies that arise from the Act as currently in force.

Mandatory security of tenure?

The final option is to introduce automatic protection for all business leases. While clear, this approach would have a significant impact on the commercial letting market and development prospects, and disincentivise landlords from granting short-term leases without the certainty of being able to regain possession.

It seems unlikely that such a change would be introduced, particularly in light of local authorities gaining new powers to compel lettings of certain types of premises (which are expressly excluded from security of tenure).

Scope

Any of the high-level models, save full abolition of security of tenure, could be adopted in conjunction with adjusting the types of business tenancy that benefit from a right to renew.

The consultation explores whether existing exclusions should be extended. One possibility would be to extend the minimum term required from six months, which would ensure only tenants that have demonstrated a reasonable level of commitment to the premises could obtain security.

Another idea is to restrict the operation of the regime to certain types of premises. Allowing security of tenure only for certain use types (such as shops and restaurants which are particularly dependent on customer loyalty) could be effective, although precise scoping would be required and it is likely to be a difficult task.

Other suggested criteria to tailor the Act more precisely include rent, location, size and preventing unwritten agreements from becoming protected leases.

Reforming the scope in any or all of these ways has potential to reduce confusion, perceived injustices, delay and costs associated with the current regime. However, retaining security of tenure but with significant alterations could also bring added complexities and uncertainties, and see more parties heading to court as the effect of the new rules is tested. In many cases, landlords may prefer to err on the side of caution and carry out a contracting-out process in case the lease was deemed to meet the relevant criteria for protection negating anticipated time and costs savings.

Osborne Clarke comment

Absolute clarity and simplification should be the main aims of the reforms, given how critical it is for landlords and tenants to exclude or obtain security of tenure.

Reform will take time to materialise, but will be highly significant for the market, whichever model of change is selected. The current consultation is open until 19 February 2025.

After the responses have been considered and a preferred model identified, a further consultation will be launched seeking views on how that model should work. That is the stage where the Commission will examine more detailed elements such as the forum for hearing disputes, alternatives for dispute resolution, landlord grounds of opposition and tenant compensation, lease renewal terms and registration gap issues. The Law Commission will then report to the government with its recommendations and legislation would follow.

Osborne Clarke will be responding to the consultation and is working with clients who wish to submit their own experiences and views for consideration by the Law Commission.