CHAPTER ONE – OVERVIEW OF SECURITY OF TENURE FOR BUSINESSES
This chapter provides an overview of the scheme of business security of tenure under Part II of the Landlord and Tenant Act 1954.
For the reader who has not yet acquired familiarity with it, or who would welcome a reminder, a précis of Part II of the 1954 Act will be helpful. Although what follows is an overview, there is no avoiding the highly technical nature of the Act; its scheme is complicated and ingenious, and works well, though one may wish that it could operate with greater simplicity.
Twenty years or more ago, on Tottenham Court Road in central London, just north of the junction with Oxford Street, there used to stand a number of rather ramshackle single-storey buildings forming a short row of shops, mostly selling hi-fi and other electrical goods. Their scruffy and mixed appearance, and low height, was rather at odds with the generally high quality of the immediately surrounding buildings, many of them recently developed, mixed-use developments over multiple storeys. Looking over the site from the vantage point of any of those higher buildings, one could see that behind the row of shops was an unused, overgrown, brownfield site.
This was reportedly the last remaining bombsite left over from World War II in central London, and now it too has been developed. The shops at street level form part of a smart, modern building, and some of the occupiers of the former row of shops have evidently taken leases there. It is entirely likely that they found themselves in a position to do so thanks to the operation of Part II of the Landlord and Tenant Act 1954, which is fitting if so, since it was bomb damage which led to the enactment of that legislation in the first place.
The bombing of London, Coventry, Liverpool, Plymouth and other cities during World War II resulted, of course, in widespread, major damage. As regards commercial property, many offices, shops, factories, workshops, warehouses and other premises were destroyed. By a simple application of the law of supply and demand, the rental value of remaining commercial property was increased, and landlords were in a dominant negotiating position. Tenants unable to afford higher rents would be obliged to vacate their premises when the lease came to an end, and some would thereby lose significant goodwill built up by decades of trading at those premises. To afford protection to business tenants, therefore, Parliament enacted Part II of the Landlord and Tenant Act 1954, conferring security of tenure on them.
As described above, there is now no remaining World War II bomb damage in Central London, and there must be very little elsewhere in the United Kingdom. There is a more than respectable argument for repeal: no other jurisdiction in the world has a similar system; it is an interference with the free market and with landowners’ property rights; and the original justification for its creation has disappeared. At the time of writing, part of the government’s response to the Covid-19 pandemic has been to announce a wide-ranging review of commercial property law, expressly including the role of the 1954 Act.
However, the Act has been around for 67 years now, it is very familiar to landlords and tenants, and its impact is ‘priced in’. Government may well conclude that it continues to provide useful protection to business tenants, and should be retained.
Legislation and amendments
There are quite a number of Landlord and Tenant Acts, but there is only one, the 1954 Act, which is regularly referred to as “the Landlord and Tenant Act”. It is also colloquially called “the 1954 Act”, and sometimes even just “the Act”, such is its central importance to commercial landlord and tenant law. To be accurate, it is Part II of the 1954 Act with which we are concerned (Part I deals with certain long residential leases), but it will generally be more convenient throughout to use the designation ‘the 1954 Act’ or ‘the Act’ rather than ‘Part II of the Landlord and Tenant Act 1954’.
The Act has been subject to a number of amendments, as might be expected over a 67-year period. Most significantly:
The Law of Property Act 1969 introduced the ability to contract out of the Act, also the availability of interim rent; and
The Regulatory Reform (Business Tenancies) (England and Wales) Order 2003 (SI 2003/3096) enacted a wide-ranging raft of reforms to the Act, following a lengthy consultation exercise.
To understand the operation of the Act in its current form, it will sometimes be necessary to refer back to how it stood prior to certain of those amendments.
There are three principles which form the heart of the 1954 Act.
When the date is reached upon which a tenancy within the Act should (contractually speaking) terminate, it does not do so. Instead, it continues under s.24(1), and is sometimes then referred to as the ‘continuation tenancy’. This state of affairs continues indefinitely, until such time as action is taken by either landlord or tenant to terminate the tenancy in accordance with the Act.
