The Law Commission should be focusing on the 1995 Act, waiver and forfeiture, MEES and other issues, write Debbie Eliad and Kim Clifford.
Of all the challenges in the commercial real estate sector, which causes you the biggest headache? Unless you are in the middle of a contested lease renewal, a safe bet is you would not answer the Landlord and Tenant Act 1954. Yet, this is what the Law Commission has been asked by the government to focus its upcoming review on. If the Law Commission had asked that question, it would have soon identified many much more pressing issues in the sector.
The AGA saga
Tenants would likely point to issues such as the impact of the Landlord and Tenant (Covenants) Act 1995 on their ability to reorganise their business. The 1995 Act introduced authorised guarantee agreements and today commercial leases commonly require that tenants wishing to assign their lease enter into an AGA to guarantee the new tenant’s performance of lease covenants (including, for example, payment of rent and repairing obligations).
Therefore, even after selling the lease to a third party, tenants can still be on the hook for lingering liabilities, which can be substantial. The Act currently operates as a noose around the tenant’s neck as it prevents a guarantor of a lease from taking an assignment, intra-group restructuring, or the guarantor from guaranteeing the assignee of the same lease, even if that is something the parties would commercially agree after taking professional advice on the possible risks.
Surely such a flaw in the legislation is a prime candidate for a review? Especially in the current market and where the Property Litigation Association, British Property Federation, British Retail Consortium and Property Bar Association have all endorsed the need for reform?
Equally, landlords would likely list numerous complaints before the 1954 Act entered their minds. A recurring issue is the interplay between the doctrine of waiver and forfeiture proceedings. Essentially, a landlord must choose between taking the draconian action of exercising its right of forfeiture or seeking to find a solution with a tenant and thereby risk waiving their right of forfeiture and losing their negotiating position.
Alternatively, landlords may complain about the tensions that arise when trying to carry out works to upgrade their buildings to ensure compliance with the Minimum Energy Efficiency Standard Regulations while there is a tenant in situ. This is undoubtedly at the forefront of landlords’ minds given the government’s recent consultation on MEES indicates that the minimum EPC rating required will likely be jumping from E to C in 2027. With the clock ticking down, landlords will be keenly focused on the need to secure compliance.
Why the 1954 Act?
In light of the above, why has the Law Commission been tasked with reviewing the 1954 Act, and what reforms could we see?
The Law Commission announced the review on 28 March 2023, stating: “Those who rely on the Act report that it is inflexible, bureaucratic and out of date, causing extra cost and delay for both landlords and tenants.” True or not, this statement fails to answer the question: with myriad higher-ranking concerns and pressures facing the commercial real estate sector, why choose this?
To identify the motivation to revamp the decades-old legislation, it may help to trace back to the origin of the review. The review has been commissioned by the Department for Levelling Up, Housing and Communities and, bizarrely, is part of the government’s anti-social behaviour action plan. A key part of the plan is to “breathe new life into shuttered shops” and tackle “complex commercial leasing rules [that] are holding back high streets… to make the system easier to understand and more transparent and attract more investment into UK commercial property”.
This is a laudable aim and few (if any) would be against reformation towards a less complex, bureaucratic and opaque legislative framework for commercial property. However, the government and the Law Commission fail to explain why they are laying the problems with attracting investment into UK commercial property at the foot of the 1954 Act. Even a high-level review of commercial property legislation would bring to light many more deserving candidates.
What reforms may we see?
While this may not be our first choice for a Law Commission report, it is the one we will get. So what may the Law Commission recommend?
Perhaps there will be amendments to when security of tenure applies. The Law Commission notes that today many choose to opt out of the 1954 Act entirely and exclude security of tenure. Could this signal a shift towards an opt-in system, where the default position is that leases are outside of the Act unless explicitly contracted otherwise? While that could help relieve the burden of the 1954 Act (few would mourn the loss of the landlord warning notices and statutory declarations), it is easy to see how it could simply become a trap for unwary tenants.
Additionally, the Law Commission’s aim seems to be to develop “a modern legal framework that is widely used”, which perhaps instead suggests the creation of a regime with much more limited opt outs – something likely to be strongly resisted by landlords.
In its announcement, the Law Commission was right to highlight the significant changes the sector has faced – the 2008 financial crash, the pandemic, the online threat to the high street to name a few – and to listen to the “growing calls for laws to be modernised”.
However, if it had listened a little longer it would have identified the real problems facing landlords and tenants today. The focus on the 1954 Act is puzzling to say the least and a lost opportunity to make real change to the sector.
Debbie Eliad is a solicitor and Kim Clifford is a senior associate at Ashurst
