The Evolution of the Landlord & Tenant Act 1954: Implications for Retail Property

Updates to the Landlord & Tenant Act 1954: Changes on the Horizon for Tenants and Landlords

In this episode of 'That Retail Property Guy,' Gary Marshall delves into potential updates to the 1954 Landlord and Tenant Act, exploring implications for commercial lease renewals. The discussion focuses on the protections it offers business tenants, the potential for legislative reform, and the broader impact on commercial landlords and tenants. Key points include the Act's protections against the loss of business goodwill, the nuances of court decisions regarding lease renewals, and the debate over whether the act needs modernising to reflect current market conditions. Two legal cases discussed are 'MVL Properties 2017 Limited versus the Lead Mill Limited' and 'Spirit Pub Company Managed Limited versus Pridewell Properties London Limited.' The episode also considers the potential ripple effects on pension funds, the necessity of lease clause modernisation as well as the possible future landscape of retail commercial property. 

00:00 Introduction to the Podcast

00:12 The 1954 Landlord and Tenant Act: An Overview

01:39 Potential Reforms and Their Implications

02:50 The Tenant's Perspective on Lease Expiry

05:15 Economic Impacts on Rent and Property Value

07:07 Modernising Lease Clauses

11:34 Legal Cases 
'MVL Properties 2017 Limited versus the Lead Mill Limited' and
'Spirit Pub Company Managed Limited versus Pridewell Properties London Limited.

