The lease termination procedure under the Landlord and Tenant Act 1954

This is a brief overview of the lease termination procedure relevant to business tenancies enjoying security of tenure under Part II of the Landlord and Tenant Act 1954 (the “Act”). It should be read in conjunction with our more general introductory note on the rights enjoyed by business tenants under the Act.

To keep this overview as succinct as possible it has been necessary to deal briefly with some points that are in reality quite complex and specific legal advice should always be obtained as to how the principles set out below apply in any given situation.

The Act is primarily intended to provide business tenants with the right to renew their lease on the expiry of the contractual term on essentially the same terms, subject to a review of the rent to open market rent. Although a landlord is entitled to oppose lease renewal on certain specified grounds (such as redevelopment), if it chooses to do so it is likely to have to pay the tenant compensation if the tenant vacates the premises voluntarily or following a court order. If the tenant contests the issue, the matter is referred to Court and it may take over a year to resolve the issue.

This is an important issue for an investor or developer to understand if it is considering purchasing a commercial building in England and Wales and requires vacant possession for, for instance, redevelopment. The potential delay, uncertainty and costs of the legal process must be factored into the purchase price and development programme.

Either the tenant or the landlord can commence the lease renewal/termination process by service of the requisite statutory notice. However, if the landlord wants to oppose renewal in order to obtain vacant possession on lease expiry, it is likely to take the initiative by serving an “opposed section 25 notice” on the tenant at the earliest opportunity, which is 12 months before the lease is due to expire.

The notice must specify one or more of the seven statutory grounds of opposition to renewal. Careful tactical consideration should be given to the grounds to be specified. Some of the grounds (such as redevelopment) are “mandatory” so that, if proven, the Court must grant possession. Some grounds give the Court a discretion whether or not to grant possession. Further, some of the grounds entitle the tenant to compensation (see below) and some do not.

In brief, the statutory grounds are

1. Breach of the repairing covenants
2. Persistent arrears
3. Other breaches
4. The landlord is able to provide suitable alternative accommodation
5. The lease was a subletting of part only and the continuing letting of part reduces the rental value of the whole
6. The landlord intends to demolish and reconstruct the property or carry out substantial works of reconstruction (commonly referred to as “redevelopment”)
7. The landlord intends to occupy the property.

Following service of the landlord’s opposed notice there usually follows a period of negotiation and it is common for the parties to agree that the tenant will surrender its lease and vacate the property, subject to payment of compensation. However if the parties cannot agree terms for the tenant to vacate, either one of them will have to apply to the Court to resolve the matter. This is likely to be the landlord if it requires possession as soon as possible.

If the landlord does so, it must have sufficient evidence to satisfy the Court at trial that the tenant should not be granted a new lease. There is a substantial body of case law around what constitutes sufficient evidence for each of the seven grounds and the Court’s discretion plays a significant role.

If the Court is satisfied that one or more of the grounds has been made out, it may (or, in the case of mandatory grounds (d), (f) and (g), must) order the termination of the tenancy three months and 14 days after the trial. Accordingly if the tenant opposes the application for possession all the way to a trial, possession is unlikely to be obtained for over one year following the issue of proceedings and this can be delayed further by appeals. This potential delay needs to be factored into the landlord’s plans.

The most commonly relied on ground for opposing lease renewal proceedings is ground (f) – redevelopment. The landlord will have to prove at trial that it has “a firm and settled intention” to redevelop the premises occupied by the tenant, as opposed to merely refurbishing them. The landlord must therefore intend to demolish or reconstruct the premises or a substantial part of them. In simple terms, it will be necessary to prove at trial (and for practical purposes some time before trial) that the landlord intends to carry out significant structural works to the premises that will necessitate vacant possession. The precise extent of the works required to satisfy ground (f) is a difficult issue and specific advice should be sought on this once the landlord’s proposals are clear.

Proving at trial that the landlord has “a firm and settled intention” to redevelop the tenant’s premises is not purely a subjective test of the landlord’s intentions. It also involves demonstrating that those intentions are viable/achievable. The evidence that the Court will expect to see at trial to establish the requisite intention should ideally include

• Detailed drawings/plans for the proposed works
• Appropriate regulatory consents/permits (e.g. planning consent and building regulations), or evidence of a strong likelihood that they will be obtained
• A proposed timetable for the works
• A building contract in place or at least quotes from contractors
• Proof that funding is in place
• Board resolutions approving the works and authorising a particular director to give evidence as to the landlord’s intention to redevelop
• Evidence that there are no other insuperable obstacles to development

Whilst the landlord’s intention does not technically have to be proved until trial, in reality the necessary evidence will all have to be collated and served several months before then. Further, once the landlord has served an opposed notice specifying ground (f), it is likely that the tenant or its advisors will request evidence of the landlord’s intentions shortly thereafter. Ideally, therefore, the landlord’s plans should be fairly advanced so that a strong picture can be presented at an early stage. This is likely to discourage the tenant from fighting the proceedings and assist in any potential surrender discussions.

If the court orders the termination of the tenancy on the basis only of grounds (e), (f) or (g), the landlord will also be liable to pay statutory compensation upon the tenant vacating the property. The amount of statutory compensation payable depends on the rateable value of the property and the length of time during which the tenant (and any predecessor in title carrying on the same business) has been in business occupation of the property. If the tenant (and any such predecessor) has been in occupation for less than 14 years, compensation will be payable at 1x the rateable value of the property; if for 14 years or more, the compensation will be 2x the rateable value.