Learning Outcomes
This article explains security of tenure under business leases and its interaction with leasehold covenants within the framework of the Landlord and Tenant Act 1954 (Part II), including:
- The statutory scheme securing business tenants under the Landlord and Tenant Act 1954 (Part II)
- Application and exclusion of security of tenure
- The contracting-out procedure and timing requirements
- Permitted methods of termination and renewal of protected tenancies
- Landlord’s grounds of opposition and evidential requirements (redevelopment and own-occupation)
- Consequences of successful opposition, including statutory compensation
- Interaction between leasehold covenants and security of tenure (quiet enjoyment, user, repair, alterations, alienation)
- Strategic considerations in commercial property practice (interim rent, notices, competent landlord)
SQE1 Syllabus
For SQE1, you are required to understand leasehold covenants and security of tenure under business leases, including the operation of the Landlord and Tenant Act 1954 (Part II), with a focus on the following syllabus points:
- The definition and effect of leasehold covenants in business leases (quiet enjoyment, user, repair, alterations, insurance, alienation)
- The lease/licence distinction and why exclusive possession matters for security of tenure
- The statutory protection of business tenants under the Landlord and Tenant Act 1954 (Part II)
- Application of the Act: business occupation, tenancies covered and exclusions, and the competent landlord
- Continuation tenancies and interim rent during the holding-over period
- Contracting out of security of tenure: prescribed warning notice, simple/statutory declarations, and lease statements
- Termination and renewal procedures: section 25 notice, section 26 request, section 27 notice, and common law routes permitted by the Act
- Landlord’s grounds of opposition under section 30(1): discretionary and mandatory grounds; evidential standards and legal limitations
- Terms of a renewal lease: length, rent (open market assumptions/disregards), rent review, and other terms (O’May principles)
- Compensation for refusal on no-fault grounds and how it is calculated by rateable value
- Practical implications of leasehold covenants and security of tenure for negotiations, notices, and litigation strategy
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- What is the effect of security of tenure under the Landlord and Tenant Act 1954 for a business tenant?
- Name two statutory grounds on which a landlord can oppose the grant of a new business tenancy.
- What is the required procedure for contracting out of security of tenure?
- True or false? A landlord can always refuse to grant a new lease to a business tenant when the contractual term expires.
Introduction
When advising on commercial leases, it is essential to understand both the contractual obligations (covenants) within the lease and the statutory rights of business tenants to remain in occupation after the lease term ends. The Landlord and Tenant Act 1954 (Part II) provides business tenants with security of tenure, subject to defined exclusions, formal procedures and specific landlord opposition grounds. The statutory framework modifies common law termination and renewal, imposes strict notice requirements on both parties, and controls the terms of any renewal lease. This article explains the key principles, procedures, and practical issues relevant to SQE1.
Leasehold Covenants in Business Leases
A business lease contains a range of covenants—promises made by the landlord and tenant—which regulate the use, management, and enjoyment of the premises.
Key Term: leasehold covenant
A legally binding promise in a lease, made by either landlord or tenant, concerning the use, repair, or management of the leased premises.
Covenants may be positive (requiring action, such as repair or payment of rent) or restrictive (prohibiting certain actions, such as alterations or subletting without consent). Typical commercial covenants include:
- Quiet enjoyment: the landlord must not substantially interfere with the tenant’s lawful use.
- Repair: obligations vary; “keep in repair” usually also requires “put into repair” if the premises are not in repair at grant. Tenants commonly seek fair wear and tear and insured risks exclusions.
- User and planning: permitted use is often defined. Changing use may require consent and separate planning permission.
- Alterations: structural/external works are often prohibited absolutely; internal non-structural works may be permitted subject to consent.
- Insurance: landlords typically insure the building for full reinstatement value and recover premiums as insurance rent; leases often provide for rent suspension and reinstatement obligations following insured damage.
- Alienation: assignment and underletting commonly require consent not to be unreasonably withheld. In post-1995 leases, an Authorised Guarantee Agreement (AGA) may be required on assignment.
- Enforcement and remedies: for breaches, the landlord may seek damages, injunction, specific performance, self-help (Jervis v Harris clauses), commercial rent arrears recovery, or forfeiture (subject to statutory constraints).
These covenants operate throughout the term and, in protected business tenancies, continue during holding over until the tenancy is properly terminated under the Act.
Security of Tenure: Statutory Protection for Business Tenants
Business tenants in England and Wales benefit from statutory protection under Part II of the Landlord and Tenant Act 1954, known as "security of tenure." This means that, in most cases, a business tenant has the right to remain in occupation after the contractual term ends and to request a new lease, unless the landlord can establish a statutory ground for refusal.
