Guy Fetherstonhaugh QC considers the case for reforming a central piece of legislation – the Landlord and Tenant Act 1954 – and argues that the time now seems ripe to do away with business tenancy protectionism.
The way we were
In 1949, during the third reading of a bill aimed at relieving the hardship of retailers who found themselves at the mercy of a difficult market in hard, post-war conditions, one member of parliament said that “most small shopkeepers would have had the pistol put to their heads either to buy at exorbitant prices or to quit the premises”. The legislation that followed duly extended protection to certain types of business tenancies. However, that protection was limited to shops, and not other commercial enterprises, and it gave tenants the right to apply for a renewal of the tenancy for a maximum period of one year.
That remains the position in Scotland, under the Tenancy of Shops (Scotland) Act 1949: no other business tenancy has any statutory security of tenure, and those that do have only very limited protection, illustrated by the decision of the Sheriff in Edinburgh Woollen Mill Ltd v Singh (2013) SLT (Sh Ct) 141, where no extension at all was granted by the court.
Protection of business tenancies took a very different course in the other parts of the United Kingdom. As early as 1889, the Parliamentary Select Committee on Town Holdings had accepted a need for legislation to protect some business tenants from their landlords’ demands for high rents on contractual renewals of tenancies. Legislative change did not ensue until after the First World War, when there was a shortage of business premises and a need to stimulate trade, coupled with (as in Scotland) a perception of landlords being ready to exploit this situation by raising rents and of entrepreneurs and operators of chains of shops seeking to evict existing business tenants to profit from their goodwill. The Landlord and Tenant Act 1927 sought to address this for the most part by compensating evicted tenants for the loss of goodwill, rather than granting statutory security of tenure, save where the loss could not be adequately compensated.
Pressure for further reform returned in the immediate aftermath of the Second World War, in the face of a shortage of supply of new business premises and an increase in demand caused by new businesses setting up. In response, the government set up a Leasehold Committee under the chairmanship of Lord Uthwatt, to determine whether business tenants should be given security of tenure. In its interim report in June 1948, the committee identified two problems in the operation of the market. First, existing tenants seeking a new lease were facing a “take it or leave it” approach to negotiations from their landlords, which disadvantaged small shopkeepers selling goods subject to price control. Second, landlords of multi-occupation office blocks were keen to obtain possession to allow the building to be relet to a single tenant. The committee decided that, although only a minority of landlords abused their superior bargaining position, this was a sufficient justification for introducing a new system, whereby sitting tenants of buildings erected before the proposed legislation was enacted would have a prima facie right to a renewal lease for a term not exceeding seven years.
No immediate action was taken by the Attlee government in response to the interim report. Instead, following the death of Lord Uthwatt, Lord Justice Jenkins was appointed to the committee as chairman. He immediately distanced himself from the interim report, which he considered overstated the business tenants’ predicament: “If abuse is the exception rather than the rule, I do not see how it can be right in principle to subject the whole business community to a new system of control… merely for the relatively few cases of unfair dealing which might otherwise occur.” The final report concluded that the landlord’s right of property should not be overridden in any fundamental fashion: “security of tenure is not to be at the expense of the landlord”. It advocated a scheme whereby the tenant had to justify the grant of a new lease, not the conferral of an automatic right to renew. The right to a renewal lease was to be conditional on the tenant proving that the inability to renew would cause “substantial diminution in the value of his business as a going concern”. The right to renew was also subject to various other considerations, such as the nature of the tenant’s business and whether it was profitable.
Ultimately, the (by then Churchill) government took a different course in 1954, embracing neither report, and deciding, in contrast to the position enacted five years earlier in Scotland, that automatic security of tenure was to be conferred on tenants of business premises. And this, despite the fact that post-war trading conditions must have been fairly similar in all parts of the UK.
The way we are now
The difference in the market between 1954 and now is substantial. There are no price controls; business tenancy term lengths have shrunk in most cases to around the five-year mark; the internet has disrupted the retail economy, with deleterious effects for the bricks-and-mortar high street; the pandemic has convinced many office workers that they may just as well work from home; there is no credible evidence to suggest that tenants have a weaker negotiating position than landlords. Do we really need business tenancy security of tenure in those circumstances?