When such action is taken, the tenant will generally be entitled to a new lease, and should therefore not have to vacate the premises. Further protection is given to the tenant by provision in the Act which regulates the content of the new lease (ss.32-35), most importantly the rent. The procedure under the Act is therefore referred to as ‘lease renewal’, and the new lease granted as a result may be called the ‘renewal lease’.
The landlord is not thereby deprived of its property indefinitely, since it has the right to oppose the grant of a new tenancy on specified statutory grounds. Any ‘ground of opposition’ on which the landlord relies must be proven in court; if it is, the tenancy terminates, and no new tenancy is granted. Unless the ground of opposition which ultimately leads to the refusal of a new tenancy includes some element of responsibility on the tenant’s part (e.g. persistent delay in paying rent), the landlord will be required to pay compensation to the tenant upon termination, calculated as provided for in the Act.
s.23(1) – Cornerstone of the Act
The first provision of Part II of the Act is s.23, and it lays down the qualifications for protection:
Subject to the provisions of this Act, this Part of this Act applies to any tenancy where the property comprised in the tenancy is or includes premises which are occupied by the tenant and are so occupied for the purposes of a business carried on by him or for those and other purposes.
There are thus three elements to protection:
a business; and
Each requires further comment.
‘Tenancy’ is defined in s.69(1), and includes both tenancies and sub-tenancies. It also includes agreements for lease (or sub-lease). It does not include licences to occupy or tenancies at will. Periodic tenancies fall within the Act, and receive special treatment in some ways, which will be considered later.
The definition of tenancy in s.69(1) does not exclude sub-tenancies granted out of tenancies which do not have the protection of the Act, so a tenant whose lease is contracted-out may nevertheless grant a sub-tenancy which falls within the Act.
Also, a sub-lease granted in breach of an alienation restriction in the headlease will nevertheless have security of tenure: D’Silva v Lister House Developments Ltd  Ch 17.
“Business” is defined as a trade, profession or employment, and includes any activity carried on by a body of persons whether corporate or incorporate (s.23(2)). There are thus different tests for an individual tenant and a body of persons, though nothing seems to turn on this in practice. Further guidance is to be had from caselaw, which shows that ‘business’ includes activities such as sports clubs, local government offices and schools. Broadly, anything that is not residential is likely to be considered ‘business’, although s.43(1) expressly excludes tenancies within the agricultural tenancies legislation, and mining leases, while leases of telecoms sites are excluded by s.43(4).
The cases show an area of uncertainty in relation to occupation for charitable and community purposes. In Secretary of State for Transport v Jenkins (2000) 79 P&CR 118, for example, use as a community free farm was held not to constitute a business. Although there need not be any goal of making a profit, there does have to be some activity of a commercial nature, and activity carried out only for ‘public benevolence’ will not qualify.
However, the definition has generally been construed widely. The only significant area of difficulty relates to businesses whose main activity is sub-letting, which raises questions about the extent to which the tenant is in occupation. This will be considered in relation to the concept of occupation.
Under s.23(4), the tenancy will fall within the Act even where use for the specific type of business carried on there is prohibited by the lease. If, for example, the lease provides that the premises are only to be used for the sale of footwear, but in fact they are used for the sale of ironmongery, the tenant will still enjoy security of tenure. If, however, the lease prohibits any business use, then neither sale of footwear or ironmongery, nor any other commercial use, would bring the tenancy within the Act.
Where the occupier is not the tenant
The wording of s.23(1) effectively requires that the business occupier and the tenant should be one and the same. This has potential to cause problems in common commercial situations. For example, while a small business may have been incorporated, a landlord may prefer to grant a lease to the proprietor of the business personally, either because the company may not be able to show a sufficient trading record, or because the landlord simply prefers that the business proprietor should be liable to enforcement against personal assets in the event of default on the lease covenants. In that case, since it would be the company in business occupation of the premises, the proprietor, as tenant, would not qualify for security of tenure under s.23.