Key Term: security of tenure
The statutory right of a business tenant to remain in occupation and apply for a new lease after the contractual term ends, unless excluded or opposed on specific grounds.
When Does Security of Tenure Apply?
Security of tenure applies if:
- There is a tenancy (not a licence) granting exclusive possession
- The tenant occupies the premises for the purposes of a business carried on by them (widely defined to include trades, professions, charities and clubs)
- The tenancy is not specifically excluded or "contracted out" of the Act
Certain tenancies are excluded, such as tenancies at will, agricultural tenancies, mining leases, service tenancies, and fixed-term tenancies not exceeding six months (unless the tenant’s occupation exceeds 12 months in aggregate or the lease contains a right to extend beyond six months).
Key Term: business tenancy
A tenancy where the tenant occupies premises for the purposes of a business carried on by them.
Where there is doubt, the lease/licence distinction is important. Exclusive possession for a fixed or periodic term generally signals a lease rather than a licence, regardless of labels used in the document.
Continuation Tenancy
If the contractual term of a protected business lease expires, the tenancy does not end automatically. Instead, it continues on the same terms until terminated in accordance with the Act. The tenant holds over under a continuation tenancy, and either party may seek interim rent.
Key Term: continuation tenancy
The statutory continuation of a business tenancy after the contractual term ends, pending proper termination under the Act.Key Term: interim rent
A rent determined by the court for the holding-over period between service of the relevant notice and the grant of the renewal lease (or termination), ensuring a fair level during continuation.
Competent Landlord
Certain notices and applications under the Act must be served by or on the "competent landlord." This is the person (often the freeholder or a superior landlord) currently entitled to grant a new tenancy at the termination date; it may not be the immediate landlord if they lack sufficient reversionary interest.
Key Term: competent landlord
The landlord (or superior landlord) entitled to grant a new tenancy or oppose renewal under the Landlord and Tenant Act 1954.
Contracting Out of Security of Tenure
It is possible for the parties to agree that the statutory protection of security of tenure will not apply. This is known as "contracting out." Strict statutory procedures must be followed for the exclusion to be valid.
Contracting out is typically used for short commercial lets where future flexibility is important, for redevelopment timetables, or to avoid holding over. Contracting out can also be required in licences to underlet (as a condition) before a sublease is granted.
Contracting Out Procedure
- The landlord serves a prescribed warning notice on the proposed tenant (and any guarantor), identifying the premises and explaining the effect of exclusion.
- The tenant makes either:
- A simple declaration acknowledging receipt and understanding of the notice at least 14 days before becoming contractually bound, or
- A statutory declaration (sworn/affirmed before an independent solicitor) if the tenant will become bound sooner than 14 days after the warning notice.
- The lease (or agreement for lease) must include a clear statement referring to the exclusion and to the warning notice and tenant declaration.
If the procedure is not followed precisely, the exclusion will be invalid and the tenant will have security of tenure. Care must be taken with timing (14-day rule), identification of the premises, parties and transaction documents, and annexing or referencing the correct notice and declaration within the lease.
Key Term: contracted-out tenancy
A fixed-term business tenancy expressly excluded from sections 24–28 of the LTA 1954 by the prescribed warning notice and tenant declaration procedure, and stated as such in the lease.
Worked Example 1.1
A landlord wishes to grant a 3-year lease of a shop to a tenant but wants to ensure the tenant cannot claim security of tenure. What steps must be taken?
Answer:
The landlord must serve a prescribed warning notice on the tenant before the tenant becomes contractually bound. If the lease will be entered into 14 or more days after the notice, the tenant may sign a simple declaration acknowledging the warning. If completion or contractual commitment will be sooner, the tenant must make a statutory declaration before an independent solicitor. The lease must state that sections 24–28 of the Act are excluded and refer to the warning notice and the tenant’s declaration. The documents must be completed before the lease (or agreement for lease) is signed; otherwise, the exclusion is ineffective.
Termination and Renewal of Business Tenancies
A protected business tenancy can only be terminated in accordance with the Act. The main methods are:
- Service of a section 25 notice by the landlord
- Service of a section 26 request by the tenant
- Surrender or forfeiture
- Tenant's notice to quit (for periodic tenancies)
- Tenant ceasing occupation for business purposes at the end of the term
- Tenant’s section 27 notice to end a fixed-term tenancy after expiry
Key Term: section 25 notice
A formal notice served by the (competent) landlord to terminate a business tenancy, stating whether renewal is opposed and, if so, on what grounds, or proposing terms for a new tenancy.Key Term: section 26 request
A formal tenant’s request for a new business tenancy, specifying the commencement date and proposed terms (including rent and property).Key Term: section 27 notice
A tenant’s written notice to end a fixed-term protected tenancy; the notice must give at least three months and cannot expire earlier than the contractual term expiry.
