Security of tenure under a business lease

Introduction

Security of tenure under a business lease refers to the statutory rights given to tenants occupying premises for business purposes, primarily governed by the Landlord and Tenant Act 1954 (LTA 1954). This legal structure grants tenants the right to continue using their premises upon lease expiry and to request a new lease, subject to specific conditions and exceptions. Core principles include the automatic continuation of tenancies, the statutory procedure for lease renewal, and the limited grounds upon which landlords may oppose renewal. Key requirements involve the tenant's occupation for the purposes of a business, compliance with statutory procedures, and observing notice periods prescribed by the Act.

Leasehold Covenants

Leasehold covenants are contractual obligations within a lease agreement, defining the rights and duties of both landlords and tenants. These covenants govern the conduct of the parties throughout the lease term and are significant in maintaining a harmonious landlord-tenant relationship.

Positive Covenants

Positive covenants require a party, typically the tenant, to perform certain actions. Examples include:

• Repair and Maintenance: Obligations to keep the premises in good repair.
• Payment of Rent and Charges: Timely payment of rent, service charges, and other agreed sums.
• Insurance: Obtaining and maintaining adequate insurance for the premises.
• Compliance with Laws: Meeting applicable statutory requirements affecting the premises.

Restrictive Covenants

Restrictive covenants impose limitations on the use of the property. These covenants can significantly preserve the value and character of the premises and surrounding properties. Examples include:

• Use Restrictions: Limiting the permitted use of the premises to specified purposes.
• Alterations and Improvements: Prohibiting structural alterations without the landlord's consent.
• Alienation: Restricting assignment, subletting, or sharing occupation.
• Nuisance and Annoyance: Preventing activities that may cause disturbance to others.

Understanding the distinction between positive and restrictive covenants is important, as their enforcement mechanisms differ, particularly regarding successors in title.

Legal Framework Governing Covenants

The legal principles governing the enforcement of leasehold covenants are rooted in both common law and statutory provisions.

Privity of Contract and Estate

Under common law, the doctrine of privity of contract binds the original parties to the lease. However, upon assignment, the doctrine of privity of estate becomes relevant, affecting the enforceability of covenants between subsequent landlords and tenants.

The Landlord and Tenant (Covenants) Act 1995

The Landlord and Tenant (Covenants) Act 1995 introduced substantial reforms to the law of leasehold covenants, particularly for leases granted on or after 1 January 1996 ("new tenancies"). Key provisions include:

• Release of Original Tenant: Upon assignment, the original tenant is automatically released from future liability, subject to any authorised guarantee agreement (AGA).
• Benefit and Burden of Covenants: Covenants are enforceable by and against successors in title, provided they "touch and concern" the land.

Case Law Illustrations

Cases such as Stuart v Joy [1904] and London Diocesan Fund v Avonridge [2005] demonstrate the application of these principles, showing how courts interpret and enforce covenants in varying circumstances.

Security of Tenure Under the Landlord and Tenant Act 1954

The Landlord and Tenant Act 1954 provides statutory protection for tenants of business premises, granting them security of tenure. This protection ensures that tenants can remain in occupation after the contractual term has expired, subject to the provisions of the Act.

Core Principles

• Automatic Continuation: Under Section 24(1) LTA 1954, a business tenancy does not end at the expiry of the contractual term but continues until terminated in accordance with the Act.
• Right to Apply for a New Tenancy: Tenants have the right to apply to the court for the grant of a new tenancy.
• Limited Grounds for Opposition: Landlords may oppose the grant of a new tenancy only on specific statutory grounds set out in Section 30(1).

Eligibility Criteria

For a tenancy to be protected under the Act:

• Occupation for Business Purposes: The tenant must occupy the premises for the purposes of a business carried on by them.
• Tenancy Status: The agreement must constitute a tenancy, not a licence.
• Exclusions: Certain tenancies are excluded, such as those under specific duration thresholds or those explicitly contracted out of the Act.