15:08 Conclusion and Future Discussions

Related Episodes:
Landlord and Tenant Act 1954 - superhero in security of tenure

Lease Lines: the crossover world of big and small retail tenants

Lease Option Forensics: options to renew or break, IFRS and Landlord's ledgers

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Transcript

0:00

Welcome to that Retail Property guy with your host, Gary Marshall. In each podcast episode, we delve into the perspective of a retailer as tenant sharing stories and insights through Gary's unique lens. We hope you'll be entertained, enlightened, and may be a little inspired. We've spoken about the protection offered to many business tenants with commercial leases under the benefits of the 1954 Landlord and Tenant Act. Well, there removes a foot to consider reforms to that act, and I mean, 1954, that's 70 odd years ago, and maybe it needs reforming. Like any ideas to reform legislation, it seems that the proposals start with just will of the wisp ideas, rumblings, recognizing a need to scratch an itch. Possibly pondering whether anything from the 1950s is still completely relevant or surely needs modernizing. Does the 54 Act really need a glow up? These rumblings relate to part two, which has already had a number of tweaks over the years. So does it need a facelift or does it need a full strip down and rebuild to many experienced surveyors and property practitioners? The 1954 Act is a well acquainted friend, maybe even a platform for everything we consider right in the world. You know where you are with a part two ground possession. The rules are quite clear. It governs so many commercial property decisions and business investments. We never consider what if, except now. Perhaps we need to consider what if? What if the rules by which we have played for most likely all of our professional careers are about to change. Will they change in subtle ways? Just shadowy revisions on the edge of specific challenges affecting only the most specialized and specific circumstances. Or will there be a wholesale rewrite, throw out the old white, the slate clean, redesign the legislation from a 21st century perspective. At which point we all go back to school. We all reread our existing leases. We all rethink our rights of tenure. We all reconsider the security and protection of our upcoming expires. But wait, there'll be many practitioners in Scotland who are thinking, what's all the fuss? This 54 act nonsense doesn't apply up here. Maybe it shouldn't apply down there either. That would make life easier for everyone. wouldn't it? Shouldn't a lease contract expire on its expiry date, just like any other contract. Okay. I acknowledge the 54 ACT provisions, which might be under review, will be of more interest to commercial landlords and tenants in England than perhaps in other realms. The 54 Act is a funny old thing that leans heavily towards tenants offering state protection from unscrupulous landlords, protecting the tenant's business model by protecting their leases. For those who are unsure what I'm talking about, the 54 Act protects most business tenants whose leases reach contractual expiry by making it quite challenging for the landlord to get possession back. In a nutshell that landlord needs a really good reason and there's a bucket load of case law to help form a precedent on what constitutes a really good reason. In the absence of a really good reason, most landlords of business premises find themselves obligated to grant a new tenancy when the old tenancy expires with no breaking occupation for the tenant. Again, okay? There are lots of nuances and conditions and variables. But generally, most business tenants of which retailers form a considerable chunk look at their English lease expires with a much more relaxed attitude than they do for their Scottish equivalents. The underlying principle of the protection is to guard against the loss of goodwill. In some sectors, goodwill is extremely valuable. For example, a retailer with an established store in a good location and who has spent many years building a reputation and a returning customer base wouldn't want to be obliged to hand that goodwill to the landlord at expiry and then have to sit and watch as the landlord reelects the premises to the highest bidder, which could include a competitor keen to benefit from that established goodwill. So the 54 Act protection is mostly, but not wholly about state-based legislative protection of the occupier's business in the form of goodwill against a landlord who could profit from that like a windfall. But it's not like landlords get ripped off in this protected renewal process. The renewal lease isn't abstract or rent protected. Like the old residential tenants that left resi landlord still collecting two shillings a week, 30 years after decimalization. There are steps to ensure that repossession for a really good reason can be successful. While at the same time, if they're obliged to grant a new lease, they do get to review the rent and maybe modernize some lease terms. I. I suppose both those arguments work both ways. In the current economic climate, there are many retailers reaching expiry or long leases. Granted, enormous rents in the late nineties where those rents have remained high because the leases rent review clauses act like a ratchet, so rents can go up but never down. So as a result, the property seems to be incredibly over rented Now. So they're achieving substantial reductions in rent at renewal that couldn't have been previously achieved at a mid lease upward only review. These reduced rents reflect market forces, the demonstrable rental values in a location which might be worth substantially less now than 20 or 30 years ago. Markets are constantly in cycle, and who knows, those rental levels might cycle back up that hill at some point in the future. There are many factors that govern the demand and the value of properties in any given location. More on that in another episode. And we need to reflect on what these longer awaited reductions could mean for the landlords, many of whom are pension funds, paying out pensions to our retirees, and maybe suddenly noticing a reduction in income flow. They've been accustomed to a constant high income flow for decades. As rent review after rent review reflected a nil uplift where that ratchet effect means the rents can't go down. Mid lease. Even if market values in the proximity have plummeted, the retailers have weathered that storm biding their time for the expiry. The moment when they can free themselves of that damned ratchet and seek a free market value. So as income streams drop, will those pension funds still have enough cash flow to meet their payout obligations? Are are pensioners looking at bleak times ahead? Will non pension fund landlords see their belt a good thing, a necessary thing, a worrisome thing? More on that. Of course, in another episode, an expiry or renewal doesn't just give tenants the opportunity to renegotiate the rent from a position of some strength. I. Tenants are also pushing for modernization of clauses, backfilling the lessons of those last 20 or 30 years with better clauses about insurance maintenance and rent payments or sustainability, or introducing better clarity on whether a pandemic is an act of guard or an insured risk. With assessor provision, there's a ton of presidential legislation about changes to modernize a lease. For some clauses, both parties might agree a change is necessary, but disagree about the effect. So many