New Law Commission consultation on 1954 Act
The Law Commission has launched a significant consultation on business tenancy rights in England and Wales, examining whether commercial tenants should continue to have statutory rights to renew their leases, and whether the current model is suitable for the present market.
Background
Following post-war scarcity and uncertainty of the commercial real estate market, as well as physical damage to real property, the Landlord and Tenant Act 1954 (the “1954 Act”) introduced a statutory right to give business tenants to option to renew their leases, and the potential to be monetarily compensated in circumstances where the landlord can prove they need the property back for either redevelopment or for their own occupation. This right, known as "security of tenure," has been a cornerstone of commercial property law for nearly 70 years.
Key Issues Under Review
With approximately 5 million businesses in England and Wales, and commercial property valued at nearly £900 billion, over half of which is rented, this review has significant economic implications.
The Law Commission is considering four potential approaches:
1. Mandatory Security of Tenure
Key features:
- All business tenants would have automatic renewal rights
- No ability to opt out
- Provides maximum tenant protection
The current system of serving notices to renew or terminate a commercial lease would remain, and the ability to opt out would be removed. This option would not provide landlords with much flexibility at all, and the inability to opt out would be even more of a point of contention. Tenants, however, would be afforded more protection than ever.
With the market not needing as much regulation, it is doubtful whether there is much need for this model.
2. Complete Abolition
Key features:
- Removes all statutory renewal rights
- Leaves renewal entirely to market forces
- Maximizes contractual freedom
This option provides the most flexibility in terms of negotiations between landlords and tenants, but, by definition, this gives tenants the least amount of protection. This model likely comes in response to criticism of the 1954 Act as being overly bureaucratic and cumbersome in practice. Commercial leases will need to be even more carefully drafted and reviewed to account for the lack of statutory intervention to ensure the intentions of the parties is accurately expressed.
3. Contracting-In Model
Key features:
- Default position would be no renewal rights
- Parties would need to agree to opt into statutory protection
This would keep flexibility where the parties choose to opt in, and reduces the administrative and financial burden of contracting out, as is the case now. This is a landlord-friendly option, and tenants may face the prospect of wanting to opt in to ensure protection, but being unable to find a landlord who is willing to contract in.
4. Current Contracting-Out Model
Key features:
- Maintains existing system
- Default position would be continued renewal rights
- Parties agree to exclude protection
The current model is more tenant-focussed, and gives landlords a limited and burdensome ability to terminate a commercial lease where a tenant wants to renew. However, the option to contract out by agreement affords a degree of flexibility, particularly to landlords.
Practical Implications
The review aims to create a framework that will be applicable across the market, while supporting an efficient and balanced use of commercial space.
An ideal model will foster productive landlord-tenant relationships, without being too heavily weighted in either corner. It is unlikely that complete abolition or mandatory security of tenure will be the new norm, as they would stray too far from the current format, with no option to contract in or out. If there is any change, landlords may look to push for an opting-in model, to reduce their automatic administrative and legal burden of lease renewal.
As with the socio-political context of the introduction of the 1954 Act, we now have the post-COVID challenges to bear in mind: notably the increase of home and flexible working, which requires less office space.
Another change since the introduction of the 1954 Act is the environmental landscape. Landlords will want more flexibility to do works to their commercial properties to ensure they are compliant with environmental regulations and energy efficient, without having to overcome the legal and logistical hurdles of doing so.
Consultation Timeline and Next Steps
The consultation runs until 19 February 2025. This is the first of two planned consultation papers, with the second focusing on detailed implementation of whatever model is ultimately chosen.
Property professionals, landlords, and tenants are encouraged to respond to the consultation. The Law Commission will use these responses to develop recommendations for reform, which will ultimately be presented to the Government for consideration. It is therefore important for those with an interest in commercial property who stand to be affected by the reform, to submit their responses.
The links for response are below:
