Many landlords and tenants of commercial premises in England & Wales will be aware of the statutory security of tenure regime introduced to business tenancies by the Landlord and Tenant Act 1954 (“the 1954 Act”). They may have found themselves negotiating with their counterpart in order for a proposed new lease to be either ‘contracted-out’ of the 1954 Act, or to remain within the statutory regime.

Part 2 of the 1954 Act gives commercial tenants important statutory rights to remain at the end of their lease term, as well as rights to call on their landlord to grant them a new lease on substantially the same terms and conditions as the old one (or to pay compensation in lieu of any renewal lease). The default position is that these provisions apply ‘automatically’ to a qualifying tenancy, unless the parties have expressly contracted-out of them.

It is crucially important for both landlords and tenants of commercial premises that they do not accidentally change the agreed position, in relation to security of tenure when the lease commenced, through their acts or omissions during the lease term.

This article highlights some of the lesser known ‘pitfalls’ by which changes to the 1954 Act status may happen and provides some suggestions as to how landlords and tenants can avoid these pitfalls in the first place.

Landlord Pitfalls

Tenants Remaining in Occupation Following Expiry of a Contracted-Out Tenancy

It is a common scenario that a tenant does not immediately vacate the premises following expiry of a contracted-out tenancy. The tenant will have no statutory right to remain, but if the landlord has not taken steps to ensure the tenant vacates or to regularise the period of occupation following expiry (via the grant of a new lease or licence to occupy), the parties may find they have inadvertently entered into an implied periodic tenancy (particularly where the tenant has continued to pay, and the landlord continued to accept, rent payments).

Landlords should take steps to recover possession and/or regularise the position as a priority, by writing to the tenant to clarify that any period of occupation beyond the contractual term is by way of revocable licence only. Landlords should also consider putting a rent stop in place until the position has been regularised.

Variations to a Lease Deemed a Surrender and Re-Grant

If the landlord and tenant formally vary the terms of their existing lease to either (1) increase the premises demised to the tenant; or (2) extend the duration of the lease, the courts have held such variation isto be construed as a surrender of the current lease and re-grant of a new lease with the enlarged premises / term of the lease included.

The significance of this in relation to the 1954 Act is that the new lease will not have been contracted out of the 1954 Act (as the parties mistakenly believed they were simply varying the existing lease) and the new lease will benefit from the default security of tenure position under the 1954 Act.

Where parties wish to make such variations to their lease, they should instead enter into an additional lease, which grants the tenant additional premises or extends the duration by way of a separate agreement with the tenant, with such additional agreement being contracted-out accordingly.

The Case of Thomas-Van Staden

This court case from 2008 established the rule that there can be no wording in an excluded lease which contradicts section 28 of the 1954 Act, namely that a lease can only be contracted-out where it is for a ‘term certain’. Therefore, if a contracted-out lease refers to any periods of holding over, statutory continuation or similar, it will likely not be a contracted-out lease, despite the parties intentions at the time.

It is therefore extremely important that the correct wording is used in the granting of a lease as doing otherwise can have serious implications for both the landlord and tenant.

Tenant Pitfalls

Renewals and Section 28 of the 1954 Act

Where a tenant under an existing protected tenancy enters into a renewal lease (or agreement for lease) to commence on a future date, section 28 of the 1954 Act provides that the existing lease automatically loses its security of tenure from the date of the agreement or renewal lease (i.e. the existing lease will continue but will automatically change from a protected tenancy to an unprotected tenancy).

Tenants should not enter into such arrangements too early during the term of their existing lease and should make sure that any conditionality in any agreement can be readily achieved, so that they do not lose their existing rights only to find they are not able to benefit from the agreed renewal lease on expiry of the existing lease term.

Tenant Occupation and Section 23 of the 1954 Act

If a tenant is not in occupation of the premises for which it holds a protected tenancy at the end of the term of its lease, then it will not satisfy the qualifying criteria contained within section 23 of the 1954 Act. In such instances the lease will terminate and the tenant will have no right to call for a new lease.

Issues arise where a named tenant takes a protected lease but over time the practical, day-to-day running of the business at the premises is carried out by someone else (such as an independent consultant, franchisee or even a tenant’s guarantor) to the extent that the tenant is no longer in occupation when the lease ends.

There are limited exceptions to the above rule within the 1954 Act (principally where a tenant has a ‘controlling interest’ in the occupier, or the occupier has a controlling interest in the tenant), but it is better not to rely on those and for a tenant to ensure the lease provisions are followed whenever giving occupation to any third party.

Short Term Leases and Section 43 of the 1954 Act

Section 43 of the 1954 Act provides that a lease of business premises for a period of six months or less cannot benefit from security of tenure under the 1954 Act, except where the tenancy contains provisions for renewal which would extend the term beyond six months; or where the tenant (or predecessor carrying on the same business) has been in occupation over twelve months.

Similarly, if the occupation arrangement does not meet the legal criteria for a lease (being ‘exclusive possession’ for a ‘determinable term’) then it is not a lease, but more likely a licence which gives no legal interest that is capable of benefitting from security of tenure (although determining whether the relationship is a lease or licence arrangement is heavily fact dependent).

Tenants should therefore be aware of the limitations of the 1954 Act in relation to short term leases and licences and ensure that, where such rights are crucial to the tenant business, the agreed terms allow for 1954 Act rights to apply in the first place.

Conclusion

The above pitfalls all clearly demonstrate that the position on the 1954 Act and security of tenure, which the parties agreed to at the outset of the lease, can be changed inadvertently by either party and more often than not such changes will have potentially serious consequences for all concerned.

Ward Gethin Archer would be happy to help you identify any such pitfalls before they arise and advise how best to avoid falling into them. To discuss how we can assist, please do not hesitate to get in contact with the Commercial Property Team.