renewal negotiations end up in arbitration or litigation, dragging out the proceedings, and sometimes ending up with a Compromise Lease document, which is more of a three humped camel than a racehorse. Is there a way to preempt this litigation to drive swifter, fairer, more modern leases, which don't unduly impact one party more than the other. In England, we are all comfortably accustomed to the 1954 Landlord and Tenant Act. Part two, which deals with the protection and those really good reasons for possession, but is our comfort zone about to be challenged? The RICS reported the results of a poll by the Property Litigation Association, the PLA, who polled their member think solicitors who deal with the court side of renewals, and mostly their members were in favor of preserving the protection, but they differed on what, why, and how. I suppose that acts as a fair barometer of how the commercial world would look at the suggested reviews. Will anyone be able to reach a well supported majority decision? To provide some more detail on this protection or security of tenure to use its proper moniker. The 54 Act applies to all leases except those of six months or less, and those that have been expressly contracted out, which is when a tenant formally agrees to ignore the protection. There's usually a sound motive for contracting out. Maybe the tenancy is getting access to a property that wouldn't be available if the tenant insisted on the 54 act protection, for example, if the landlord has a redevelopment scheme in mind for a few years, hence, and would rather leave a unit empty than risk getting tied into a protected tenancy contracting out removes that protection, so removes the risk to the landlord. Though woe be tired. A tenant who contracts out unwittingly the PLA poll suggested that some members thought the act should apply to more leases with less chance to contract out. There's another point of view that suggests it should be standard practice to choose to contract in. It's an interesting point for discussion. For example, would contracting out or contracting in make it easier? Would the rules be easier? Would there be more or fewer available properties? Would we end up with buildings sitting empty for years while redevelopment plans come together? Would we have tenants who simply can't afford to take new leases? Other suggestions for improvements in the legislation might be to attempt to improve the long, often dreary court process, to serve the required notices, file for protection, offer up those really good reasons. Defend against those really good reasons, round and round, to negotiating the minutiae of modern lease clauses, terms and conditions, which differ to variable degrees from the original lease, or at least the spirit of the original lease. Perhaps there's an argument that it could be easier if the rule was simple. The tenant gets exactly the same lease again, irrespective of any lessons learned or economic changes, maybe at a commercially modernized rent. But would either party really want that, not just on a specific case basis, but how would it affect the view of landlords to develop new schemes, to offer exciting new locations, to grow our economy, to modernize our futures if they could never then modernize their leases? And another thought. The 54 Act as it presently stands, guarantees the protected tenant, the right to compensation from a landlord if they do successfully regain possession for one of those justified really good reasons, so long as it isn't a tenant at fault reason, like non-payments of rent. Usually a good reason could be redevelopment or the landlord intending to occupy the premises themselves. A couple of recent cases have given different outcomes on a landlord seeking possession under section 30 of the landlord and Tenant Act. In the famous case of MVL Properties 2017 Limited versus the Lead Mill Limited, which is a successful nightclub in Sheffield, the landlord successfully recovered possession of the nightclub underground G of the 1954 Act. Ground G allows a landlord to oppose a lease renewal if they intend to occupy the premises for their own business purposes. In this litigation, the tenant argued in favor of their established goodwill and the venue's historical significance, and argued that the landlord had insufficient funding to run the business, but the court held that the landlord's intention was genuine and substantial, so the landlord got possession. But compare that with Spirit Pub Company Managed limited versus Pride. Well Properties London Limited. The tenants of a popular pub served a request for a new tenancy, but the landlord served a counter notice citing ground F, which is plans to redevelop, including in their case, the upper floors into residential accommodation. The tenant challenged this on several basis. The court recognized that the landlord's intentions were genuine and recognized that it would be necessary to vacate the whole property to carry out the works. I. But the court also considered other tests such as the availability of planning permission, any restrictive covenant funding and timing, and in the end, the court held that the landlord had failed to demonstrate a real prospect of obtaining the necessary funding, so the landlord's claim failed. The takeaway point from this is that both landlords and tenants shouldn't consider the grounds and the protections offered by the 54 Act to be set in stone. There are nuances, there are challenges, there are tests and conditions which can impact the court's decision either way, if it gets so far as to go to court. The judge might say the tenant should hand back the keys, but then receive compensation ostensibly for that loss of goodwill. The compensation is a statutory calculation based on how many years of occupation and the rateable value. But is it fair that a landlord with a valid, really good reason or grounds for possession should have to pay out compensation? Surely they would just be getting what was rightfully theirs as confirmed by the court's decision. Why do they have to compensate for a really good reason? That's been confirmed by law. And if they do have to pay up, is the compensation scheme anywhere near adequate? If this was a compulsory acquisition by a state agency, there'd be all manner of grounds for claim, possibly up to and including a crystallization of the loss of profit and a write-off of the fixtures and fittings. So a compensation process based only on rateable value seems neither helpful or adequate. Should this be considered for review? And if you're listening in Scotland, you might still be thinking, what is this fuss all about? No tenant in Scotland is entitled to statutory compensation. At expiry. The lease expires and that's that. How's that for market forces? We'll discuss these points again in more detail in other episodes. In the meanwhile, check online for the many articles and discussions about this potential revision and the impact of those grounds for possession, how it might affect you, your clients, and how these changes might impact the future landscape of retail commercial property. Thank you for listening to that Retail Property guy. I hope you enjoyed today's discussion and found it both entertaining and insightful. Don't forget to explore more episodes and if you have ideas for future topics, feel free to share them below. Be sure to like, share and subscribe so you can never miss an episode. For more information, visit that retail property guy.com. Thanks again for tuning in.