Business Tenancies: the right to renew – Falcon Chambers discuss the Law Commission’s Consultation Paper on reform of the 1954 Act

Welcome to the Falcon Chambers podcast. Falcon Chambers is the only set of baristas chambers, all of whose members specialise in property law and allied topics. On the podcast, our baristas discuss all things related to their specialist field, get updates on legislative changes, how current affairs affect the property markets, discussion on important cases, more. Well, we've been waiting for this for years. The project of ensuring that part two of the landlord in San attack 1954 works for today's commercial leasehold market was referred by the government of the law commission on the 28th of March 2023. At the time, the law commission explained, "It is now nearly 20 years since the legislation was last reviewed. Lucy rely on the act report that it is inflexible, bureaucratic and out of date. It causes extra cost and delay for both landlords and tenants, and it prevents space in high streets and other commercial centres from being occupied quickly and efficiently." The law commission said at the time that its review would be wide ranging and would consider in detail how the right to renew business tenancies is working and what, if any, reform is needed. Why is this particular consultation important? Well, commercial property in the UK is thought to be worth nearly 900 billion pounds with more than half of it being rented. Some tenants say that having security at Penteña can be extremely important to them and that when they do not have security at Penteña, they experience considerable difficulties at the end of their tenancies. But on the other hand, the 1954 Act can cause problems for landlords. So, after nearly 70 years of operation, has the 1954 Act had its day and should the commercial leasehold market be left to operate without it? Reform of the 1954 Act has the potential to impact every business tenancy in England or Wales as well as the prosperity and growth of the areas where those businesses are situated. The terms of reference agreed between the commission and the government required regard to be had to three particular factors. The first was creating a legal framework that is widely used rather than opted out of without limiting the rights of parties to reach their own agreements and to do that by making sure that legislation is clear, easy to use and beneficial to landlords and tenants. Secondly, supporting the efficient use of space in high streets and town centres now and in the future by making sure that current legislation is fit for today's commercial market, taking to account other legislative frameworks and wider government priorities. And, certainly, fostering a productive and beneficial commercial leasing relationship between landlords and tenants. Now, we were due to receive a consultation paper on this subject in December 2023, a full year ago, but events intervened. At one minute past midnight today, the paper was finally produced 108 pages of it, along with an important survey which asks searching questions about the current regime, designed to garner market intelligence on how the act operates, what use it is, what it costs and how long it takes. As the commission comments in paragraph 1.30 of its paper, we are keen to consult widely so that we have as strong and evident space as possible to reach conclusions as to which model we will recommend to government and whether the scope of the act needs reform. This consultation and the survey are open until 19th February 2025. Now, here in Forkland Chambers, we all specialise in business tenancies, of course, and five of us today who've been studying the paper, outline the principal topics of interest to solicitors, to surveyors and to parties in the market. So first, over to Emily, who's going to deal with the central topic of security of tenure. Emily, what does the paper say about that? Thank you, Guy. As Guy has said, this consultation is the first step in the Law Commission's two-part review of the 1954 Act. It's said to be a chance to test the 1954 Act's foundations. It's very reason for being. At present, the 1954 Act can first security of tenure upon business tenants unless the parties have contracted out. The act gives tenants a statutory right to continue to occupy and obtain a renewal tenancy when their existing tenancy would otherwise come to an end, subject to the landlord being able to oppose the grant of a renewal tenancy on a number of limited grounds. Where the parties can't agree the terms of the tenancy, the 1954 Act provides a mechanism for the court to decide those terms. Much has changed since 1954. At that time, the country was recovering from years of war and deprivation, with lettable premises and short supply, and it was perceived that retail and other businesses needed protection to ensure their viability and to preserve their goodwill. The situation now could not be more different with vacancies in high streets, parties commonly agreeing lease terms of five years or less, and retailers often operating in chains with great negotiating power. So the Law Commission now states that it is stepping back and asking at a fundamental level whether the current security of tenure regime is the right starting point in today's commercial lease hold market. And sure, it's asking, do we need the Act at all? How will the Law Commission embark on such a broad inquiry? As Guy has explained, the review will be underpinned by three core principles agreed between the Law Commission and the government. The Law Commission has expressed a desire to ensure a framework that is widely used, rather