Business tenancies are governed by the Landlord and Tenant Act 1954 Part II. Essentially tenancies which fall within this act have security of tenure. This means they have an automatic right to renew at the end of the lease.
This is incredibly important when looking at commercial investments. Whether a business lease falls within security of tenure (Inside the Act) or not (Outside the Act) will govern the strategy for the investment.
Inside the Act
A business tenancy which falls within the Act, means that the tenant has the right to renew at the end of their lease. A business tenancy will always be inside the act unless it is expressly stated and agreed that it shall be taken outside the act.
Furthermore, a business lease which is Inside the Act does not terminate with the effluxion of time. The tenant is entitled to continue holding over (I.e. in possession of the premises and paying an interim rent) until either the Landlord or Tenant serves notice to terminate, or enter into a new lease, in accordance with the provisions of the Act.
If the Landlord wants to terminate the lease, there are only 7 grounds on which a Landlord can do this:
- Breach of repairing covenant
- Persistent delay in paying rent
- Other substantial breach of lease covenants
- If the Landlords provides suitable alternative accommodation
- Uneconomic subdivision – i.e. the Landlord could get more rent from renting out the property as a whole
- Demolition / reconstruction – For development Landlord must prove firm intention, prove funding and planning, substantial work & necessity to gain vacant possession
- Owner occupation – For re-occupation the Landlord must have owned the premises for 5 years & prove intention to occupy for business purposes
If the Landlord is successful in ending the lease and agrees it on grounds e-g, the Landlord must pay the tenant compensation. This is 1 x Rateable Value if they have been in occupation for less than 14 years and 2 x Rateable Value if they have been in occupation for over 14 years.
TIP: THIS IS WHY IT IS IMPORTANT FOR LANDLORDS TO HAVE AN ACTIVE INTEREST IN BUSINESS RATES. BY KEEPING BUSINESS RATES LOW LANDLORDS WILL HAVE LESS TO PAY IN COMPENSATION IF THEY NEED TO END AN INSIDE THE ACT LEASE!
Outside the Act
A business tenancy which is outside the Act does not have the right to renew on expiry of the lease. Therefore, the last day of the lease is the last day of the term. If a new lease isn’t agreed then the tenant must vacate.
To agree a lease outside the Act you must expressly advertise that a lease is outside of the Act. The tenant must also sign a statutory declaration to agree to taking a lease outside of the Act.
You will know if a lease is outside of the Act by reading the lease. It will state that the lease is outside the provisions of section 24-28 of the Landlord and Tenant Act 1954 Part II. These are the sections which govern the right to renew.
TIP: DO NOT DEMAND OR ACCEPT RENT, SERVICE CHARGE, INSURANCE, OR ANY OTHER FORM OF EXPENDITURE FROM A TENANT FOR ANY PERIOD AFTER EXPIRY OF THE LEASE. THIS MIGHT GIVE SECURITY OF TENURE AND AUTOMATICALLY ENTER THEM INTO A NEW INSIDE THE ACT LEASE.
Strategy of the 1954 Act
It is important to know whether a business lease is inside or outside the Act. This will govern the strategy around the investment you are buying.
If an inside the Act lease is ending shortly, you may want to wait to purchase the property. The current Landlord can then negotiate vacant possession, VP, and deal with the expense associated with doing this (compensation and legal fees). If it turns out that the current Landlord cannot get VP then you may want to re-assess the deal. It may not be worth your time waiting for the next lease to end. This could involve going through the turbulent process of ending the lease. Then if successful paying the tenant compensation based on the new rateable value decided in 2017!
However, if you want to retain the current tenant. Consider buying the property quickly and negotiating terms which work for you, rather than letting the current Landlord do it. In this case buy the property prior to the tenant having 12 months left on their lease. Then prepare to serve notice on the tenant for renewal exactly 12 months before the lease ends, the earliest date you can serve notice.
Alternatively, if you are buying a property which you are looking to develop then you will want the business leases to be outside the Act and preferably ending around the same time. What you will notice is that rents are sometimes lower for outside the Act leases. This is because they aren’t as tenant friendly.
TIP: OFTEN LANDLORDS COMPENSATE FOR LOWER RENTS BY OFFERING A RENT FREE, TENANTS ONLY BREAKS OR FRIENDLIER RENT REVIEW CLA– USES. THESE ARE ALL ITEMS TO LOOK OUT FOR AND CAN IMPACT THE YIELD PLACED ON A PROPERTY!
The Importance of the 1954 Act
Often the 1954 Act isn’t a factor taken into consideration by commercial investors. However, it is something that must be understood and discussed with a solicitor.
Prior to getting to the stage of your offer being accepted on a commercial investment, you must decide on your strategy. Then you must look at this in conjunction with the business leases within the building.
If your strategy doesn’t work with the lease structures in place you either need to move on to plan B or go and find another property.
The 1954 Act – Other Helpful Information
The 1954 Act is lengthy and always best discussed with your solicitor. Notices need to be served correctly and as a Landlord you have to be making sure you are acting right. However, to help you understand that Act further I have put together a summary table. This shows the key sections of the Act and a brief summary of what they cover.
TA – Tenant
|23||Application of the Act|
|24||Security of tenure provisions & continuation tenancy|
|25||LL notice to end or seek a new lease|
|26||TA notice to seek a new lease|
|27||TA notice to end lease|
|28||Renewal of tenancy by agreement|
|29||Order by court for a new tenancy|
|30||LL grounds for opposition|
|32-35||Terms of new lease|
|34||Basis of valuation for new rent|
|40||Notice requesting information about either party|
|44||Definition of competent LL|
Buying commercial property can be extremely rewarding and give you excellent returns. Your investment will succeed where your strategy works well with the properties lease structures.