Security of Tenure for business premises – changes on the horizon?

The Landlord and Tenant Act 1954 (the “LTA 1954”) provides a business tenant of premises the rights to:

• Remain in occupation of their property, even after the lease would naturally expire by effluxion of time; and
• Request a new lease of the property, either via negotiations with their landlord or an application to the courts, with a landlord only being able to object to a new lease on limited grounds.

These rights are collectively referred to as “security of tenure”. Under the LTA 1954, if a lease qualifies for security of tenure, it will be granted automatically. A landlord can exclude security of tenure from a lease, but only by strictly following the “contracting out” procedure before the lease is granted.

Although security of tenure is an integral aspect of commercial leasing, it has been heavily criticised by commercial landlords for restricting their ability to use their property as they see fit. Additionally, other critics say that security of tenure is “past its prime” and at odds with the current rental market.

In response, the Law Commission has recently published the first of two Consultation Papers on the right to renew business tenancies. In the first paper, the Law Commission asks two key questions:

1. Is the current “contract-out” procedure for security of tenure appropriate? If not, what model of security of tenure (if any) should be used?
2. Are the current requirements for a lease to benefit from security of tenure fit for purpose? If not, how should they be changed?

Models of Security of Tenure

The Law Commission have proposed four models of security of tenure, discussed further below.

Model 1: Mandatory Security of Tenure

As the name implies, under this model a qualifying lease will automatically benefit from security of tenure, with no ability to contract out of it.

This would put commercial tenants in an incredibly strong negotiating position – under the current model, most tenants tend to prefer protected tenancies, but during negotiations they may not have the sufficient bargaining power to secure a protected tenancy. A mandatory model would ensure that all commercial tenants, regardless of their position, could acquire security of tenure. Additionally, security of tenure would no longer be a point of contention during negotiations, which would save both parties considerable time and costs.

Of course, this proposal would leave landlords in the weakest position, and many commercial landlords may either:

• Refuse to let their commercial properties outright; or
• Try to grant leases that are technically out of the scope of the LTA 1954, e.g. leases for less than six months.

This would be a drastic departure from the current model, and would undoubtedly need to be accompanied by wider changes to the LTA 1954.

Model 2: “Contract-in”

Here, security of tenure would be automatically excluded from commercial leases, but the parties could follow a procedure to “contract-in” to the LTA 1954. The Law Commission have suggested that the procedure would be set out in statute, rather than in published guidance or a standard-form contractual option.

Compared to the current model, this would grant considerable flexibility to the landlord and tenant. While rare, tenants can sometimes prefer unprotected tenancies, and in any case landlords would undoubtedly appreciate the default position being in their favour.

On the other hand, this could put vulnerable tenants in a much weaker position, as they are less protected by default and will need to ensure they comply with the prescribed statutory process to contract in. Additionally, landlords can use the process as a “bargaining chip” during negotiations. For example, they may only be willing to contract-in if the tenant pays a considerable premium on the rent, sacrifices a rent-free period etc.

Model 3: “Contract-out”

As this is the current model, one clear advantage is that commercial landlords, tenants and their legal advisors are already aware of how it operates. Additionally, keeping this model would cause minimal disruption to the current market. However, the Law Commission are also considering how this model can be changed to line up with rental market trends, so reforms could be on the horizon.

If the current model (or a variant) is preferred then the current issues and frustrations will remain relevant. For example, landlords may still feel that they are on the back foot in negotiations, as they often prefer the freedom and flexibility of unprotected tenancies.

Model 4: No Security of Tenure

In this model, the Law Commission proposes to abolish any kind of security of tenure for business tenancies, meaning that they will always terminate on their contractual expiry date.

Much like mandatory security of tenure, this model will undoubtedly be incredibly polarising. On the one hand, this would grant landlords maximum flexibility in managing their properties. Similarly, as security of tenure would no longer be a consideration, this model could simplify negotiations and save both parties considerable time and costs. This model could also placate many of the current model’s critics, who believe that the rental market is being excessively regulated by statute.

On the other hand, this would put tenants in a very precarious position. Many commercial tenants, particularly small business, rely heavily on security of tenure and its removal could drastically change the rental market. Smaller businesses may struggle with the costs of relocating, and many businesses may be reluctant to invest in their rental property without any guarantee of long-term use and enjoyment. The Law Commission has stated that landlords and tenants can still use contractual options to secure renewal leases, but tenants will still need to persuade their landlords to include these in the lease (possibly in exchange for a premium on rent, or other incentive).

Types of Tenancies to be covered by the LTA 1954

The second part of the paper considers how the current “scope” of the LTA 1954 should be altered, if at all.

For example, if the contract-out model is kept, the Law Commission has proposed to consider the following:

1. Changing the list of tenancies currently excluded by the LTA 1954 (e.g. mining leases and farm business tenancies), as many of these benefit from protections under different statute;
2. Changing the minimum term requirement for a business tenancy to qualify for security of tenure – currently, it only applies to business tenancies granted for a duration of 6 months or longer; and
3. Add further criteria that may exclude a tenancy from security of tenure, such as:
   1. Internal floorspace of the premises
   2. Where the premises is situated; and
   3. The level of rent payable under the tenancy

The Law Commission has suggested that similar changes would be considered for the mandatory and contract-in models, though these could be influenced by any further changes required to accommodate the change in model.

Conclusion

Overall, it appears that the Law Commission is largely in favour of mitigating instances of overlapping protections and adjusting the current exclusions from security of tenure. They have opened these questions to the public, particularly commercial landlords and tenants, legal advisors, property professionals and academics, to narrow down the topics for the second consultation paper.

Whatever reforms are put in place, it will affect the position of landlords, tenants and their legal advisors moving forward. Any change could carry potentially significant advantages/disadvantages, and so parties who anticipate having any commercial leasehold dealings within the next few years would be wise to keep an eye on how the debate develops.

Responses to the first consultation paper can be lodged via the Ministry of Justice’s website. The deadline for responses is 19 February 2025. After reviewing the responses, the Law Commission will publish their second Consultation Paper, which will contain details on how the new model for security of tenure will operate (publication date TBC).

To discuss further how this could impact your properties, contact a member of the Property Disputes team.