than widely opted out of, a regime where the parties to a business lease are free to reach their own agreements, and legislation which is clear and easy to use. These guiding principles do suggest that we may be moving towards a regime where the default position is greater freedom of contract between the parties. However, the paper asks for views on four possible models for the future in a very open way, which Daniel will address shortly. The content of the second consultation paper on the finer details will depend on the outcome of this first consultation. If the Commission recommends the retention of security of tenure in some form, then it will review particular issues which have arisen with the current law, such as whether the current contracting out procedure is unnecessarily complex and rigid, and whether the grounds for possession strike the right balance in today's world. If, on the other hand, the Commission concludes that security of tenure should be abolished, then it will consider how that might best be achieved. I think we can expect at the market, and therefore the outcome of this first consultation will be polarised, with landlords voting for appeal, and tenants voting for retention. At which point I will hand over to Adam. How will the Commission find its way through this conflict, Adam? Thanks, Emily. Now, the Commission stresses a number of times that if the statutory regime is broadly perceived to be working satisfactorily, then Parliament should resist the temptation to fiddle with the text in a bid to improve the user experience. The paper warns that changes might have a big impact on the market, and the consequences of those changes might be hard to predict. The Commission's therefore likely it seems to require strong evidence that a different model should be adopted in place of part two of the 1954 Act, as we all know it, before making a recommendation to go down that road. As Guy said earlier, the Law Commission has decided to take a wide birth in its consultation process, looking at this stage at whether the overall framework of the Act is appropriate, and whether to consider an alternative approach to business tenancies. The consultation document is very clear that the answer to this big picture question must be marked driven. Rather than relying on anecdotal evidence of the impact of the current regime in the market, what the Commission has done is to prepare a survey which asks a number of questions about the current model, and the proposals for reform. The survey invites consultees to provide information about the time and cost of renewing protected tenancies, versus renewing tenancies that aren't protected. There are also questions about the impact of the statutory regime on the willingness of landlords to let and on rents payable by tenants. Interestingly, the survey then asks about the prevalence of contractual options to renew, which provide an alternative to invoking the current statutory regime, and seeks to look at the rationale that might leave parties to agree a contractual mechanism for renewing tenancies. This, I assume, is intended to inform the debate about whether a statutory regime is required at all. A market-based focus, it seems to me, is obviously to be welcomed with the recognition of the law commission that the legal framework impacts what they describe as the commercial leasehold market, which in reality is a combination of a number of rather different markets. In looking at the prospect of reform, the Commission is investigating four different models ranging from compulsory protection for all business tenants through to no protection at all and with maintaining the current framework sitting somewhere in the middle. And I'm going to ask Daniel now, if he will, to explain what those four models look like. Yes, as we've heard, today the Commission puts forward four possible models for reform. The all tenancies protected route, as was the case in 1954, the no tenancies protected route, a contracting in-model, or a finally keeping the existing contracting out-regime. Now, the Commission is keen to stress that the fact of consulting on these models does not mean that they support a particular approach. This, in large part, is because the Commission recognises, sensibly, that any change would be a significant one, with the potential for big impacts on the commercial rental market. And for this reason, most interestingly, the Commission identifies that they would need, quote, "significant evidence" before they would be able to recommend the adoption of a new model. So what then of the possible models? Well, the Commission considers the pluses and the minuses of each, and that gives us an insight into the considerations that have already impacted upon their minds. So with respect to the first, the return, a return, rather, to mandatory protection. Well, in addition to all of the familiar arguments about bargaining strength and balance of interest, perhaps the most recent section of interest is the Commission recognising that they have told, and recording that they've been told, that new rent models, such as turnover rent models, are not common, but the businesses can find that the current arrangement is not necessarily well suited to such models. The Commission indicates that, of course, if a mandatory scheme were introduced, it might be possible to amend the test in the act, to determine and make clear that the court can grant renewal tendencies with turnover rents. But the Commission also recognises that mandatory renewal models might be crafted in such a way as to suit market conditions that exist at its genesis, but be found too rigid and