This and related issues were among the matters addressed when the Act was reformed in 2003, and the general principle now is that an individual and the company that they control are treated as one and the same for the purposes of the operation of the Act: ss.23(1A), 23(1B), 30(1A), 30(1B).
In the same way, where a lease is held by a company, business occupation by another company within the same group of companies is treated as business occupation by the tenant (s.42). There is also specific provision to overcome this potential difficulty in relation to premises held on trust (s.41) and partnership premises (s.41A).
It is apparent from the wording of s.23 that the Act applies where only part of the premises is occupied for business purposes. That might be the case, for instance, in the very commonly encountered letting arrangement of a shop with a flat above it, all let together on one lease. In such a case, the obvious question is whether the tenancy is protected under the 1954 Act as a business tenancy, or under the Rent Act 1977 or the Housing Act 1988 as a residential tenancy.
This is a question with real practical significance, because of the different degrees of protection afforded to tenants by the different statutory regimes. Under the 1954 Act, as we have said, the landlord may obtain possession at the end of the tenancy if it can prove one of the statutory grounds of opposition. Protection under the Rent Act 1977 is much stronger, and may be transmitted to family members upon the death of the tenant, so that recovery of possession may be practically impossible for decades. Recovery of possession under the Housing Act 1988 has been quite straightforward, though a gradual accretion of protections and restrictions has increased the difficulties for landlords over recent years.
The qualifying condition for residential protection is that the property must be “let as a separate dwelling”. This wording has a long pedigree in the residential legislation, going back as far as 1915. Note that if premises are let as a dwelling, but occupied partly or wholly for business purposes, on the face of it both schemes of protection would apply.
That outcome is prevented by s.24(3), Rent Act 1977, and also s.1(2) and para 4 of Sched 1, Housing Act 1988, both of which specifically provide that the respective Acts cannot apply to a tenancy which falls within Part II of the 1954 Act. In effect, the business security of tenure regime ‘trumps’ the residential.
There is a limitation, in this context, to the meaning of ‘business occupation’. If the business use is so limited that it is regarded as incidental to the residential occupation, then the 1954 Act will not apply. For example, in Gurton v Parrott  EGLR 98 a lady had occupied a property since 1939 as her home, although she was only granted a tenancy of it in 1974. At that time, and for some years afterwards, various outbuildings and land comprised within the property were used for her business of dog-kennelling, grooming and breeding, and the landlord subsequently gave notice to terminate under the 1954 Act, asserting that she had a business tenancy. The court held that she occupied the property as her residence, and that the running of the business there was incidental to that: “something akin to a hobby”. That meant that her tenancy was protected under one of the predecessors to the Rent Act 1977, and she was effectively irremoveable. This ‘incidental use’ exception has never applied in any recorded case since, and seems to be very limited.
There are some dicta in decided cases (e.g. Broadway Investments Hackney Ltd v Grant  EWCA Civ 1709), to suggest that a lease might move out of residential protection into business protection, or vice versa. In Tan v Sitkowski  EWCA Civ 30, Neuberger LJ had no difficulty with the idea that a tenant might have been granted a residential tenancy under the Rent Act, then use the premises wholly or partly for business purposes, thus coming within the ambit of the 1954 Act, and subsequently cease the business use and return to the fold of the Rent Act. There does not appear, though, to be any case in which a court has actually decided that this has happened. It would in any event depend on the tenancy not prohibiting business use; if there were such a prohibition, the 1954 Act could not apply (s.23(4)), and the lease would remain within the Rent Act throughout.
A more common situation might be that premises are originally let for mixed business and residential use, within the 1954 Act, as will usually be the case in relation to a shop-and-flat lease, but the tenant gives up the business while continuing to live there. If there is no longer any business use, the tenancy will have ceased to be a business tenancy within the 1954 Act, so does the tenant thereby gain the protection of the 1977 or 1988 Act? That was the issue in Tan v Sitkowski, where it was held that residential protection had not been acquired, as it could not be said that the premises had been “let as a separate dwelling”.
It may be noted, finally, that s.35 of the Small Business, Enterprise and Employment Act 2015 inserted a new section, s.43ZA, into the 1954 Act, to prevent ‘accidental’ business security of tenure being acquired where people run businesses from their rented homes.
