1954 Act Business Lease Renewal - Can Tenants Require Short Terms In A Recession?

Author:Mr Peter Levaggi
Profession:Charles Russell LLP

The global financial crisis has had a subtle but important influence on business lease renewals under the Landlord and Tenant Act 1954 ("the 54 Act"). In the recession, lease lengths have become shorter with most new leases now being less than 5 years. The average length of a lease last year was just 4.8 years, according to the latest BPF/IPD Annual Lease Review. More than three-quarters of all leases are now five years or fewer in length, compared with 63% in 2010. Taking breaks into account, leases have shortened by three years over the course of the crisis. Obviously this depends on the property and there are some anomalies - despite the gloom on the high street, retail sector leases are still averaging 10 years.

Shorter leases often increase the upward pressure on bank lending rates while depressing the capital value of freeholds. The conventional trade off for landlords is a higher rent. The tenant pays more for the privilege of more flexibility and the extra rent compensates the landlord for the loss of certainty. However, with the rise of occupier insolvency, true rents are also under pressure (particularly when rent free periods and other inducements are stripped out). Therefore landlords are faced with the reality of shorter leases without the compensation of higher rents.

However, in this climate it isn't surprising that where tenants seek a lease renewal under 54 Act they are looking for shorter extensions. There is no bar on multiple applications under the 54 Act and so a tenant can, for example, request a series of 3 year extensions. After each 3 year term a new application can be made and so on. Alternatively, the tenant can request short recurring break clause periods. In fact, under the provisions of the Act there is no fetter on the tenant consecutively applying for a series of shorter terms. This doesn't mean that the Tenant has the right to a short lease. Naturally the 54 Act allows the then tenant to apply and the Court then determines the length of term (in the absence of agreement).

Recessions generate certain kinds of case and last time we saw a run of cases on this subject was in the wake of the downturn from 1989 to 1993. The cases in the early 90's established a number of important principles which remain highly relevant for the present turbulent financial conditions. The 54 Act is not as tenant friendly on this issue as some believe.

The Statutory Framework

The 54 Act itself provides limited guidance, s.33 provides that:

". . . the new tenancy shall be such tenancy as may be agreed between the landlord and the tenant, or, in default of such an agreement, shall be such a tenancy as may be determined by the court to be reasonable in all the circumstances, being, if it is a tenancy for a term of years certain, a tenancy for a term not exceeding fourteen years, and shall begin on the coming to an end of the current tenancy."

Under the 54 Act, the maximum term which can be granted by the Court is 15 years (it used to be 14 years before the 2003 reform, hence the reference to this period in much of the case law) . However the landlord and tenant can agree a longer term. In the absence of agreement (subject to the maximum) the Court therefore determines the term on the basis of what is reasonable.

So what constitutes "reasonableness in all the circumstances" and when is it reasonable for a tenant to request a short term (of say 1/2/3 years)?

In normal circumstances the court is unlikely to order the grant of a new tenancy for a term longer than that for which the tenant asks; but if the term proposed is so short as not to give the landlord reasonable time in which to re-let, the court has discretion to order the grant of a longer term than that proposed by the tenant.

This would also apply to a term so short...

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