inflexible as time goes on. As to the abolition option, abolition of security of tenure, the Commission recognises that this becomes renewal by market force alone. Islander parties negotiate upon expiry or they pre-negoseate some sort of option arrangement. The Commission identifies that this might be balanced with something like the 1927 conditional compensation payments for goodwill under the 1927 act, but it, of course, recognises that this leads to a very different form of regime. But here, perhaps the most interesting part of this action is that the Commission says it has not satisfied itself yet, that contracting out is widespread. It then goes on to say, but even if it had, the position would not necessarily become that there was no place for a protected tenancy regime to exist, at least to some extent. The third option, the contracting in model, in terms of the Commission states, we recognise that this type of legislative approach, whereby parties choose to contract into a statutory regime, would be unusual. Particularly given this context, it may be questioned where their legislation is, in fact, needed to achieve the policy objective, underpinning the contracting in model, and if not, where there is any need for the contracting in model at all. Well, perhaps, but one can readily see some advantages of having an office here of model for consideration, and in some cases agreement, as opposed to negotiating extension options individually in lease contracts, or having standalone negotiation options available. On renewal, the Commission indicates its view is furlough that it is likely to be more expensive and cumbersome under contracting in model than under a contracting outmodel. This is because of the parties having to work through a statutory scheme and the Commission recognises that this could internally, the point at which both parties start to receive income as a result of the transaction. So, we've considered all change. They all change options. But what about no change? Well, we'd have the system with which we're familiar, a definite advantage. But we would have all those familiar disadvantages, too. Now, I'm going to hand over to Stephanie, who's going to tell us what the paper says about Pact. Well, very little. The Pact scheme is footnoted at paragraph 1.38 in Appendix 1, which is the section which summarises the current law. But the consultation paper itself says very little about dispute resolution, simply that the forum in which disputes are heard and alternative dispute resolution will be covered in the second consultation paper. So it's clear that if a security of tenure regime of any sort is retained, this will be very much still on the table down the line. Our view is that Pact and other ADR processes may have a very prominent role in resolving disputes about rent or terms on renewal in the future, whether the act is reformed or repealed. Take first the current regime. Pact has worked well, but has not been widely adopted despite the fact that in many unopposed renewals, the main issue is rent, and it seems obvious that experts in the field of valuation should decide rental disputes rather than judges. We think that the main reason for the lack of take-up is that reference to Pact is voluntary and sometimes one party or the other wants their day in court for some reason. We expect that in line with the general direction of travel following Churchill and Murthy Tidville that we've seen in the recent amendments to the CPR, the Commission might ask next time whether any new business tenancy regime should contain a mandatory requirement to consider the use of an ADR procedure before applying to court. This sort of provision was introduced into the electronic communications code in the Product Security and Telecommunications Infrastructure Act 2022, so the certainly precedent for it. If a security regime is retained, we can see the sense in making consideration of Pact or alternative compulsory, so that routine disputes about the rental level or terms are not burdening the courts or tribunals. And even if business tenants no longer have security of tenure, there will still be tenants who want to renew and landals who are content for them to do so provided they get market rent. And there will still be disputes about what the market rent is which the parties are unable to resolve by negotiation. We expect such disputes will often be resolved by arbitration, just as rent-review arbitrations are used for rental disputes during the term of a tenancy. So we have a reasonable expectation that some form of ADR will feature in the landscape in the future, whatever happens, but otherwise, Guy, where does this consultation pay for leave us? Well, ladies and gentlemen, the authors of the paper are keen to stress that they have not made up their minds on whether to reform or appeal or do nothing to the act, and secondly, if reform, then what? The paper does not stray into the detail of the possible reforms, but the simple reason that if repeal is the overriding call for the market, then there would be no point in the law commission embarking on that. So, overall, it's a fresh and interesting approach in an area that is characterised by the extremes generated by things going wrong. The commission has made it clear that it's going to be greatly informed by the evidence. So, on that subject, we leave you all with a plea to fill in the survey and respond to the paper. It's up to you. Thanks for listening. If you would like to hear more from us, please subscribe to the podcast and we welcome suggestions on topics to discuss. Please get in touch with us by the Folk and Chain of this website.