Elsewhere on LandlordZONE (at http://www.landlordzone.co.uk/content/what-is-a-section-25-notice and http://www.landlordzone.co.uk/content/what-is-a-section-26-notice-2 ) you can find out about section 25 and section 26 notices respectively in more general terms, but here I talk about some of the ways the 1954 Act notices and procedures may be used tactically by landlords.
It ought to be simple to explain what happens on expiry of a business tenancy, but it is not. The purpose of the Landlord and Tenant Act 1954 Part II is, amongst other things: “to enable tenants occupying property for business, professional or certain other purposes to obtain new tenancies in certain cases; to confer jurisdiction on the County Court in certain disputes between landlords and tenants”. Nevertheless, it is (to quote from case-law) “no part of the Act to confer upon the tenant a saleable asset”. Hence, where a landlord does not want to confer the tenant with a saleable asset – and in the context of a business relationship why should a landlord be expected to give a tenant a present unless there is some benefit to the landlord – there are permutations galore so tactics vary depend upon the circumstances.
The dynamics are challenging. As far as the tenant is concerned, a saleable asset is a certain term (or term of lease, in popular parlance) which might also attract a premium payment (capital sum) either for the value of the certain secure term in itself or in conjunction with sale of the tenant’s business as a going concern.
A landlord ought not assume that the premises are as important to the tenant as they are to the landlord. Not all tenants necessarily need the premises, as are the subject of the renewal, in which their business is run. With corporate tenants, particularly larger companies, the subject premises might not be the only place where the tenant could conduct business and the value of the company as a whole may not be as dependent upon any particular premises. Also, the ownership of some businesses is separate from the legal tenant of the subject premises and could be relocated should the need arise. Generally, the desire for a secure term for the marketability of businesses as a going-concern tends to be local trader oriented or where the cost of relocation could be prohibitive or there is limited availability of other suitable premises.
From the tenant’s perspective, a secure term is the minimum period of tenancy that would be required by the tenant for its present and future plans, for example retirement age or prospective buyers for the business. Selling a business as a going-concern depends upon the sophistication of the buyer having regard also to source of finance. Amongst smaller businesses, bank lending criteria features strongly, because the bank may want a minimum unexpired certain term of say 8 years. The tenant’s criteria, however, could differ from a prospective buyer’s criterion because as the first tenant for the renewal lease would remain liable for the performance of the lease covenants should the first assignee default, per an Authorised Guarantee Agreement. First-tenant-thinking that a break clause after a few years would avoid the problem of being stuck with a long-term commitment that might be unsaleable depending upon the state of the market at the time, or thinking that if an assignee didn’t make a go of things then the first assignee would also use the break clause as an escape route, are not necessarily watertight thoughts: break-clause conditions can be draconian. When I advise smaller tenants on renewal, I try to get them to focus on what they want for their business, as distinct from what they might hope to get were they to sell it. Apart from hotspots where a premium (akin to key-money) comes with the territory, the days are long gone where a substantial premium could be taken for granted; nowadays, what with rising costs and pressure on margins, many smaller businesses are more circumspect and realistic about the saleable prospects for their businesses.
The easier way to understand the complexity of tenancy expiry/renewal is to use the correct terminology. Strictly, as I’ve said elsewhere, a lease is simply the document. The document records the basis of occupancy and, to avoid over complicating matters, let’s assume the occupancy is a tenancy. The duration of the tenancy (the period between the start date and end date in the lease) is known as the ‘contractual term’. The duration between expiry of the contractual term and whatever happens thereafter is known as the ‘holding-over’ period.
Before serving any notice, it’s important to check whether the existing tenancy is inside or outside the Landlord and Tenant Act 1954. The parties would’ve contracted out of sections 24-28 by complying with the statutory procedures before the lease was granted, a clause in the completed lease would confirm. When a tenancy is outside the Act, it is not a qualifying tenancy as defined by LTA54, and there are no notices involving the expiry of the contractual term. Where a tenancy is outside the Act but statutory notice is served by mistake then that notice has no efficacy because the statutory notice only applies to qualifying tenancies under LTA54.
