The Law Commission has released its first consultation paper, exploring the possibilities for wholesale change to security of tenure and tenants' rights. Potential reform will be welcomed by the market – but where will this leave landlords and tenants, and their freedom to reach their own agreements?

The Law Commission (an independent body aimed at modernising and improving the law) has published a new consultation into potential reform of Part II of the Landlord and Tenant Act 1954 (LTA 1954). The consultation asks various questions about how to approach reform and will be followed by a later technical consultation on the implementation of the chosen proposals. The consultation is open until 19 February 2025. The Law Commission is also undertaking a market survey on the leasing and security of tenure to inform its thinking which is open to anyone regardless of whether they are submitting a full consultation response.

The LTA 1954 gives business tenants security of tenure - essentially the right to a new lease after expiry of an existing lease unless the landlord can establish one of the statutory grounds opposing it (e.g. intention to redevelop, owner intention to occupy, or "bad tenant" grounds such as the tenant consistently failing to comply with terms in its previous lease). If renewal is not opposed, the LTA 1954 provides a process of agreeing the terms of the new lease and (if there is no agreement) the basis on which the court can set the terms. Some types of leases are out of scope and owners and occupiers can also agree that the LTA 1954 will not apply before a lease is entered into by following a specific procedure – commonly referred to as "contracting out" or "excluding security of tenure).

Many would say that the processes for contracting out, terminating leases and agreeing the terms for new leases could be simplified. Process and drafting mistakes or missing documents relating to contracting out can lead to uncertainty and valuation issues on acquisitions due to unintentionally giving tenants security of tenure leading to unexpected windfalls for occupiers and valuation issues. Where the court sets the terms of new leases, each case is decided on its own facts leading to uncertainty for owners and occupiers. Evidential problems and uncertainties arise frequently in disputes over termination.

This initial consultation is looking at the high-level question of how and whether security of tenure should operate for business tenancies. The Law Commission is seeking views on four possible courses of action:

  • Mandatory security of tenure – tenants of all business leases (subject to exceptions for certain leases as currently) would automatically always have security of tenure – with no ability to agree otherwise.
  • No security of tenure – abolishing the concept entirely (for new leases).
  • "Contracting-in" model – where tenants do not have statutory rights unless agreed by the landlord and tenant.
  • "Contracting-out" model – the current position where tenants have rights by default, but landlords and tenants can agree otherwise

The consultation also seeks views on whether different parts of the market should be treated differently by reference to factors such as location, value, asset type or otherwise.

In each case, the consultation acknowledges that the position for existing leases (and renewals of them) needs to be set out together with any exceptions to the general rule which are appropriate for the market. There will also be existing known problems with processes to iron out if and when those processes are adapted to the chosen regime. This technical consultation will follow in the second consultation.

Our Real Estate team is formulating our response to the questions based on our experience of the LTA 1954 when acting for both owners and occupiers. Our initial view is that a streamlined and more certain approach to security of tenure would be a good thing for the market and help speed up and simplify transactions – but we are also aware that wholesale change could upset and confuse the market.

If you are interested in the Law Commission's proposals, or would be interested in discussing our analysis or your own response, please contact Paul Barker or Ryan Davies.