The Law Commission has launched its much-anticipated consultation on the Landlord & Tenant Act (1954), which governs business tenancies, to ensure it works for the modern commercial leasehold market.

Launching the consultation into Part 2 of the Act, the Commission, the independent body that keeps the law of England and Wales under review and recommends reform where it is needed, said the Act is not working well for landlords or tenants and parts of it are out of date.

Around half of all UK commercial property is rented rather than owned and businesses in other commercial centres rely heavily on securing the right premises.

Part 2 covers "security of tenure", which means most business tenants automatically have the right to renew, unless before any lease is granted, they agree with their landlord that the right to renew should not apply. In order to do that, in a process known as “contracting out”, various formalities must be followed.

But it says the "problem" is security of tenure was introduced following World War Two and the legal framework is nearly 70 years old. It says since the Act was last reviewed, around 20 years ago, the world has changed and so has the commercial leasehold market. The rise of the internet has led to a "dramatic increase" in online retail and services, and landlords and tenants have been impacted by world events including the financial crisis of 2008 and the COVID-19 pandemic. Government priorities have also evolved, for example, there is now an increased focus on the environmental sustainability of commercial properties.

The Law Commission says some aspects of the law are "burdensome, unclear and out-of-date". Often, landlords and tenants decide to contract out of the Act, meaning that tenants do not have the right to renew that the Act would otherwise give them.

It wants to create a legal framework that is widely used rather than opted out of, support efficient use of space in high streets and town centres, and foster a productive relationship between landlords and tenants.

The first consultation paper considers the pros and cons of the “contracting-out” model and considers three alternatives: mandatory security of tenure, abolition of security of tenure and a “contracting-in” model. It seeks consultees’ views on which model they prefer.

It seeks views on whether or not the types of business tenancy which can benefit from security of tenure are the right ones. It is also conducting a short survey to help understand the impact of the 1954 Act on the current commercial leasehold market.

The consultation paper and related background is published here. The consultation closes on 19 February 2025 and will inform the second part of the consultation.

Melanie Leech, chief executive, British Property Federation, said in a statement: “The Act reflects the post-war market conditions when there was very little commercial space available, and leases were typically much longer and less flexible.

“Today, market dynamics are very different and overlaying this is the urgent need to invest to decarbonise the built environment in order to meet the UK’s net-zero targets. For example the stipulation that vacant possession can only be sought for redevelopment does not reflect the fact that today retrofit or refurbishment is often the best and most sustainable approach for modernising and repurposing buildings.

“We look forward to working with members and the Law Commission to present our ideas for how the Act can be modernised to provide a better framework for property owners and occupiers to work together and accelerate investment into towns and cities.”

The Law Commission of England and Wales gave first details of its review of commercial tenancy legislation in England, aimed at modernising how commercial property is leased, in April last year.

Experts have previously told CoStar News that one area the previous government was interested in is how lease renewals might be taken out of the court system. Using something similar to the COVID arbitration system would make resolving lease renewal conflicts a private process rather than seeing them in the County courts.

Ion Fletcher, director of policy (finance), at the BPF, said: "Firstly, we are really pleased the Law Commission has finally gone ahead with it. We narrowly missed out on the Law Commission looking at this in 2016. We are talking about a piece of legislation that is 70 years old and was last looked at in the 1970s. It is focusing on security of tenure, which makes sense because everything else hangs off of that principle.

"But we are after a commercial leasing framework that better reflects today's commercial environment, in particular the drive to decarbonisation, that there are less barriers in the way of redevelopment, and that it is administratively a lot simpler than it is at present. The other point around security of tenure is what has happened to lease lengths is they are a lot shorter and more flexible. In 2022, 50% of leases were between one and five years and a further 32% between six and 10, so 80% of the leasing market is on 10 years or less leases. There is a lot more flexibility being provided. The commercial context means it makes sense to ask how appropriate security of tenure is now."

Commercial property expert Adam Carney of law firm Pinsent Masons said an overhaul is “long overdue”.

“The rationale for the legislation is to give businesses certainty as to the premises they trade from. However, there are numerous exceptions to the right of renewal which, together with the huge body of case law that has built up around them, leads to both landlords and tenants often spending vast sums on strategic and legal advice."

Carney says that at present proceedings can take an "inordinate amount of time" to resolve, particularly given court delays and this is not helpful to landlords, which might require the premises back to redevelop them, or tenants, which want certainty.

"It is not known what the commission will recommend, but a consolidation of the case law and taking resolution of renewal disputes outside of the court system would be welcomed by many,” Carney said.

He added that it would be a missed opportunity if the review didn’t also consider how "green" lease provisions could be better incorporated as part of lease renewals. "It will be interesting to see how the review develops to take into account the legitimate concerns of both landlords and tenants.”

Ben Barrison, partner and head of real estate disputes at Forsters said it was high time the 1954 Act was reviewed, and welcomed the Law Commission's launching of the consultation about the principle of security of tenure.

"Of the four options they are considering, a modernised contracting-out regime, to reflect the 20 years of tech advancement since it was last updated, would be an important first step and this would retain the balance the Act brings to commercial landlord and tenant relationships. Apart from security of tenure, there is a great deal of additional work for the Law Commission to do in terms of the other mechanics of the 1954 Act to deliver a modern regime for determining the lease terms and opposing renewal/termination cases. The 1954 Act is currently too slow and cumbersome for the digital age, but the overarching intent remains good.”