The reality of a contracted-out tenancy means that the tenant has no renewal rights on expiry of the contractual term so no legal right to remain in occupation on expiry of the contractual term. Renewal rights provide the tenant with a dispute resolution procedure but the rights do not include any sitting-tenant discount so in the context of affordability of the market rent the tenant is exposed to the full force of the market regardless.
Assuming the tenancy is inside the LTA54, the landlord cannot get the tenant out on expiry of the contractual term merely by asking or telling the tenant to leave. Leaving is something only the tenant can do, moreover without having to give notice to quit. No advance-warning or statement of intent by the tenant is necessary. Even if the tenant has indicated an intention to renew, there is nothing to stop the tenant changing its mind (assuming no part-performance issues, in any event a separate matter). All that the tenant has to do is vacate the premises on expiry of the contractual term and that’s it.
The tenant could vacate before expiry but if so then the tenant would remain responsible for the rent and performance of the tenancy covenants until expiry. If the tenant remains in occupation after expiry of the contractual term but wants to leave then it either has to give 3 months to quit or if timing requires more careful planning another strategy is to give 26 notice (minimum 6 months, maximum 12 months) to end the tenancy on a date specified in the notice and request renewal per proposals in that notice, but when it comes to it not protect its renewal rights.
Assuming a qualifying tenancy, the only way the landlord can get the tenant out on or after expiry of the contractual term is with use of either the s25 notice or the 26 Notice. Section 25 of the Landlord and Tenant Act is about the termination of the tenancy by the landlord; section 26 about the termination of the tenancy by the tenant.
Only one notice can be served so if the tenant gets in first with a s26 notice then landlord’s s25 notice cannot override. [Only once in my career has the timing coincided: acting for a tenant, I’d given s26 notice on the same day as the landlord served s25 notice. The respective notices were received by the respective parties on the following day but at different delivery times. The matter was resolved by reference to the time on the recorded delivery posting receipt.] Assuming the wording of the notice is valid and complies with mandatory requirements, there is no turning back for either party, except by mutual agreement.
The notices (s25 and s26), both of which are in prescribed forms, have a dual-function: 1) to end the existing tenancy on expiry of the contractual term or at any later date as stated in the notice; 2) to issue proposals for the renewal of the tenancy, or not, depending upon whether or nor the tenant’s application to the court before the stated end date is opposed.
Before LTA54 was amended, a s26 notice could be used to extend the end date of the contractual term by up to 12 months from the date of the notice and preserve the passing rent to the end date so tenants could put off having to pay the market rent for as long as possible. Nowadays, with the s24A interim rent starting from the earliest date the tenancy could have been brought to an end, a s26 no longer works for that strategy. An adaptation is that the s26 notice enables the tenant to force the landlord to get started with the renewal, rather than allow the landlord to leave the tenancy holding-over and the tenant in a state of uncertainty. Under the LTA54, the s26 notice has another function which is to flush out the landlord’s intention for renewal. If the landlord wishes to oppose granting a renewal lease then it must give counter-notice within 2 months of the date of s26 notice, stating the ground(s) for opposition, failing which the landlord cannot oppose the tenant’s application to court for renewal.
Opposing renewal can only be done on one or more of the seven grounds that are specified in LTA54. The notice could be considered misleading since it is not enough for a landlord to merely oppose, the opposition also has to be successful. The test of successful has regard to case-law and informed opinion or circumstances not covered by case-law that would require the court’s ruling. Successful opposition, especially which one or more of the grounds to rely on, requires a great deal of careful thought. Apart from whether the opposition would be successful in its own right, two of the grounds require the landlord to pay statutory compensation and that prove expensive. The compensation based on Rateable Value is either one or two times RV depending upon how long the tenancy has been in force and for the same business use. Tenants like to try to reduce business rates by appealing against Rateable Value but they don’t have to if that would mean less compensation should the landlord oppose renewal.
