Landlords at Renewal - competent, intermediate?

Understanding Landlord Competency in Lease Renewals

In this episode of 'That Retail Property Guy,' host Gary Marshall explores the legal competency of landlords under the 1954 Landlord and Tenant Act, as usual from the tenant's perspective. He discusses renewal rights under the 1954 Act, with potential consequences for tenants who are not in occupation for business or when dealing with subleases. He highlights the possibility for a new landlord to insert themselves into the chain of competency – with ensuing risks for the occupying tenant.  Marshall highlights the criticality for tenants in identifying their true landlords, highlighting the importance of serving Section 40 notices to obtain robust data, and mentions the '14 month rule,' which determines a landlord's legal competence at lease-expiry to grant or oppose new leases. 

00:00 Introduction to Retail Property Insights

00:41 Landlord Competency Under the 1954 Act

01:48 Identifying the True Landlord

03:35 Section 40 Notices and Tenant Rights

04:34 The 14-Month Rule Explained

05:24 Intermediate Tenants and Subleases

07:52 Landlord's Rights and Grounds for Possession

09:32 Case Study: Wicks vs. Marks and Spencer

10:45 Managing End of Lease Scenarios

13:56 Conclusion and Final Thoughts

The Times article: https://www.thetimes.com/business-money/companies/article/retailers-resort-to-ungentlemanly-tactics-in-uk-turf-war-870h6pb76

