The Regulatory Reform (Business Tenancies) (England) Order 2003 came into effect on 1 June 2004. It introduced new procedures for terminating or renewing business tenancies under the Landlord and Tenant Act 1954, and procedures for contracting out of sections 24 to 28 relating to security of tenure.
The Order contains a number of other useful provisions that we do not discuss here, such as: making fairer the rules on interim rent (rent payable pending renewal of the tenancy); clarifying how a tenant may bring a business tenancy to an end; and improving the arrangements for the parties to obtain information from one another before embarking on renewal or termination procedures.
What is security of tenure?
The 1954 Landlord and Tenant Act gives rights of security of tenure to tenants. This is the right for the tenant to stay in the property when the lease term expires. It is effective if the fixed term of the lease is greater than 6 months, or if they have been in occupation for more than 12 months. The idea behind it is to protect businesses that either invest heavily in the building (for example by installing specialist machinery) or that build up a valuable reputation for trading from certain address.
To obtain possession when the lease term expires, the landlord must give the appropriate notice, quoting one of a number of reasons specified in the 1954 Act. The three most common are:
- non-payment of rent or other breach of the lease
- they want to redevelop the building
- they have owned it for more than 5 years and now wishes to use it themselves
If the landlord cannot prove one of those reasons, the tenant is entitled to a new lease on the same terms as the last one – apart from a new rent.
Both also have a mechanism for finding out about the lease before deciding whether to renew or not in the form of a Section 40 notice.
The tenant therefore has what is called security of tenure - the right to occupation after the lease has ended - provided that they continue to observe the terms of the lease.
There was a way to opt out. The landlord and tenant could make a joint application to court for an order to validate an agreement for the tenant to waive their right to security of tenure. Despite being a mere formality (since both parties would have already agreed to the contracting out), the process involved solicitors on both sides at great expense, and was tedious and time consuming, adding several weeks to the lease process without doing anything to safeguard the rights of the tenant.
The 2003 Regulatory Reform Order hasn't changed the tenant's right to a new lease, or the reasons a landlord could give to insist on taking possession changed, or the procedure for giving notice. It has introduced a simplified procedure for setting up the opt out before the lease is signed. If this procedure is used, the tenant knows that their lease will end and the landlord knows they will get their property back.
Changes under the Regulatory Reform (Business Tenancies) (England) Order 2003
Requirements before a lease is signed
The new requirements before a lease is signed for valid exclusion of the tenant's right to a new tenancy at the expiry of that lease are as follows.
The application to court has been replaced by a simpler 'health warning' notice, written in plain English and served on the tenant, that explains the loss of rights and the importance of getting professional advice.
If the landlord serves the notice to the tenant at least 14 days' before the lease is due to be signed then the tenant simply needs to sign a declaration that they have read the warning and has accepted its consequences. It is a good idea (although not a statutory requirement) to encourage the tenant to sign quickly by reminding him that the lease cannot commence until 14 days after they have returned the signed declaration.
If the landlord doesn't give 14 days notice (or, for example, the tenant wishes to move in sooner), then the tenant must visit an independent solicitor to make a special statutory declaration that they understand the consequences. This takes a prescribed form. Visiting the solicitor is only necessary if the 14 day deadline is missed.
The old 'agreement to enter into a lease' formula is not relevant under the new rules. The warning notice has to be given. The lease cannot be completed (and the tenant can't move in) until either 14 days after the tenant declares they have accepted the warning or after the tenant has made the special statutory declaration.
A reference to the notice and the declaration must be must be 'contained in or endorsed on' the lease. All Net Lawman leases now contain a suitable clause. For good measure, we would advise you to attach to the lease a copy of the notice and the declaration.
Surrender of an existing lease before its expiry: requirements for agreement by the tenant
The landlord and the tenant may negotiate whatever deal they wish with respect to the surrender of the lease. Either side could pay the other for the benefit of breaking the lease. The agreement to surrender could be documented in any form, but for it to be binding against both or either of them, the landlord and tenant must proceed under the following procedure (similar to that for a grant of a new lease).
The landlord serves notice on the tenant in the prescribed form or substantially in that form not less than 14 days before the tenant enters into the agreement to surrender under section 38 (A) (2) of the Act, or (if earlier) becomes contractually bound to do so.
The landlord receives a response from the tenant in the form of a signed declaration (not a sworn statutory declaration) in the prescribed form.
If the 14 day time period has already expired, the landlord can still come to an agreement with the tenant for the tenant to swear a statutory declaration in the prescribed form. This can be done right down to the day the lease is surrendered, but not afterwards.
Again, a reference to the notice and the declaration must be must be contained in or endorsed on the lease. For good measure, we would advise you to attach a copy of the notice and the declaration to the lease.
Renewing an existing lease that wasn't drawn under the Regulatory Reform provisions
Under the Landlord and Tenant Act 1954, only the tenant could apply to the court for a new lease. But the tenant and their solicitors often dragged their heels with a view to negotiating a better deal with the landlord, who would still be receiving only the old rent. Negotiations might become protracted.
Section 24 of the Act has been amended so that either the landlord or the tenant can apply to the court for the terms of a new lease to be fixed, but neither may apply once the other of them has applied. If the landlord wants the tenant to renew (if they do not oppose the renewal), they can set out in their Section 25 notice the terms of the proposed new lease including not only the rent, but also any changes to other terms, even to the extent of altering the area let or the obligations to repair. The effect is that each party is aware of the position of the other at an early stage so that time taken to negotiate the terms of the new tenancy is reduced.
There are detailed provisions as to the landlord's and the tenant's obligations in respect of the procedure of applying to court, which are little changed. Most landlords will instruct a solicitor to deal with them. In particular the court has no power to hear an application made after the end of the date specified in the landlord's notice or before the date for the commencement of a new lease specified in the tenant's request for a new tenancy.
Related documents
Net Lawman offers a template agreement to exclude security of tenure, which is a pack of all the forms needed to exclude security of tenure when entering into a new lease.
These forms are included with our commercial lease agreements, which have been written for experienced property developers, solicitors and surveyors who require more provisions than those in our more general business lease agreements.
You may also be interested to download the Section 25 and other legal notices for landlords.