Section 25 notice timing is strict: it must give not less than six months and not more than twelve months’ notice of the termination date, and that date cannot be earlier than the common law expiry date for a fixed term. The notice must relate to the whole holding.
Section 26 requests operate similarly: the specified start date for the new tenancy must be between six and twelve months after the date of service and cannot precede the contractual expiry date. If the landlord wishes to oppose the grant of a new tenancy, the landlord must serve a counter-notice stating the grounds of opposition within two months of the tenant’s request; if they do not, the landlord generally cannot oppose in court.
Following either a section 25 notice or section 26 request, either party may apply to the court within the statutory time window. The parties can agree extensions in writing before the deadline. During continuation, a party may apply for interim rent to reflect market conditions pending renewal or termination.
Landlord's Grounds for Opposing Renewal
A landlord can only refuse to grant a new lease on one or more of the statutory grounds set out in section 30(1) of the Act. These include:
- Tenant's failure to repair (ground (a)) – discretionary
- Persistent delay in paying rent (ground (b)) – discretionary
- Substantial breach of other obligations (ground (c)) – discretionary
- Suitable alternative accommodation available (ground (d)) – mandatory
- Uneconomic subletting (ground (e)) – mandatory
- Landlord's intention to demolish or reconstruct (ground (f)) – mandatory
- Landlord's intention to occupy for own business or residence (ground (g)) – mandatory
Some grounds are discretionary (the court may refuse renewal if satisfied the tenant is significantly at fault); others are mandatory (the court must refuse renewal once the ground is established).
Ground (f) requires a genuine, settled intention to carry out substantial works and that those works cannot reasonably be carried out without obtaining possession. The landlord must show the intention is independent of the tenant’s presence; contrived schemes that would only be undertaken to defeat renewal are insufficient. If the tenant offers practical rights to permit works without substantial interference (or agrees to take an economically separable part), the court may consider a defence under section 31A.
Ground (g) requires a fixed intention to occupy for the landlord’s own business or residence and proof of a reasonable prospect of achieving that intention. A five-year rule applies: the landlord (or person with a controlling interest in the landlord company) must have owned the relevant interest for at least five years before the tenancy’s termination date to rely on ground (g).
Worked Example 1.2
A landlord serves a section 25 notice opposing renewal on the ground that they intend to redevelop the premises (ground (f)). What must the landlord prove?
Answer:
The landlord must show a genuine, settled intention to carry out substantial works, that this intention is independent of any desire merely to remove the tenant, and that the works cannot reasonably be carried out without obtaining possession. The landlord must evidence practical steps (such as plans, finance, professional engagement) and a real prospect of doing the works. If the tenant proposes granting suitable rights of entry allowing the works without substantial interference or offers to take an economically separable part, the tenant may have a defence under section 31A.
Worked Example 1.3
A landlord acquired the freehold reversion two years ago and now wants to oppose renewal to occupy the premises for its own business (ground (g)). Can it do so?
Answer:
No. The landlord cannot rely on ground (g) because it has not owned the superior interest for at least five years before the termination date. Ground (g) is mandatory when established, but section 30(2) imposes the five-year rule to prevent opportunistic acquisitions to secure vacant possession. The landlord must consider other grounds, if any, or agree renewal on suitable terms.
Exam Warning
If the landlord fails to specify the correct statutory grounds in the section 25 notice or section 26 counter-notice, they cannot rely on other grounds later. The notice must be accurate and complete at the time of service. Use prescribed forms and check timing: the notice must give 6–12 months and relate to the whole holding. Minor errors may be overlooked only if a reasonable recipient would be left in no doubt about the notice’s meaning, but do not rely on this.
Compensation for Refusal of Renewal
If the landlord successfully opposes renewal on certain "no-fault" grounds—ground (d) suitable alternative accommodation, ground (e) uneconomic subletting, or ground (f) demolition/reconstruction—the tenant may be entitled to statutory compensation calculated by reference to the rateable value of the premises. Broadly:
- One times rateable value if the tenant (and predecessors) has been in occupation for less than 14 years
- Double rateable value if the tenant has been in occupation for 14 years or more
Compensation is payable only where refusal is not based on tenant default (grounds (a)–(c)). It is designed to reflect loss of business premises and goodwill associated with the location.
Key Term: compensation
A statutory payment due to a business tenant denied a new lease on specified no-fault grounds, calculated by reference to the rateable value and increased where long occupation is established.
