This is probably the most important piece of legislation for commercial properties in the UK, as it’s the bedrock on how to deal with lease renewals. It originates from just after the Second World War when properties were scarce from bomb damage, and there were issues with landlords being selective on what business tenants stay on in light of better alternatives.
For an occupier though who will have essential business interests linked with that particular property and location, this can be a nightmare, with your whole business potentially at risk from difficult landlords trying to negotiate unfair rents and terms at renewal.
Therefore where residential property has similar protection for their occupiers, this 1954 act does the same through Sections 24 to 28 (Part II) for business tenancies.
The principle is simple; at the end of every business property lease, the tenant automatically has the right to ‘hold over’ the lease on a similar basis until either the landlord or tenant triggers a procedure to renew or end this.
In reality this can be complicated, and in most cases not necessarily needed as each side sensibly negotiates a termination or renewal, but even then it’s essential to understand the principles here to fall back on if things don’t work out as they should do. I see it time and time again where this has been ignored and the 1954 Act procedures not triggered as a safety-net, or other angles not considered, meaning missed opportunities, harmful negotiations, and high costs being incurred afterwards.
So let us keep things simple to get the gist of this legislation – here are 10 of the main aspects about it to remember, and have at your disposal for both landlords and tenants:
1. It Only Covers Business Occupation in a Certain Manner, Namely For at Least 6 Months and For Most Types of Tenancies
There are some exemptions such as agricultural holdings, but all main business uses are included. If you have an element of residential use tagged on, for example a flat above a shop under the same lease, then it can still be all under this protection as part of the business, although it was clarified for the record last year that on the other extreme where you have a primarily residential dwelling with a work-at-home element it does not fall within the 1954 Act business protection but stays under residential control.
2. Although This Protection Automatically Happens, Both the Landlord and Tenant Can Contract Out and Exclude the Provisions of it (Section 38)
There is a process of warning notices to go through, and a clause in the lease to include, but you can be ‘outside the act’ with an excluded tenancy so that at the end of the natural lease term the tenant has to leave and normal negotiations apply.
3. Remember Any Sub-Tenants or Occupiers Within the Main Premises
These are normally outside the act anyway, and designed to end a day or two before the main head lease meaning that the main tenant can have business occupation for the whole area if only for a day or so to trigger this protection and business use for the whole area. This is great for a tenant who wants to renew on the whole part, but also good news for a landlord insisting that the whole area is taken on at renewal.
Conversely, if such sub-leases lasted to the same point as the head lease then they would actually have this protection triggered themselves for their area, leaving the head tenant for whatever area they have, and therefore splitting the original premises up.
4. Parties Can Request Official Information on the Situation Through Serving a Section 40 Notice on the Other Side
As things can get complicated and you need the true situation to get things right, these Notices oblige the other side to give the facts about what leases are in existence and who has occupation, including an obligation to update any changes afterwards.
5. The Tenant Can Easily Just Leave and Walk Away
So this protection is for their benefit if they want it, but if they physically just vacate the property by the natural lease end date then it does not apply and the lease naturally ends with nothing to protect and extend, as there is no business occupation on that last day. After this date though (and before if preferred) they do have to give notice through a Section 27 notice giving at least 3 months’ notice.
6. A Landlord Triggers the Process By Serving a Section 25 Notice on the Tenant
This will state whether they want the tenant to renew their lease, and if so the basic proposed terms like length of lease and rent, or if they do not want a renewal then reasons why not. These reasons of refusal have to fall within certain bands from (a) to (g), some genuinely down to the tenant’s behaviour, and others due to external circumstances like the landlord redeveloping the building or using themselves.
The timing of this is also important, such as giving between 6 and 12 months’ notice with the end date in this notice then being the applicable date for any new lease. So this means that it must be served well in advance within the current lease to line this new-lease date up nicely with the natural end date of the current lease, although a landlord may want to deliberately delay in the case of say the current rent being too high to benefit from this under the current lease and rent naturally extending beyond the lease date until this official later date of a new lease.
7. A Tenant Triggers the Process by a Section 26 Notice
In a similar fashion and time frame as a landlord’s notice, this is a tenant’s request for a new lease which can affect the start date of any new eventual lease. If they do not want to renew then this is not needed, as they can just leave or serve a Section 27 Notice. A landlord then needs to serve a counter notice to this Section 26 Notice to this clarifying if they agree or not to the request.
8. The Court Can Get Involved in Determining Any New Lease or Termination
So after the above notices have been served to trigger the Act’s procedures, any new lease can be openly negotiated between the parties and completed as normal, and overriding any dates and terms originally in such notices. The Act is only there as a fall-back position; if terms are getting difficult to agree, then the next stage is for either the tenant or landlord to apply to court for them to determine any new lease or terms that can’t be agreed before the parties, or for a quicker and cheaper alternative a system called PACT (Professional Arbitration on Court Terms).
9. Interim Rent Can be Applied For the Gap Between the End of the Old Lease and Start of the New Lease
This interim rent application is to the court, and will often be driven by the tenant or landlord who will benefit from a sensible adjustment to the rent in this interim period.
10. Remember the Money Involved in Terms of Compensation and Costs
So where a landlord has legitimate grounds to refuse a tenant’s requested renewal, there are grounds for paying them landlord’s compensation, which can be costly to factor in. There can also be increasing costs on both sides for going through this whole procedure, mainly through solicitors’ involvement, which can involve the abortive costs of the other side being covered as well, for example when a tenant decides to back out and leave anyway (which they can do).
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