What is security of tenure?
Part II of the Landlord and Tenant Act 1954 (LTA 1954) affords business tenants security of tenure i.e. the right to a new tenancy on expiry of the current tenancy on like for like terms, save for a change in the market rent, if appropriate. This Act was introduced to protect tenants who may have built up goodwill where to relocate could have a detrimental effect on that business.
If a tenant has security of tenure, there are only limited circumstances where a renewal lease can be successfully opposed by a landlord. These limited grounds for opposition are set out in section 30 (1) of the LTA 1954. Under section 30 (1), there are fault grounds i.e. grounds were the tenant is at fault (for example, if it persistently pays rent late) and there are no-fault grounds, such as grounds where the tenant is not at fault (for example where the landlord wants to redevelop the property and / or resume occupation itself).
Depending on the circumstances, if a non-fault ground is advanced by the landlord, the tenant could be entitled to a payment of compensation, which is usually linked to the rateable value of the property. It is therefore essential to consider, at the time of entering into negotiations, what the landlord’s future plans for the property are. If the landlord is only looking at leasing a property for a few years, to allow him time to save money for a redevelopment, the lease should be expressly excluded from the security of tenure provisions contained in the LTA 1954.
So, can the right to security of tenure be excluded?
Yes – if this can be agreed between the landlord and the tenant at the outset. Leases can be drafted outside of the security of tenure provisions contained in the LTA 1954 if appropriate wording is included in the lease at the time of drafting and a certain, strict statutory procedure is followed before the lease completes. The statutory procedure involves the landlord serving an exclusion notice on the tenant and the tenant acknowledging receipt of the notice (and acknowledging its consequences), by swearing or signing a prescribed form of declaration.
There are also certain arrangements which do not actually qualify as a ‘tenancy’ and therefore do not have protection of the LTA 1954. See below.
How does a tenant qualify for security of tenure?
There are three basic requirements for a tenant to acquire security of tenure:
- There must be a tenancy;
- The tenant must be in occupation; and
- The tenant’s occupation must be for the purposes of a business.
What is a tenancy?
The best starting point to answer this question is to look at the case of Street v Mountford (1985). While this case centred on a residential dwelling, the Courts took the opportunity of setting out what distinguishing features a tenancy must have. Broadly speaking, for a tenancy to be created, there must be:
- An intention to create legal relations;
- Exclusive occupation by the tenant for a fixed term; and
- Payment of rent.
The Court will ignore labels if, for example, an agreement was entered into which called itself a ‘licence’ but the tenant was granted exclusive possession, for a fixed term and paid rent. In this case, a tenancy would be implied. Generally speaking, genuine licences, where a tenant is not afforded exclusive possession, do not attract security of tenure.
It is therefore important to note that even if a document is termed a ‘licence’ or there is no actual document in place, tenancies could inadvertently exist which could potentially attract security of tenure. Periodic tenancies which arise following the expiry of a lease, where the tenant continues to make ‘periodical’ rent payments to the landlord, can attract security of tenure.
The tenant must be in occupation
This requirement is fairly self-explanatory but it is worth noting that if a tenant grants a sub-lease of the whole of its demised premises to a third party, it will not be in occupation and therefore will not have security of tenure.
What does occupation for the purposes of business mean?
In Part II of the 1954 Act the expression ‘business’ is given a very wide interpretation and includes a trade, profession or employment and includes any activity carried on by a body of persons, whether corporate or unincorporated.
So the definition includes a trade, profession or employment and in addition, if the tenant is a body of persons, ‘business’ includes any activity. It is not necessary to establish that the business is carried out for the purposes of making a profit and a trading activity that is carried on for the purposes of making a profit will be a business for the purposes of the LTA 1954, even if that profit cannot be distributed because the tenant is a not-for-profit organisation.
A members’ club is also carrying on a business for the purposes of the LTA 1954, even if it only trades with its members.
Each case will be dependent on its facts but landlords beware – if you have an arrangement with a tenant for a fixed term who pays rent and who occupies the property for the purposes of a business, security of tenure may well have been acquired and you may have to follow a costly, statutory procedure to object to a new tenancy.
If you have any questions concerning security of tenure or about commercial leases in general, please do not hesitate to call BHW Solicitors and ask to speak to someone in our Commercial Property Department.