Using s25 notice, the official way to oppose renewal which, in the wording to the tenant, is something like ‘I am giving you notice under section 25 of the Landlord and Tenant Act 1954 to end your tenancy on (date). I am opposed to the grant of a new tenancy. You may ask the court to order the grant of a new tenancy. If you do, I will oppose your application on the ground(s) mentioned in paragraph(s)(5) of section 30(1)t. I draw attention to the table in the notes which sets out all the grounds of opposition. If you wish to ask the court for a new tenancy you must do so before the (date) unless, before that date, we agree in writing to a later date. I can ask the court to order the ending of your tenancy without granting you a new tenancy. I may have to pay you compensation if I have relied only on one or more of the grounds mentioned in paragraphs (e), (f) and (g) of section 30(1). If I ask the court to end your tenancy, you can challenge my application.’
Generally, unless there is a tangible plan that would require the tenant to give up possession, landlords tend to not oppose renewal for the sake of it. The desire for continuity of income can override tactical considerations. Consequently, such landlords may be doing themselves disservice by placing the tenant in a stronger negotiating position, especially if the landlord makes it apparent the landlord doesn’t want to go to court. By opposing renewal on at least two of the grounds stated in the LTA54, even if neither could be satisfied successfully, has the effect of ensuring a level-playing field, with the added-advantage to the landlord of instilling the feeling into the tenant the extra costs the tenant would incur in going to court beyond the preliminary stages.
Even when the renewal is not opposed, arguably there is no reason, other than dislike of extra costs, to agree an extension to the end date for the court application when no serious negotiations have taken place beforehand. An extension of the deadline for the application without the landlord having any understanding of the tenant’s rental stance surely makes a mockery of serving s25 notice to begin with? Rather than be keen to get the tenancy on a more secure keel, so far as the investment is concerned, (even though a reversionary investment could be more valuable), why not leave the tenant in a state of uncertainty or wait until the tenant starts the ball rolling with a s26 notice? Playing into the tenant’s hands in biding its time could result in cost-consequences should the tenant not make its application to the court before the extended date. The notice of 3 months for discontinuance of proceedings which the tenant would have to give were it to withdraw after having made the court application would not be applicable, hence denying the recovery of the landlord’s costs and fees.
Despite the notes on the prescribed form, a s25 notice that states the landlord would not oppose the grant of a new lease (or no counter-notice following a s26 notice) can lull a tenant into a false sense of security. Complacency can set in where negotiations are underway and landlord is evidently content for the tenant to renew, but what the tenant has to realise is that the right to renew must still be applied for and protected on application to court. The s25 notice, in the wording to the tenant, is something like ‘I am giving you notice under section 25 of the Landlord and Tenant Act 1954 to end your tenancy on (date). I am not opposed to granting you a new tenancy. You will find my proposals for the new tenancy, which we can discuss, in the schedule to this notice. If we cannot agree on all the terms of a new tenancy, either you or I may ask the court to order the grant of a new tenancy and settle the terms on which we cannot agree. If you wish to ask the court for a new tenancy you must do so by the specified date unless we agree in writing to a later date and do so before at specified date.”
To be pedantic, it is not about whether the tenant wishes to ask the court for a new tenancy so much as having to do so to avoid losing the right to renew. There is nothing to stop the parties from arriving at an agreement before the end date in the s25 or s26 notice, or any extended date, and in many cases that is what happens. Invoking the court procedure is expensive but whether the extra costs of litigation are frightening depends upon what the parties are separately wanting to achieve. To ensure the parties are aware what they could letting itself in for, the court case management procedure includes a costs budget scenario.
