The Law Commission has launched a consultation on commercial leases, as well as an update and a second consultation on the right to renew business tenancies, proposing a series of reforms with major implications for the commercial property sector.
The consultations run until 16 September with the Commission seeking the views of tenants, landlords, their representative bodies and advisers, and anyone else interested. It said it will then consider these responses and then publish a final report with a view to pushing through reforms.
The Commission launched its much-anticipated consultation on the Act in 2024, saying there had been no significant updates for 20 years despite dramatically changed market conditions.
Of particular interest has been its proposals for Part 2 of the Landlord and Tenant Act 1954 which gives business tenants the right to renew their tenancies when they would otherwise come to an end. This enables businesses to remain in their premises with the legal right to a new tenancy, often called “security of tenure”. Most business tenants automatically have the right to renew unless they agree with their landlord that it should not apply before the lease is granted. They can do that by a process known as “contracting out”.
In June last year the Law Commission disappointed many in real estate, including lobbying body the British Property Federation, in an interim statement that said there should be no change to "security of tenure", and the existing contracting-out model should remain.
In its latest update on the "'contracting-out" model, the Law Commission confirmed it has concluded reforms should be introduced to extend the period for a business tenancy to benefit from security of tenure from six months to two years and is now consulting on this.
It is also making provisional proposals on a wide range of issues across the 1954 Act regime, including:
- Qualifying criteria – excluding the majority of periodic tenancies from the scope of the 1954 Act and increasing the duration threshold (which sets the length of fixed-term tenancies which are excluded from scope).
- Contracting out – simplifying the contracting-out process.
- Terms of a renewal tenancy – considering how the terms of a renewal tenancy are determined by the court, and whether changes should be made to address environmental matters.
- Rent – changing the law to ensure that the court can grant a renewal tenancy with a turnover rent and improving the interim rent process.
- Grounds of opposition – reviewing the test in Ground F and whether it should change to take into account modern building methods and/or the Minimum Energy Efficiency Standards or regime.
- Dispute resolution process – exploring whether lease renewal disputes should remain in the county courts or whether some or all cases should be decided in the tribunal and/or High Court, and considering whether alternative dispute resolution could have a greater role in resolving disputes.
Adam Cohen, policy manager at the newly launched property industry body Real Estate:UK, the successor to the BPF, described it as a technical consultation but an important one. "We’re pleased that the Law Commission has listened to our sustained calls and is proposing to drastically simplify the contracting-out process and is considering long overdue improvements to the forum for rent disputes and fix the valuation and commencement dates for renewal tenancies. These changes will help remove unnecessary grit from the cogs of commercial leasing."
Kate Corke, partner at law firm Farrer & Co, described the proposal to extend the period to benefit from security of tenure to two years as "sensible" but said it was still arguably a missed opportunity. “Extending the period from six months to two years is a sensible change. However, there is arguably a missed opportunity to update the model for commercial leaseholds and move away from the current approach of giving tenants security of tenure by default. Nevertheless, this is a positive change, and the industry will be pleased to see the Law Commission reach this conclusion.
“The Law Commission's proposal to simplify the contracting out process will also be welcomed by the commercial real estate sector, as the current system is time consuming and complex and, if it is not followed stringently, can lead to a protected tenancy being inadvertently granted. The updates to the Landlord and Tenant Act 1954 are long overdue, and some may be disappointed by how long it has taken to make what are ultimately relatively minor adjustments."Elsewhere in its separate review of the law relating to commercial leasehold, the Law Commission says it is now consulting on two aspects of the law that are causing significant problems for transactions. In addition, it said it has heard concerns that the law governing the maintenance, repair and upgrading of leased commercial buildings is causing confusion and unfairness, which has not kept pace with modern priorities such as the need to improve the environmental sustainability of buildings or to reinvigorate the high street.
Cohen at Real Estate:UK said: "The focus on how the Act can be modernised to better support sustainability improvements is also a key priority for property owners and it seems the Law Commission understands the barriers the Act currently puts in the way of these. Bold steps are now needed including on the introduction of basic green leases at lease renewal. The consultation is a golden opportunity to ensure that commercial leasing is fit for the 21st century and not the middle of the last one.”
As part of the first area, the Law Commission is suggesting a possible amendment to the Landlord and Tenant Act 1987 to remedy flat owners’ first right of refusal to limit its application to residential and communal parts of a building, preventing its use in commercial real estate.
Corke describes this as also being positive: "The right of first refusal currently applies more widely than originally intended. The legislation was designed to protect residential tenants' interests and give them the opportunity to purchase their building before it was sold to others, not to catch routine commercial lettings – but at present you can end up with the grant of a purely commercial lease triggering a residential tenant protection regime. This can result in up to two months of wasted time with the accompanying costs and administration of serving notices on tenants offering a right of first refusal falling on the landlord. These proposed changes would avoid this outcome whilst still affording residential tenants a right of first refusal on a sale of the freehold or common parts. This would be a positive result for landlords."
There are also fresh proposals for updating The Landlord and Tenant (Covenants) Act 1995 to resolve issues around intra-group reorganisations. Corke said this was "good news".
"The Act currently makes intra-group reorganisations more difficult than necessary due to the provisions of the Act meaning an existing guarantor of a tenant cannot directly guarantee the performance of another group company on a lease assignment. The proposed change would enable parent companies to act as a guarantor for the assignee when an assignment is made to another subsidiary company."
She added the current situation is: "Where there is a change of partner in a partnership, there is no automatic release for the outgoing partner as there is no lease assignment as such, meaning the outgoing partner will remain liable for the tenant covenants unless expressly released by the landlord. This cuts directly across the ‘clean break’ principle the Act was intended to introduce and any consultation on sensible amendments to make the realities of the partnership model work within the spirit of the Act will be welcome.”
The Law Commission is a statutory, independent body established by the Law Commissions Act 1965 to keep the law of England and Wales under review and recommend reforms.
Professor Lisa Webley, commissioner for property, family, and trust law, said in a statement with the latest updates: "Businesses of all sizes across England and Wales rely on a vibrant and well‑functioning commercial leasehold market. The law is, however, causing significant problems in practice, creating barriers for businesses."We are consulting on removing unnecessary obstacles in commercial leasehold transactions and setting out detailed proposals to modernise the right of business tenants to a renewal tenancy. Our proposed reforms will affect a significant number of businesses in England and Wales and we are keen to hear from as many people as possible in response to our consultations."