Those in favour of red tape will say that, in the decades since 1954, the Act has become almost voluntary, given the ease with which parties may contract out of its security of tenure provisions, introduced successively in 1969 and 2003. There is therefore, they say, no need to change the status quo. But let me stand that argument on its head: if it is so easy to contract out of the 1954 Act, why then do we have it at all? It stands as a trap for the unwary, with landlords subjecting themselves inadvertently to security of tenure, or facing barely arguable contentions from their tenants that the contracting out procedure was improperly followed. In cases where security of tenure has been conferred, it may prove very difficult for landlords to redevelop, following the decision of the Supreme Court in S Franses Ltd v Cavendish Hotel (London) Ltd [2018] UKSC 62; [2019] EGLR 4.
Showing some sympathy with this point of view, the Law Commission has included reform of the 1954 Act in its list of projects for consideration. Opening its consultation in 2016 for subjects to include in its Thirteenth Programme of Law Reform, the commission noted the criticisms that had been made of the 1954 Act, and stated that a review could consider the extent to which security of tenure continues to perform an important function and whether it should continue under the existing model. When the commission came to publish the programme on 13 December 2017 (Law Com No 377), it observed from the responses to its consultation that stakeholders from across the industry had criticised various aspects of the scheme that gives business tenants security of tenure. The legislation was not operating to the benefit of the tenants it was designed to protect, nor to the benefit of landlords. The scheme was created for different (post-war) economic conditions and now leads to unnecessary costs of £20m-£40m (for both landlords and tenants) and the needless loss of hundreds of thousands of retail trading days each year. It puts unnecessary obstacles in the way of businesses starting up in the UK and generates up to 1,400 more cases for the courts annually than is necessary. It went on to refer to the consensus that these problems create needless red tape, inhibit economic growth and productivity, and cause tenants, landlords, local authorities and central government to suffer significant preventable financial losses. The law creates commercial uncertainty and stifles legitimate commercial transactions.
The commission is not the only respected authority to voice these thoughts in recent years. Writing extra-judicially in these pages shortly after his appointment to the High Court Bench in 2000, the hugely experienced and admired Sir David Neuberger spoke in favour of repeal. He drew attention to the fact that residential and agricultural security of tenure had become progressively weakened in recent years, and emphasised the incongruity of elevating business tenants to a higher plane. I can only respectfully agree with his Lordship.
Arguments against
Let me deal briefly with the principal arguments against repeal. First, it is said to be unfair on tenants whose tenancies are coming to an end, and who therefore face paying over the odds to secure a new tenancy in order to remain in possession. That is, however, merely one factor. As against that, the sitting tenant’s landlord will surely bear in mind that if it turfs its tenant out, it will face a void, which it will be anxious to avoid.
Next, opponents of repeal contend that tenants will not wish to lose the goodwill associated with their existing premises. To the extent that that factor exists at all (which may be debatable in our age of internet shopping), it may be considered for compensation, in much the same way as the position that formerly applied under the 1927 Act.
Lastly, the objection is made that tenants will be disadvantaged from making improvements if they cannot guarantee renewal. There is a host of arguments against that proposition: tenants will usually seek a term length that will enable them to amortise the cost of their improvements; tenants may seek to rely on Part I of the 1927 Act to secure compensation for valuable improvements; and tenants can always seek to secure their position contractually, perhaps by negotiating an option for renewal.
The government’s position
In its report on the Thirteenth Programme, referred to above, the Law Commission concluded that a law reform project to address the problems with the 1954 Act it had identified had extensive and long-standing cross-industry support. It went on to note, however, that the government does not currently support such a project. The Department for Communities and Local Government (now the Department for Levelling Up, Housing and Communities) had said that, while it recognised that commercial leasehold could be improved, other departmental priorities meant that it was not able to support the project at the moment. As a result, the Law Commission did not conduct the project then. It will only do so in the future if it is supported by government. Given the legislative problems facing the government at present, such support seems unlikely – but nevertheless the case for repeal seems, to this writer at least, to be gathering pace.
Guy Fetherstonhaugh QC is a barrister in Falcon Chambers