It applies where:
Property is let as a dwelling
The tenancy specifies residential use, but also permits the tenant to run a business from home
The tenant carries on a business of a nature “which might reasonably be carried on at home”.
In those circumstances the tenant will not have security of tenure.
To come within s.23(1), it is not enough that the premises should be let for the purposes of a business, they must also be occupied for that purpose. Occupation is an important qualification for protection under the 1954 Act, and indeed under s.27(1A) of the Act the statutory continuation tenancy will not arise if at the expiry of the lease the tenant has gone out of occupation. Occupation can be relevant to other matters, as well as the basic question of whether a tenancy falls within the Act, such as the rate of compensation payable to a tenant where a landlord successfully opposes the renewal of a lease.
Occupation may still qualify if it is for uses which are purely ancillary to the business, as in Hancock & Willis v GMS Syndicate (1983) 265 EG 473, in which solicitors used certain premises purely for storing files and occasional business lunches. That still qualified as occupation for the purposes of their business. A more common example might be the arrangement found in many shopping centres, where the tenant has a lease of its shop, and a separate lease of a storage unit elsewhere in the centre. As regards the storage unit, it is not being used for retailing, which is the tenant’s core business activity, but storage is ancillary to the business, so the occupation will attract security of tenure.
Where the tenant’s business is sub-letting the premises, then it becomes problematic to regard them as remaining in occupation, though depending on the specific factual circumstances they may have retained sufficient control of the premises to qualify for protection under the Act.
In Lee Verhulst (Investments) Ltd v Harwood Trust  QB 204, the tenant carried on the business of letting furnished service rooms, and was nevertheless held to occupy the whole premises for the purposes of a business. The important factor was that the tenant exercised an unusually high degree of control over the sub-let parts, and provided services for the sub-tenants.
The important factors to consider in such situations, the court held, are:
Has the tenant sub-let the whole of the premises?
Does the tenant supply any services to the sub-let parts?
Does the tenant devote time and resources to the management of the sub-let parts?
Does the tenant exercise a high degree of control over the sub-let parts?
The Lee Verhulst case must now be read in the light of the House of Lords decision in Graysim Holdings Ltd v P&O Property Holdings Ltd  AC 329. The case concerned a market, held on a lease. Much of the space was sub-let to stall-holders. As a matter of principle (perhaps also as a matter of physics), premises cannot be occupied for business purposes by two occupiers simultaneously, as then both would be entitled to renew their leases under the 1954 Act. But whether it is the sub-tenant stall-holder or the head-tenant which can be said to be in occupation is a question of fact and degree.
On the facts, the stall-holders enjoyed exclusive possession of their stalls, and had business tenancies. While the head-tenant retained some common parts and provided services, that could not be said to be occupation for the purposes of a business. The reason for that was that the stall-holders would, under the structure of the 1954 Act, renew their sub-leases direct with the superior landlord, and once all of the stall sub-leases had become head-leases in this way, the head-tenant’s business would no longer exist.
It seems to follow that it will be more difficult for a head-landlord to establish that it is in business occupation where the sub-lettings are of a commercial nature.
A question which often arises is whether a tenant is in occupation despite not having a physical presence at the premises for a time (for example, having moved out because of fire damage). The courts have dealt with this by developing the concept of the ‘thread of continuity of business occupation’, and asking whether in any particular set of circumstances it has been broken.
In I & H Caplan Ltd v Caplan & Anor  2 All ER 930, the question was whether the tenant had lost the protection of the Act by going out of occupation. Prompted by the landlord’s initial success (later overturned on appeal) in opposing the grant of a new lease, the tenant had ceased trading for over six months, and relocated stock to other premises. However, the tenant intended to resume trading if the application for a new tenancy was successful, and did resume trading after success in the appeal hearing. It was held that the tenant had not lost protection simply by ceasing physically to occupy. This was a borderline case, but the thread of continuity was not broken.
