16.3 Business Security of Tenure (Landlord and Tenant Act 1954 Part II)

When Part II applies

Part II of the Landlord and Tenant Act 1954 gives security of tenure to tenants occupying premises for the purposes of a business. Independent OpenExamPrep teaching treats this as a closed statutory system: if the Act applies, the tenancy does not end by effluxion; it continues under section 24 until terminated in accordance with the Act. If the Act does not apply, or has been contracted out, the contractual term and common-law ending rules (taught in section 16.2) control.

The core conditions, in outline, are:

• there is a tenancy (not a mere licence);
• the tenant (or a person on the tenant's behalf) occupies the premises for business purposes;
• the tenancy is not in an excluded class in section 43 (for example certain agricultural and mining tenancies, service tenancies, and some very short tenancies).

"Business" is wide. A professional practice, a charity's office, and a shop all count. Occupation is a question of fact: a tenant who has sublet the whole and does not occupy will usually lose protection. A tenant who occupies part and underlets part may be protected as to the occupied holding.

Contracting out (section 38A)

Section 38A (inserted by the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003) lets the parties agree to exclude sections 24 to 28. The procedure is mandatory. Get it wrong and the tenant may have security the landlord thought had been excluded.

Before the tenant becomes contractually bound to take the tenancy:

1. The landlord serves a warning notice in the prescribed form (Schedule 1 to the 2003 Order), telling the tenant that it is giving up the right to renew.
2. The tenant makes a declaration that it has received the notice and accepts the consequences:
   • a simple declaration if at least 14 days elapse between service of the notice and the tenant becoming bound;
   • a statutory declaration before an independent solicitor (not the landlord's solicitor) if the parties cannot wait 14 days.
3. The lease or agreement for lease contains a reference to the notice and the declaration.

Only then are sections 24 to 28 excluded. Contracting out is party-specific: it does not automatically strip a later underlease of protection. On grant and on underletting, check whether the deal is intended to be inside or outside the Act and complete the procedure before exchange of an agreement for lease, not after the tenant is already bound.

Tenant renewal: the section 26 request

A tenant who wants a new tenancy serves a section 26 request on the landlord. The request must be in the prescribed form, specify a commencement date for the new tenancy, and be served not more than 12 months and not less than 6 months before the proposed start date (which cannot be earlier than the contractual term date). The request should set out the tenant's proposals for property, rent, and other terms. Once a valid section 26 request is served, the landlord cannot serve a section 25 notice. If the landlord wishes to oppose, it must notify the tenant of the grounds within two months of the request (section 26(6)). The tenant who wants a new tenancy must apply to the court before the date specified in the request as the start of the new tenancy (the same date on which the current tenancy will end). Sections 29A and 29B allow the parties to extend that deadline by written agreement. If no application is made in time and there is no extension, the tenancy ends on the specified date.

If the landlord does not oppose, the parties negotiate a new lease. If they cannot agree terms, the court settles them under sections 32 to 35.

Landlord termination: the section 25 notice

A landlord who wants to end the continuation tenancy (whether or not it also opposes renewal) serves a section 25 notice in the prescribed form. The notice must:

• specify the date on which the tenancy is to end (again, not more than 12 months and not less than 6 months after service, and not earlier than the contractual term date);
• state whether the landlord will oppose the grant of a new tenancy;
• if opposing, state the ground or grounds in section 30(1).

A landlord who does not oppose is offering a new tenancy and should set out proposals. A landlord who does oppose is relying on section 30. The tenant who wants to stay must apply to the court before the termination date specified in the section 25 notice, unless that deadline is extended in writing under section 29B. A section 25 notice and a section 26 request are mutually exclusive once one is validly served.

A tenant who simply wishes to leave can serve a section 27 notice (at least three months before the term date, or on three months' notice during continuation). Do not use a break clause and a section 25 notice as if they were the same instrument: a contracted-out lease with a break is exercised under the lease; a protected tenancy needs 1954 Act notices.

Grounds of opposition (section 30(1))

Learn the lettered grounds. FLK2 will expect you to pick the correct ground and to know which ones carry compensation.

Ground (f) requires a genuine, firm, and settled intention at the date of the court hearing, plus a reasonable prospect of carrying the works through (planning, funding, and vacant possession). Cosmetic works dressed up as reconstruction will fail. Ground (g) is subject to section 30(2): the landlord must have held the reversionary interest for at least five years before the end of the current tenancy, unless the landlord acquired it by a gift or on death from someone who already had the five-year period. A landlord who bought the freehold last year to occupy cannot use (g).

Terms of the new lease

If opposition fails, or was never raised, the court can order a new tenancy.

• Property (section 32): usually the holding (the part occupied for business), not parts the tenant has sublet and does not occupy, unless the parties agree more.
• Duration (section 33): such term as is reasonable in all the circumstances, not exceeding 15 years, starting on the date specified in the notice or request (subject to the court's power to adjust).
• Rent (section 34): the rent at which the holding might reasonably be expected to be let in the open market by a willing lessor, with statutory disregards: the tenant's occupation, goodwill, and certain tenant's improvements. There is no disregard of a restriction in the current lease that would depress the rent unless statute requires it; this is a common drafting and valuation fight.
• Other terms (section 35): based on the current tenancy, with such modifications as are reasonable. The court can insert a break, alter user, or refuse an onerous new clause the landlord suddenly wants.

Interim rent (sections 24A to 24D) can be claimed so that the rent during continuation moves toward the market while the case proceeds. Either party may apply.

Compensation (section 37)

Where the tenant quits the holding because the landlord has successfully opposed on ground (e), (f), or (g), or because the tenant did not apply for a new tenancy after a notice specifying only those grounds, compensation is payable. The amount is a multiplier of the rateable value: generally 1 × rateable value, or 2 × rateable value if the tenant (and its predecessors in the same business) have occupied for at least 14 years. No compensation is payable where the landlord succeeds on fault grounds (a) to (c), or on (d). Parties sometimes agree in the lease to exclude compensation; section 38 restricts contracting out of compensation unless the tenant has been in occupation for less than five years, so do not assume a boilerplate exclusion always works.

Worked paths

Path A — contracted out. Warning notice, statutory declaration (because completion is in 10 days), lease refers to the procedure, 10-year term, no break. At the end of year 10 the tenant has no right to a new tenancy under the Act. Vacant possession is a contract question plus any holding-over as a tenant at will or periodic tenant on the facts.

Path B — protected, landlord wants the building back for a rebuild. Section 25 notice opposing on ground (f), served nine months before the term date. At trial the landlord proves funding, planning permission, and a contractor. New tenancy refused. Tenant quits. Section 37 compensation is on the table.

Path C — protected, tenant wants to stay. Section 26 request proposing a 10-year term at a stated rent. Landlord does not oppose. Parties cannot agree rent. Court sets a section 34 rent and a reasonable term of up to 15 years.