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Transcript

0:00

Hello, and welcome to that Retail Property guy with your host, Gary Marshall. In each podcast episode, we delve into topics relating to the particular overlap between estate management and accounts payable from the perspective of a retailer as tenant We hope you'll be entertained, enlightened, and maybe a little inspired. Something caught my eye the other day, courtesy of LinkedIn, Facebook, and the Sunday Times. That prompted a thought about the legal position of landlords at Lease Renewal. Usually we focus on the tenants as the occupier, so it might seem unusual for us to have an episode seemingly dedicated to landlords. The point of this discussion is a landlord's competency. This doesn't mean whether they can competently raise an invoice for rent or adequately manage the service charge in the common areas. It's referring to their legal competence under the 1954 Landlord and Tenant Act, their legal competence to assume the legal rights of a landlord under that act to serve valid section 25 notices on the tenants at expiry and maybe even to oppose lease renewal. Is the mortar this than meets the eye? Is every landlord legally competent or should tenants occupies be wary of these rules and the risks? So, hey, sigh of relief. We're only looking at landlords from the perspective of the tenant, which is well within our comfort zone. Tenant occupier together, standing shoulder to shoulder against the despicable landlord, right? Hmm. Well, the case that caught my eye involves Wicks and Marks and Spencer, but let's come back to that later. Our first point, I suppose, is the obvious point. When is a landlord, not a landlord, or at least not a competent landlord. A smart tenant anticipating their upcoming expiry should always have an eye on the timeline of their immediate landlord, and this in itself can be complex. Many tenants don't actually know who their current landlord is. Landlords can change as investments are sold. Corporate reshuffles can blur the lines. The original named party on the lease might no longer be the vested legal landlord. And many landlords don't even collect their own rents. They employ managing agents or rent collection agents, so the identity of the actual landlord disappears into the background. The agent raises the invoice on their own letterhead, and hopefully they include the name of the landlord, but in my experience, this isn't always accurate. I've seen countless examples of autogenerated invoices where the agent names their client being the business that instructed them, but sometimes that business is an asset management arm of the legal landlord, or another intermediate party, not the named party themselves. And, and this is a really big, and the smart tenant shouldn't assume that the landlord who receives their rent is the legally competent landlord. Maybe they are indeed the freeholder sitting at the top of the title tree with no other legal interest sitting in a superior position above them, or likely to confuse things later. But the smart tenant shouldn't assume that they should always check it out, maybe with the help of a solicitor or a property professional with relevant experience in this sector. Although a DIY approach is not complex. This belt and braces approach is to demand clarity by serving formal legal notices on the likely parties and maybe some less likely ones who might come outta the woodwork. These notices are known as Section 40 notices after the relevant clause in the 1954 Landlord and Tenant Act. The 54 Act empowers either party, tenant, or landlord to serve these notices requiring a mandatory response with information which can include details of the legal interest held by the other party. This information must be provided within one month, and a tenant can use this as a device to recognize the true legal competency of their landlord. And so to make informed decisions, yes, it's a kind of phishing exercise, asking questions to demand info to allow them to not get duped and not to miss deadlines, and importantly, not to risk their protected rights under the 54 Act to be able to negotiate with confidence. So what's the root issue behind this? What is the tenant trying to establish? Well, remember that's earlier point. When is a landlord not a competent landlord? The key test is known as the 14 month rule. It's defined in section 44, 1 of the 54 Act. It basically applies this key test. A landlord must have an unexpired term of at least 14 months remaining on their own lease to be deemed competent to grant or oppose a new tenancy. IE, they must have a legal interest, which extends 14 months more than their tenant's lease. So for the freeholder landlords, this isn't a hurdle, but if the tenant's immediate landlord is a lease holder themselves, then their lease must run for at least 14 months more than the occupying tenant's lease. But for example, if the immediate landlord's lease expires within a few days of the occupying tenant's lease, then for the purposes of the 54 Act, they're not competent. Situations like this are quite common, particularly in retail property, maybe where once upon a time a retailer exited a surplus property midway through a lease, and rather than surrender the lease to the landlord or assign it completely to another retailer, they created a sublease. They became landlord to a new tenant on a sublease, which was slightly shorter than their own lease, maybe just by a few days. They accept rent from the occupying subtenant and continue to pay rent to their original landlord. The original lease and the sublease are completely separate, and as the occupying subtenant's lease approaches expiry, they should be aware that their immediate landlord, the original tenant to whom they pay rent mightn't be legally competent because they don't have more than 14 months remaining on their intermediate lease. That original retailer sitting between the Occupy tenant and the original landlord is just waiting for their lease to end and hopes to step outta the picture. Well, in theory, at least, there are potential pitfalls for the intermediate tenant aiming to step away, particularly if the Subtenant doesn't vacate and hand back the keys in good time. And if the Subtenant is claiming renewal rights under the 54 Act. It's highly likely that they won't vacate leaving a legal problem for the intermediate tenant and the actual landlord. Let's come back to this later. Another point about landlords, the 54 Act and expires. A tenant might be able to claim protection under the 54 Act to demand a new tenancy when their current one expires. There's a requirement that the tenant must be in occupation for the purposes of business. So in our previous example, the intermediate tenant who exited the property and granted the sublease no longer actually occupies it, so can't claim any