Morrison Holdings Ltd v Manders Property (Wolverhampton) Ltd  1 EGLR 70 also concerned whether the tenant had lost security of tenure. There, the premises were badly damaged by fire, entitling the landlord under the terms of the lease to give notice terminating the tenancy forthwith. About a month later, the landlord demolished what was left of the premises. The court held that the tenant had not abandoned occupation, but intended to go back as soon as the premises were fit for occupation, and had not therefore lost protection.
Bacchiocchi v Academic Agency Ltd  3 EGLR 157 is perhaps the most extreme example, and concerned the question whether the tenant was entitled to compensation where the landlord had successfully opposed the grant of a new tenancy. That in turn depended on whether the tenant had been in occupation for the five years immediately preceding the end of the tenancy. In fact, having been in occupation for twenty years, the tenant vacated the premises twelve days before the lease terminated. The court considered that where premises are empty for a short period, whether at the beginning or end of the term, or mid-term, that is a ‘normal incident of business occupation’, and does not break the continuity of occupation. The tenant should not have to resort to devices like storage of goods or token visits in order to maintain that it was in occupation. The tenant was entitled to compensation.
Overview of procedure
The Act preserves, by virtue of s.24(2), certain common law methods of lease termination: forfeiture, surrender, and notice to quit given by the tenant. If a lease is terminated by any of those methods, there is no right to renew, and no need for the procedure now described to be followed.
s.25 notice or s.26 request
Either the landlord or the tenant may initiate the lease renewal process. The landlord can do so by serving on the tenant a notice under s.25, or the tenant can do so by serving on the landlord a different type of notice, referred to as a ‘request for a new tenancy’, under s.26. There can be only one effective notice, however: if the landlord has served a s.25 notice, the tenant cannot validly serve a s.26 request, and vice versa (s.26(4)).
A s.25 notice terminates the existing tenancy, and must specify a termination date. A s.26 request must specify a commencement date for the requested new tenancy, but the effect is also to define the termination date for the existing tenancy, on the date immediately before the specified commencement date (s.26(5)). Thus, the effect of either type of notice is to terminate the existing tenancy, or continuation tenancy which arises under s.24(1), on the specified date.
The date specified in the notice, whether under s.25 or s.26, must be from six to twelve months after service of the notice, and cannot be earlier than the contractual expiry date. Therefore, notice cannot be given earlier than the date which is twelve months before the contractual expiry. In the last twelve months of the term, the length of notice cannot, initially, be any less than the remaining time up to the contractual expiry date, but once that remaining time reduces to less than six months, or once the contractual expiry date has passed, the length of notice can be anything from six to twelve months. These time limits are absolutely strict, and the Act contains no provision for them to be varied by the parties.
Landlord’s ground of opposition
At this early stage, the landlord must specify whether or not it intends to oppose the grant of a new tenancy, and if so on what grounds. If the process is commenced by a s.25 notice, the ground of opposition must have been set out in that notice. If it is a s.26 request which initiated matters, the landlord has two months in which it may (but is not obliged to) serve a counternotice under s.26(6), indicating whether it will oppose the grant of a new tenancy, and if so on what ground. The landlord will not subsequently be able to rely in court upon any ground of opposition which has not been specified at this point (s.30(1)).
The landlord therefore has to consider carefully whether, and if so on what basis, it intends to oppose renewal. The decision has irrevocable consequences, since what the landlord does in this regard may affect whether any compensation is payable to the tenant, and if so how much. If the landlord’s notice or counternotice specifies a ground of opposition which entitles the tenant to compensation, that entitlement cannot be cancelled by the landlord withdrawing the ground of opposition. Once the ground has been specified in this way, the tenant may at any time abandon the renewal process, vacate the premises, and claim the compensation.
Should the landlord decide to oppose renewal, its ground of opposition will have to be proved in court, if the tenant resists termination of the tenancy. If the renewal is unopposed, however, it may still be necessary for there to be a hearing, since it is for the court to decide upon the terms of the new tenancy, if the parties are unable to agree them.