Grounds for Opposition to Lease Renewal

Landlords may oppose a tenant's request for a new tenancy on one or more of the grounds specified in Section 30(1) LTA 1954. These grounds include:

• Breach of Repair Obligations (Ground (a)): Substantial breaches by the tenant concerning repair and maintenance.
• Persistent Delay in Paying Rent (Ground (b)): Habitually late payments of rent.
• Other Substantial Breaches (Ground (c)): Significant breaches of other obligations.
• Alternative Accommodation (Ground (d)): Availability of suitable alternative premises for the tenant.
• Uneconomic Subletting (Ground (e)): The premises are held under a sublease, and possession is required for economic reasons.
• Demolition or Reconstruction (Ground (f)): Landlord intends to demolish or reconstruct the premises and requires possession.
• Owner Occupation (Ground (g)): Landlord intends to occupy the premises for their own business or residence.

Application of Grounds

In S Franses Ltd v The Cavendish Hotel (London) Ltd [2018] UKSC 62, the Supreme Court clarified the application of Ground (f), noting that the landlord's intention must be genuine and not solely to remove the tenant. The case emphasized the need for landlords to demonstrate a firm and settled intention to carry out the proposed works, independent of the tenant's rights.

Contracting Out of Security of Tenure

It is possible for parties to agree that the tenancy will not have the protection of the LTA 1954. This process, known as "contracting out," is governed by Sections 38A and 38B of the Act.

Procedure for Contracting Out

To validly contract out of the Act's protections, strict compliance with the prescribed procedure is required:

1. Service of Warning Notice: The landlord must serve a warning notice on the tenant, explaining that the tenancy will be excluded from the security provisions.
2. Tenant's Declaration: The tenant must make a statutory declaration acknowledging receipt of the notice and understanding the consequences. This can be either a simple declaration or a statutory declaration, depending on the timing.
3. Inclusion in Lease: The lease must include a reference that the parties have agreed to exclude the security of tenure provisions and that the requisite notices and declarations have been exchanged.

Failure to follow these steps can result in the purported exclusion being ineffective, thereby affording the tenant statutory protection.

Case Reference

In TFS Stores Ltd v The Designer Retail Outlet Centres (Mansfield) General Partner Ltd [2021] EWCA Civ 688, the Court of Appeal highlighted the importance of following the correct procedure when contracting out. The case demonstrated that procedural defects could invalidate the exclusion, emphasizing the need for meticulous compliance.

Practical Considerations in Commercial Leases

Understanding the interplay between leasehold covenants and security of tenure is important for legal practitioners advising on commercial leases.

Drafting Lease Agreements

• Precision in Language: Clear and unambiguous drafting reduces the likelihood of disputes.
• Tailoring Covenants: Customizing covenants to reflect the specific needs of the parties and the nature of the premises.
• Forward Planning: Anticipating future assignments or subletting and incorporating appropriate provisions.

Advisory Role

Legal advisors must consider:

• Client Objectives: Aligning legal advice with the client's commercial goals.
• Risk Assessment: Evaluating potential risks associated with covenants and security of tenure.
• Compliance with Statutory Procedures: Ensuring adherence to statutory requirements to prevent unintended consequences.

Conclusion

The complex relationship between leasehold covenants and security of tenure under business leases necessitates a comprehensive understanding of both the legal framework and relevant case law. The Landlord and Tenant Act 1954, along with the Landlord and Tenant (Covenants) Act 1995, establishes the regulations governing these areas. Specific principles, such as the automatic continuation of tenancies and the enforceability of covenants against successors, play a central role in commercial leasing. Cases like S Franses Ltd v The Cavendish Hotel (London) Ltd highlight how concepts such as genuine intention and procedural compliance interact within this legal structure. Detailed knowledge of these requirements enables practitioners to handle the complexities of lease negotiations, advise on the implications of contracting out, and address potential challenges in lease renewals and enforcement. Understanding these legal principles is essential for effective practice in commercial property law and for success in the SQE1 FLK2 examination.