renewal rights. Those rights only attach to the occup occupying tenant. And it's not unusual for an original tenant who doesn't want to renew, but recognizes that they occupy a pretty desirable property to market the short remaining tail end of the lease for sale, just so that the incoming tenant is guaranteed the benefit of that protection when they get to negotiate the new lease, rather than facing a completely open market negotiation for a new lease, maybe in competition with other retailers. But protected renewal rights are not a cast iron guarantee of a new lease. The 54 Act is absolutely intended to help protect tenants at renewal, but it does allow some rights to landlords, especially to landlords who have a valid reason to regain possession of the property at expiry. We discuss this in greater detail in other episodes, but in a nutshell here, there are some valid reasons known as grounds for possession. These can include an intention to redevelop, which must be robust and not just a pipe dream or to occupy the premises themselves. And at this point, we approach the plot of the situation that caught my eye. That self occupation rule has another test. If the landlord wishes to use it, they must have been the landlord for at least five years prior to serving any notice to quit. So while a tenant could possibly sell on their protected renewal rights right at the last minute, a landlord has to plan well ahead. And of course, they have to be legally competent. No point planning five years ahead. If the whole project could be sced by an incompetent title that isn't greater than the occupying tenants by at least 14 months. A high profile example of a landlord seeking possession so they could occupy the premises themselves is a 2025 case involving a Sheffield nightclub, the lead mill. Where the landlord was successful, the tenant had to vacate. The landlord was able to move in and start their own business. They had owned the property for more than five years before they served notice to quit, and they had a title which extended more than 14 months beyond the tenant's lease. So they were competent to serve the notice. This anecdote simply goes to prove that in some cases a landlord can get the property back. And now the case which triggered the thought process behind this episode reported in the Times it concerns a property which Wicks have occupied since 2016. We could guess that it's comfortably protected by the 1954 Landlord and Tenant Act. Then along comes Marx and Spencer. A fellow retailer, according to the Times, m and s inserts themselves into the hierarchy of title taking a newly created intermediate lease that puts them between Wix and the original landlord. Now, depending on the terms of that intermediate lease, it is possible that m and s could use the self occupation grounds to seek, to nudge out Wix at expiry. In essence, they could be pulling the 54 at rug out from underneath Wix. A fellow retailer. Hmm. And of course there could be a lot more to this than meets the eye. My point here is only about highlighting the technical conditions that could lead to a scenario like this, where in theory, any landlord could offer their tenants properties to the highest bidder among fellow retailers, perhaps on a conditional money back if it doesn't work kind of way. Just requiring five years of patience again. Hmm. And in closing, let's loop back to that point about managing the end of lease scenario when the occupier holds a sublease, but their immediate landlord isn't competent because they don't have that necessary extra 14 months of title and probably as intermediate tenant, they want out, they want to exit a picture. They maybe wanted to exit many years ago. They might have been subsidizing the subtenant's rent for years just to mitigate their own losses. Who. But the expiry deadline approaches. So what happens if the occupying subtenant is protected by the 54 Act? They might be able to claim renewal rights. They don't actually have to initiate any process. If they're protected, then they could just hold over. That's legal Speak for remaining in possession until a competent landlord serves a valid notice under section 25 of the act. Then they negotiate for renewal with that competent landlord. And the intermediate tenant could just step away with their fingers crossed, hoping it all goes well, because they could remain liable for any losses. Rent, dilapidations, maybe even unrecoverable, VAT if the intended renewal doesn't go through as planned. Because until the competent landlord either gets possession or grants a new lease, they technically have no contractual relationship with the occupying subtenant. Their lease contract is with the non OCU occupying intermediate tenant. So an intermediate tenant looking to exit with a guarantee of no further claims, uh, kind of get out of jail. Free card might do well to negotiate a settlement deal with the competent landlord before actual expiry to surrender the remainder of their lease. But that might only happen if the landlord is willing, if they're certain of a successful outcome with the subtenant. Otherwise, why take the risk? In the absence of a surrender, it could get very messy given the occupier's rights and the landlord being reluctant to take a risk, and also maybe not wanting to dilute the strength of their investment by granting a new lease to lower rent to a local independent tenant rather than to a blue chip national. The negotiation period might just roll on and on. On the intermediate tenant's, contractual obligations to the landlord remain enforceable. End of lease doesn't necessarily mean end of liability. The intermediate tenant isn't competent to serve a notice to quit on the subtenant, but if the competent landlord doesn't serve one to kickstart the renewal process, then the protected subtenant could just remain in occupation. But who do they pay rent to? The competent landlord might not want to accept it for fear of creating some form of direct relationship. The intermediate tenant might not want to accept it for fear of confirming an ongoing relationship, and if nobody accepts it, then the unpaid rent could accumulate, which could be a risk to the ultimate landlord if that occupying tenant then went bust. The key to unlocking this impasse and risk might sit with the intermediate tenant, keen to exit, incentivize to lubricate the process with a settlement or maybe a new temporary tenancy. But the intermediate tenant should be under no doubt that they're not off the hook until the property is re let, and maybe also a full and final settlement has been made. Thanks for tuning in to that retail property guy. I hope you enjoyed the discussion and found the subject both entertaining and insightful. If you liked what you heard, please consider leaving a review. Your invaluable feedback helps improve content. Thanks for listening.