1954 Act Consultation – procedure and other issues

There is no case law on the point but, balancing the various points for and against, the Commission concludes that this is not possible.  This causes difficulty for both parties: for a landlord, delays to recover possession, uncertainty whether the tenant will retake possession and a knock-on effect on the ability to claim interim rent; and for a tenant, no right to claim compensation if the notice is served while it is out of occupation.  The Commission therefore recommends reform to make such notices valid.

Certain periodic tenants and tenants of fixed tenancies for a year or less cannot serve a section 26 notice.  The Commission considers it odd that these tenants have the benefit of security of tenure but cannot use it proactively.  It causes unfairness in a falling market as they will have to continue to pay a higher rent.

If the Commission’s proposed reforms for excluding more types of tenancy from security of tenure (ie including periodic tenancies) are adopted, the impact of this unfairness will dissipate. However, there will remain tenants who cannot serve these notices.  Therefore, the Commission recommends that all protected tenants (whatever their type) should have the same ability to start off the renewal process.

As long as a tenant has occupied its premises for more than a month, it can terminate its protected tenancy on any day after the contractual expiry date by giving at least 3 months’ written notice to its direct landlord.  The Commission highlights a number of difficulties that this creates:

• There is no cap on the length of the notice period so in theory it could be served one month after the tenant moves in, with an expiry date at any time after the contractual expiry date, no matter whether that is 2 or 20 years away. 
• There is no limit on how far past the expiry date the section 27(2) notice should expire. Thus a tenant could effectively extend the length of its term and potentially avoid paying an interim rent.
• It is unclear whether a landlord can serve a section 25 notice, certainly where the section 27(2) notice stipulates a date more than 12 months into the future.

The Commission concludes that this is unsatisfactory and unlikely to have been Parliament’s intention, particularly in relation to avoiding interim rent.

It proposes two alternative ways to overcome the issue.  The first is to permit the landlord to serve a section 25 notice after the tenant has served a section 27(2) notice to bring forward the termination date and trigger the interim rent provisions.  While this method would provide flexibility to both parties it would result in more notices being served and legal issues over which date takes precedence.

The Commission prefers the second way, which would be to introduce a cap on the length of a section 27(2) notice, suggesting it be either 6 or 12 months. If the latter, it would be possible for interim rent provisions to be triggered.

Failure to serve a notice substantially in the form of the relevant section or to apply to court by the necessary deadline is usually fatal to the party at fault.  The Commission has considered mitigation provisions and even abolishing the court deadline, but concludes that these should not form part of any reform.  While the consequence is harsh it provides certainty, whereas mitigation provisions could cause uncertainty, increased litigation and difficulty in distinguishing meritorious cases.  Even if they are introduced that would not obviate hard cases – a line has to be drawn somewhere. 

Provided a tenant moves out of its premises by no later than the contractual expiry date, it ceases to have a business tenancy, statutory protection ceases and the tenancy ends on the contractual expiry date.  No notice need be served to confirm this and it is irrelevant whether the landlord has already served a section 25 notice.  However, if the tenant fails to vacate in time, the statutory protection continues and the tenant therefore remains liable for rent until the tenancy is brought to an end by other means.  (The tenant can mitigate this risk by serving a section 27 notice on the landlord in advance.)

The difficulty for the landlord, in the absence of a section 27 notice, is that it will not necessarily know the tenant’s intentions beforehand.  The Commission recognises that this contributes to unnecessary delays before premises can be marketed to new tenants. The only way of flushing out the intention is for the landlord to serve a section 25 notice and issue court proceedings.  That is burdensome both to the landlord and to the already stretched court system.

The Commission rejected the idea of reintroducing the automatic counter-notice requirement on the tenant, which applied before 2004, as it would simply result in tenants serving a counter-notice to preserve their position and not necessarily to reflect their genuine intention.   

An alternative would be to introduce a trigger notice which the landlord could serve on the tenant, requiring it to explain its intentions, with sanctions to apply if the tenant subsequently changed its position.  A financial sanction would work if a tenant said it would stay but then vacated, but not if the tenant says it will leave but then stays as it is difficult to see what the landlord’s loss is.  Losing the right to renew as a sanction would be heavy handed. 

The Commission concludes that forcing a tenant to give an early binding indication of its intentions would create an imbalance as the landlord is not obliged to do the same.  Bureaucracy and complexity would increase and landlords might use the tool as a bargaining chip in negotiations with tenants, gaining 3 months’ rent if the tenant incorrectly says it will stay but then leaves.  For this reason, the Commission does not propose reform of this part of the 1954 Act.

The touchstone for protection under the 1954 Act is business occupation of premises.  The Commission recognises the difficulties this creates when a tenant’s business is the supply of the whole or part of those premises to third parties, by subletting or licence, whether for residential or commercial purposes. Established case law says that a tenant who grants subleases and retains only common parts risks losing their own 1954 Act protection as they cease to have exclusive possession of the relevant space for business purposes.  The position is less clear where licences are granted, as it will depend on the level of control and management of the space retained by the tenant.

The Commission is cautious about reforming this area of the 1954 Act as it would shift the emphasis from protecting all business occupiers to protecting certain types of business.  To better understand the position, it invites evidence on the extent of the problems in practice and opinions on whether, despite its reticence, reform is indeed required.

A landlord of a protected tenancy must, when exercising a break option, also serve a section 25 notice and then satisfy one or more of the grounds for opposing a new tenancy cited in the notice.  Compensation may be payable if the landlord succeeds on a compensatable ground.

A proposal was put to the Commission that if a landlord’s break is included by agreement of the parties (as opposed to imposed by the court), there should be no need to follow the section 25 notice procedure or pay compensation.

The Commission considers that this could risk unfairness and potentially create a trap for unrepresented tenants.  It could allow landlords to insert a penultimate day unconditional break date into a protected lease which, if exercised, would bring the tenancy to an end without the payment of compensation.  This would be a significant erosion of the tenant’s protection and should not be permitted.

Large and complex developments have challenges of scale, timing and tactics. For example, a single tenancy of part with 1954 Act protection could make a development more expensive, difficult or dangerous if grounds of opposition (redevelopment, own occupation or suitable alternative occupation) cannot be called on.  However, the Commission’s  view is that developers have plenty of other legal and commercial options at their disposal to mitigate the risk, so no further reform is necessary. The countless large developments that have been completed over the years since the 1954 Act was introduced support this. Again, however, the Commission invites views to the contrary and potential amendments for better dealing with the hurdles.

The MEES regime prevents substandard premises being let to a tenant unless a statutory exemption applies.  One exemption applies solely to lease renewals and provides a temporary exemption of 6 months.  There is a lack of clarity about whether this exemption only applies to renewals where proceedings have been issued.  The Commission is of the view that it should cover all protected lease renewals, including those where the statutory renewal procedure has not been triggered. However, its remit does not extend to reforming MEES.  All it can do is recommend that interaction between the 1954 Act and the MEES regime be streamlined.