The costs budget is a useful tool in the landlord’s armoury. To quote an 18th century satirist, albeit I’ve not been able to verify, the law was invented by lawyers as a source of revenue: seen in that light, it all begins to make sense’. The Royal Institution of Chartered Surveyors (RICS) has in its past marketing material said that the RICS exists as a source of revenue for its members. Landlords and tenants are not obliged to take professional advice from surveyors and lawyers and for low-rented premises it may not pay to involve surveyors where the parties are or think themselves sufficiently au fait, but many do because of the complexities of business tenancy law, and the pitfalls for the unwary. On renewal of a tenancy, doing-it-yourself could easily result in coming a cropper. In a matter I dealt with earlier this year, the tenant having tried to do it himself and on the cheap I reckon probably ended up paying considerable more for professionals to sort out the mess he’d got himself into than it would have cost him to have instructed us to begin with.
With professional advice from surveyors, the cost for both landlord and tenant renewing a tenancy has risen, some might say disproportionately, because a feature of litigation is the court’s dislike of incentive fees for expert witness surveyors who are expected to be scrupulously neutral and not make one of the top five mistakes that inexperienced persons acting as expert witness make: namely, trying to fit an opinion to a preconceived goal. Hence, the hourly rate or fixed fee presented as justifiable in the context of time involved can, particularly in what would appear to be fairly straightforward matter, often bear no relationship to the figures involved. The policy of the law is to compromise disputes but business tenancy law and rental valuation isn’t concerned with the wider consequences for the parties so the fact that attempts at compromising could end costing one or both parties disproportionately is in the scheme of things irrelevant, except of course to the parties concerned. Whatever one’s views about the cost of professional advice, there’s no getting away from the fact that most things to do with a business tenancy do take an enormous amount of time, but the tactical advantage to a landlord in knowing the tenant is being presented with an estimated worst-case scenario cost budget for the simplest of jobs of around £25,000 plus VAT and disbursements is that the tenant is more likely to cave in during the negotiations, or as with more sophisticated tenants find a plausible way to drag them out until the tenant’s hidden agenda can be revealed.
With a s26 notice, the tenant makes the first move. With a s25 notice, the landlord starts the ball rolling. Regardless of who goes first, it can be matter of who dares wins. There are two scenarios: either keep the existing tenant committed to a lease favourable to the landlord or get rid of that particular tenant and do something else with the property.
Either the landlord would not oppose an application to court for renewal of the tenancy, or the landlord would oppose. Not opposing means that the s25 notice must contain proposals for the renewal. Proposals for renewal do not have to be in great detail, but the wording must comply with mandatory requirements, failing which the notice might be invalid. Whether a challenge to validly would succeed would depend upon the wording of the proposals. Case-law concerning the validity of notices generally, such as whether a reasonable recipient would be misled, does not always apply where there are mandatory requirements.
Tenants may think the proposals for renewing generally negotiable but the proposals do not have to be. Furthermore, not opposing but issuing proposals for renewal does not force the landlord to negotiate. The only time the landlord is obliged to cooperate is after the tenant has made application to court to protect renewal rights and the court case management procedure is underway. Since at least 6 months notice has to be given, that could prove a long time for the tenant to remain none the wiser to what could be negotiated without having to incur the cost of a court application. However, silence can work both ways. The tenant does not have to communicate its intention in advance: all the tenant needs to do is either vacate the premises on or before expiry of the contractual term (assuming expiry is within the period of the s25 notice) or protect rights by applying to court before the stated end date. The landlord could also be none the wiser for at least 6 months were it not for the landlord’s right to flush out the tenant’s intention. The landlord can apply to court at any time before the end date in the s25 notice. The tenant must either respond by entering a defence or lose the right to reject the proposals in the landlord’s claim.
Generally, where the landlord wants the tenant to renew and has no hidden agenda (namely to get the tenant out as little or no cost to the landlord), it then becomes a question of agreeing the market rent. Since the tenant could walk away if the renewal terms are not to its liking, negotiations could become fraught if the tenant isn’t getting his own way. Perhaps it ought to be a partnership, sharing the ups-and-downs together as I used to reason; nowadays, there is so much distrust in the landlord and tenant relationship and so many power-games played by advisers pitting their wits against each other at their clients’ expense that it is surprising just how far removed from wanting a divorce from the existing system the landlord and tenant relationship really is.