The scheme of the Act envisages the court application being made at a relatively early stage in the process. Application may be made following service of either a s.25 notice or a s.26 request (in the latter case, either a s.26(6) counternotice must have been served by the landlord, or the time for doing so must have expired). The latest date at which an application can be made is the termination/commencement date set out in the s.25 notice/s.26 request. It follows that the deadline is from six to twelve months after service of the initial notice, depending upon what date was specified in it.
The parties can agree to extend this deadline, under s.29B, inserted into the Act as part of the 2003 reforms. Successive agreed extensions are commonplace, and many lease renewals are resolved without involving the courts at all.
If no application to the court is made before the expiry of the time limit, or of any current extension of the time limit, the old tenancy will come to an end on the date specified in the s.25 notice or s.26 request, and the tenant will have to vacate. This is, for the tenant, one of the most important deadlines in the Act, and strict diary discipline is required to ensure it is not missed, since a negligence claim will inevitably follow if it is. The ability to agree to extend the time may appear to make this less crucial, but if, say, three successive extensions of the original deadline are agreed, that represents four opportunities to get things wrong, instead of just one, so diary discipline is as important as it ever was.
There are potentially three different types of court application:
The tenant may make an application for an order for the grant of a new tenancy, under s.24(1).
Equally, the landlord may make an application for an order for the grant of a new tenancy, also under s.24(1).
A landlord who opposes renewal may take the initiative by making an application under s.29(2), for the termination of the tenancy without any new tenancy being granted.
As there can be only one effective initiating notice, so there can be only one effective court application. If the tenant has made a s.24(1) application, then the landlord can make no application under either s.24(1) or s.29(2), by virtue of s.24(2A) and s.29(3). On the other hand, if the landlord has got in first with an application of either sort, then the tenant may not make an application under s.24(1) (see s.24(2A) and (2B)).
Continuation of tenancy pending outcome of court proceedings
Whichever is the effective type of application, and whichever party is the claimant, once it has been made then the existing tenancy will be further continued by the operation of s.64, up until three months after final disposal of the court proceedings.
This potentially presents an opportunity for the landlord to make the court application and then withdraw it, so terminating the tenancy without the necessity to prove a ground of opposition or pay compensation. That eventuality was anticipated, and provided for in s.24(2C) and s.29(6), which prevent withdrawal of a landlord’s application without the consent of the tenant.
During the continuation period, all terms of the existing tenancy still apply, though it is open to either party to have an ‘interim rent’ determined, so that the rental level during the continuation period can be adjusted.
If a s.24(1) application is made, s.29(1) requires the court to make an order for the grant of a new tenancy, subject to the other provisions of Part II. However, if the landlord establishes one of the seven grounds of opposition set out in s.30(1), the court shall not make an order for the grant of a new tenancy, but shall make an order for the termination of the tenancy without any new tenancy being granted; if not, there will be an order for the grant of a new tenancy (s.29(4) and s.31(1)).
Business tenancies within the 1954 Act do not come to an end on their contractual expiry date, but continue indefinitely, unless and until terminated in accordance with the Act. When terminated, the tenant is entitled to a new tenancy, on regulated terms, although the landlord may oppose renewal on seven statutory grounds. Depending on which ground is relied upon, a landlord who succeeds in resisting the grant of a new tenancy may have to pay the tenant compensation.
The Act applies to tenancies and sub-tenancies, whether fixed-term or periodic, but not to tenancies at will or licences to occupy. There must be occupation of at least part of the premises for business purposes, and ‘business’ is given a wide interpretation by the courts.
The renewal process is initiated by either a s.25 notice served by the landlord, or a s.26 request served by the tenant, and strict time limits apply to the timing of service and length of notice. The landlord must, at this initial stage, identify whether it intends to oppose the renewal, and if so on what ground, thus potentially incurring liability to pay compensation.
The next procedural step is an application to court, which must be made by either landlord or tenant. The deadline for doing that is the date specified in the s.25 notice or s.26 request, though the parties can agree to extend it. If no court application is made in time, the tenancy comes to an end at the deadline, and the tenant loses security of tenure and must vacate.
Once a court application has been made, the tenancy continues until three months after the court proceedings have been finally determined.