Business tenancies - overview

A business tenancy automatically continues after the initial lease expires (Landlord and Tenant Act 1954 (LTA 1954)).

A ‘business tenancy’ is one where property is occupied for the purposes of a trade or profession unless specifically excluded by LTA 1954, s 43, or where occupation is as licensee or tenant at will. Unless the tenant surrenders or gives notice to quit, a protected business tenancy can be brought to an end only by:

Compensation

In a s 25 notice the landlord must let the tenant know whether or not a new tenancy will be offered. If the landlord opposes the grant of a new tenancy he must be able to rely on one of the limited grounds set out in LTA 1954, s 30. Those statutory grounds fall into two categories – often referred to as 'fault' and 'no fault' grounds.

If the landlord can rely on one or more of the 'fault' grounds (eg persistent failure by the tenant to pay its rent on time or serious breach of tenant covenants) the tenancy will end without compensation.

If the landlord relies on one or more of the 'no fault' grounds (eg where the landlord intends to redevelop the property or to occupy for the purposes of its own business) the tenant will be entitled to compensation for loss of its tenancy.

Compensation is assessed as the 'rateable value' of the property, rising to twice the rateable value where the tenant has been in occupation for more than 14 years. For this purpose, any period of occupation by the tenant’s predecessors (eg former tenants where the current tenant acquired the lease by assignment) will count.

Contracting Out

If a landlord and tenant agree to exclude or ‘contract out’ from the security of tenure provisions of LTA 1954, ss 24-28 the landlord must serve a ‘warning notice’ on the tenant, explaining that security of tenure will not apply. The tenant must sign a declaration to confirm that it has understood and agrees to the exclusion of its statutory rights. If the tenant’s declaration is made within 14 days after the landlord’s warning notice it must be sworn as a statutory declaration. The agreement to contract out must be set out in the lease.

The forms to be used in this process are prescribed by the Regulatory Reform (Business Tenancies) (England & Wales) Order 2003, SI 2003/3096 , which came into force on 1 June 2004. Before that date the ‘contracting out’ process required a court order made before the date on which the lease was granted.

The whole ‘contracting out’ process must be completed before the tenant takes the lease or becomes contractually bound to do so. If this requirement is not met then the agreement to exclude security of tenure will be void and the tenant will have the full protection of LTA 1954.

Renewal

If the security of tenure provisions apply, and if the landlord cannot rely on any of the LTA 1954, s 30 grounds, the tenant is entitled to call for a new lease once the initial lease has expired. The parties can agree the terms of the new lease themselves, but if they do not the terms of the previous lease will be the starting point.

The onus is on the party wishing to alter those terms to show that the alteration is reasonable (O’May v City of London Real Property Co Limited [1982] 1 All ER 660).

Where the terms of the new lease cannot be agreed they will be determined by the court under LTA 1954, s 35. Where the rent cannot be agreed that will also be determined by the court under LTA 1954, s 34.

Interim Rent

Interim rent fills the rental gap between the earliest date that could be specified in a s 25 notice or a s 26 request and the date on which rent under a new lease begins or the property goes back to the landlord.

As long as there has been no 'substantial change' in the rental market and no substantive alterations to the terms of the new lease affecting the rental value, LTA 1954, s 24C states that an interim rent will be equal to the rent payable at the start of the new tenancy where:

Where the landlord opposes the grant of a new tenancy or the tenant does not occupy the whole property as a business the court will determine an interim rent in accordance with LTA 1954, s 24D.