Security of Tenure
There has been much discussion in government about leasehold reform in the residential context, with Michael Gove and the DLUHC being in favour of abolishing leasehold ownership altogether. In the commercial context, however, the government’s view appears to be that security of tenure is here to stay, albeit in a hopefully new and improved form.
Under the 1954 Act as it currently stands, only short-term leases of six months or less are automatically excluded from security of tenure. That said, increasingly large numbers of leases are contracted out of the Act. The government’s intention is that the security of tenure regime be one that both landlords and tenants actually use, rather than contract out of.
The Law Commission will need to grapple with the fundamental question of when security of tenure should apply. Should the regime be opt in or opt out? Should it be limited to (or automatic for) particular businesses or sectors? Landlords are likely to resist attempts to limit the parties’ freedom to contract on an “outside the Act” basis but where should the balance be struck?
The Law Commission could take inspiration from the Telecoms Code to help simplify the Act and include only written agreements. This would avoid the confusion which can be caused by periodic tenancies and undocumented agreements falling within the Act inadvertently.
Complexity of the Act
While the premise of the Act is straightforward, its nuances are not and the Act’s somewhat technical provisions have been supplemented by a body of case law which has developed over the past 70 years. The Law Commission may well try to streamline the lease renewal process, making the Act easier to navigate.
While the ability to contract out of the provisions of the 1954 Act is widely supported – and is a huge improvement on pre-2004 process, which required a court order – this could still benefit from being simplified.
Under the Act as it currently stands, landlords must serve a warning notice on a tenant, who must then make either a simple or statutory declaration (witnessed by an independent solicitor), confirming it understands the rights being given up.
Though the notice process provides an important pause to confirm the tenant knows what they are giving up, there are concerns around fairness when errors in the process could mean a landlord is subject to a protected lease.
The notice process can also cause problems in agreements for lease, where there may be a change of landlord between exchange and completion, while uncertainty can also arise where variations to the lease are agreed at the last moment, after the notice has been served.
The need for a statutory declaration (which is the norm to avoid the 14-day cooling off process required if the simple declaration is used) also means this is a lawyer-led process, which makes it less accessible to smaller tenants and introduces an additional layer of bureaucracy.
The notice and declaration process could be streamlined by introducing an online procedure which permits e-mail notice and electronic signatures and requires a simple rather than a statutory declaration. It could even do away with the notice process altogether and simply require a confirmation on the face of the completed lease. This would have the advantage of making it immediately apparent if the lease fell outside the terms of the Act, and force parties to apply their minds to the 1954 Act position.
The Law Commission could also look into whether the notice and declaration process is still needed for agreements to surrender a protected lease.
Forums for disputes
The courts have always been the main forum for determining 1954 Act disputes, and the process is a well-trodden path with judicial expertise. However, while court delays are not unique to disputes around the Act, anyone experienced in the area will be well aware of long waiting times for both opposed and unopposed renewals.
In order to improve the court process, the Law Commission could consider imposing a pre-action protocol – akin to the dilapidations protocol – requiring meetings between experts at an early stage to encourage the parties to reach agreement without the need for court proceedings. However, it may be necessary to have costs sanctions for non-compliance to ensure this is a helpful process, rather than a box-ticking exercise.
Alternatively, the Law Commission could consider whether another forum would be better placed to deal with 1954 Act claims, such as the First-tier Tribunal or an arbitration process.
The Renters Reform Bill – expected to be put before parliament in this session – has also noted the impact of delays on possession proceedings. It proposes making a greater use of the FTT, which could also be a solution for 1954 Act disputes.
The pilot scheme for unopposed lease renewals – where cases in central London are transferred to the FTT – has proven broadly popular, with cases being dealt with markedly more swiftly.
The FTT’s judges can be more specialist and experienced with property claims and there is often a surveyor on the panel too. However, there is a risk of this transferring the problem and relieving the courts at the expense of the FTT, which could be overwhelmed. The solution may be for the FTT to deal with more straightforward unopposed lease renewals, leaving County and High Courts as an option for more complex cases.
More radically, the Law Commission could even consider removing the 1954 Act process from the courts altogether and use the Covid rent arrears arbitration scheme as inspiration for a new forum to resolve 1954 Act disputes more swiftly.
The Law Commission would need to consider how to resource an arbitration scheme, but arbitration has the benefit of being a more flexible process, which could potentially reduce the cost. Specialist arbitrators and valuers could also be appointed by virtue of their expertise in this area, while making the arbitration process public rather than confidential would ensure consistency.
Currently, protected tenants are entitled to receive statutory compensation where the landlord successfully opposes renewal on one of the no-fault grounds, such as redevelopment.
Compensation is currently calculated by reference to the rateable value of the property, which provides certainty, and is a straightforward calculation method.
The Law Commission may revisit this, asking whether statutory compensation should still be payable at all and, if so, calculated by a different measure, such as annual rent or even tenant profit.
While a more bespoke regime may seem fairer, it will inevitably add another layer of complexity and could lead to yet more litigation.
An unenviable challenge
These are just some of the questions the Law Commission will need to grapple with. In revisiting these long established principles and processes, there is always a risk that attempts to improve the 1954 Act may lead to additional complexity, or even unintended consequences, leading to more litigation.
However, it is difficult to disagree with the conclusion that reform of the 1954 Act is long overdue and – if nothing else – the opportunity to deal with court delays and create a simpler process will be welcomed across the board.
An earlier version of this article appeared in EG on 8 April 2023.
Authored by Paul Tonkin.