Terms of the Renewal Lease
If renewal is ordered or agreed, the court determines terms where parties cannot agree, subject to statutory guidance:
- Term: a reasonable fixed term not exceeding 15 years, commencing three months after final disposal of proceedings and expiry of the appeal window
- Rent: open market rent under section 34(1), applying standard assumptions and disregards to avoid inflation by occupancy, goodwill, voluntary improvements, or licences payable by the tenant
- Rent review: a rent review clause may be included even if none existed in the previous lease; reviews are typically upwards-only but subject to negotiation
- Other terms: the court considers existing lease terms and all relevant circumstances. New terms or types of clause may be added only if fair and reasonable. The party seeking departure from the existing lease bears the burden—commonly the landlord proposing new restrictions or costs must justify them (O’May principles)
This approach preserves commercial balance while avoiding unfairness from tenant-generated factors.
Practical Implications for Commercial Leases
When advising clients, it is important to consider:
- Whether security of tenure applies or has been excluded; check lease references to exclusion and whether the contracting-out procedure was strictly followed
- The correct procedure and timing for terminating or renewing a protected business tenancy; use prescribed forms and identify the competent landlord
- The landlord's ability to oppose renewal; assess which grounds are viable and the evidence required (plans, finance, length of ownership, alternatives offered)
- The effect of redevelopment ground (f): ensure genuine intention and necessity for possession; consider section 31A tenant defences
- The five-year ownership rule on ground (g) and how corporate groups and controlling interests may satisfy it
- Interim rent during the continuation period; consider applying to align rent with market conditions pending renewal/termination
- How lease covenants (user, alterations, repair) interact with security of tenure and shape both parties’ strategy in negotiation, evidence gathering, and litigation
Worked Example 1.4
A tenant serves a section 26 request proposing a new term to commence 12 months ahead and a reduced open market rent due to local market falls. The landlord wants to oppose on grounds (f) (redevelopment) and (g) (own occupation), but it acquired the reversion four years ago. What next?
Answer:
The landlord must serve a counter-notice within two months of the tenant’s section 26 request, stating the grounds of opposition. Ground (g) is unavailable due to the five-year rule; ground (f) can be pursued if the landlord evidences genuine, settled, and necessary redevelopment intention and a real prospect of carrying it out. The tenant may defend under section 31A by offering appropriate rights of entry. Either party may apply to court after the counter-notice (or after two months if none is served) and before the day preceding the requested start date. The court will then determine the outcome and, if renewal is granted, set rent on section 34 assumptions/disregards and appropriate terms.
Revision Tip
Always check the lease for any reference to exclusion of security of tenure and ensure the statutory procedure has been followed. If in doubt, assume the tenant has security of tenure. Ensure s25 and s26 dates and contents are correct and served by/on the competent landlord. Keep a timeline for notices, counter-notices, court application deadlines, and interim rent strategy.
Key Point Checklist
This article has covered the following key knowledge points:
- Security of tenure gives business tenants the right to remain in occupation and request a new lease after expiry of the contractual term.
- The Landlord and Tenant Act 1954 (Part II) sets out the statutory framework, modifies common law termination, and provides continuation tenancies.
- Security of tenure applies to business tenancies granting exclusive possession; certain categories are excluded (e.g., tenancies at will, short fixed terms with no extension, agricultural holdings).
- Contracting out of security of tenure is only valid if the prescribed warning notice, tenant declaration (simple or statutory depending on timing), and lease statement are all correctly completed.
- A section 25 notice must give 6–12 months and cannot terminate earlier than common law expiry for fixed terms; a section 26 request must propose a start date 6–12 months ahead and not before contractual expiry.
- Only tenants can serve notice to quit for periodic tenancies under the Act; tenants can also end their fixed-term tenancy by a section 27 notice or by ceasing occupation at expiry.
- A landlord can oppose renewal only on specific statutory grounds and must state these in the notice or counter-notice; redevelopment (ground (f)) requires genuine, settled intention and necessity for possession; own-occupation (ground (g)) requires five years’ ownership.
- Tenants may be entitled to compensation if renewal is refused on specified no-fault grounds; the amount is based on rateable value and increased for long occupation.
- Terms of a renewal lease are set by reference to existing terms and fairness; rent is open market with statutory disregards; rent review may be included even if not previously present.
- Interim rent can be sought during continuation to align the holding-over rent with market conditions.
Key Terms and Concepts
- leasehold covenant
- security of tenure
- business tenancy
- continuation tenancy
- interim rent
- competent landlord
- section 25 notice
- section 26 request
- section 27 notice
- contracted-out tenancy
- compensation