UK: The Courts & Lease Renewals

Last Updated: 12 February 2002
Article by Mark Lavers

The use or occupation by a commercial third party of part of a hospital could well give the third party the right to renew its occupancy at the contractual end of the agreement allowing the occupation because a Tenant of business premises has the right to renew its Lease at the end of the Lease term. Calling the occupancy a Licence will not prevent the Courts from deciding that it is in fact a Tenancy (a Lease) if the occupier had exclusive occupation of the area, especially if rent is paid. This rule does not apply if before the Lease was granted/a relationship of Landlord and Tenant was created an exclusion order (often called a contracting out order) was obtained from the Court. There are certain other exceptions to this principle which this article does not address.

A Landlord can successfully oppose the grant of a new Lease if it can prove a designated statutory ground. The most common of such grounds are re-development and owner occupation. If the Landlord pleads a designated ground but the Tenant feels the ground has not been made out there is a dispute between the Landlord and the Tenant over whether or not the new Lease is to be granted and the Court will make its decision on the evidence presented to it.

However, even if the Tenant wants a new Lease and the Landlord is quite prepared to grant such a Lease the Tenant must still "protect" its security by making an application to the Court. In the past the Landlord and Tenant would generally agree that the Court proceedings were stayed so that the terms of the Lease could be settled by negotiation. The Courts very rarely intervened in this arrangement and it was not uncommon for the stay to last many months, if not years. The points that were generally in dispute were the length of the new Lease and the rent payable, neither of these are particularly "legal" and so they were usually settled by the parties’ surveyors. It was very rare for such a renewal to go to a full Court hearing because it would probably not be worth either party’s costs and time.

The Woolf reforms which came into effect in April 1999 affected all forms of litigation. Unfortunately for Landlords and Tenants this included Landlord and Tenant Act renewals, even where the Landlord had indicated that it would grant a new Lease. The difference in the way that the various County Courts interpreted the reforms was enormous. We have some cases where a Court has allowed a "general stay" which has been in place for over 12 months. Other Courts though have vigorously imposed their own timescale and have categorically stated they would not allow further extensions of time. We even had one situation where although the form of Lease had been agreed and was with the parties for their signature the Court would not allow an extension and made an Order that if the Tenant did not file its evidence the Tenant would "lose" its statutory protection and that if the Landlord did not file its evidence the Landlord would be prevented from relying upon comparables.

It was widely accepted that these rules did not work for Lease renewals and the rules for Lease renewals were changed again on 15th October 2001. However, if anything the new procedure is even stricter and will probably lead to greater costs and more wasted time. The new rules will probably be interpreted by the Courts in a more consistent manner and will probably mean that the date of the full Court hearing to determine all matters will be much earlier than before. The Landlord and Tenant are required to submit evidence at a very early stage and this will undoubtedly increase the cost of the renewal process. It is possible that the Landlord and Tenant could be forced to agree a rent some four months before the new Lease is to commence.

As the new rules have only recently come into effect we are still waiting to see how they work in practice but it is clear that if a Tenant receives a notice terminating its Lease it needs to take immediate action to ensure that its statutory rights are protected. Both parties are going to have to instruct their surveyors to prepare evidence (mainly on the level of rent) much earlier than they used to.

The question of the timing of the service of a notice by the Landlord terminating a Lease will be crucial where the Landlord opposes the grant of a new Lease, especially on the redevelopment ground. It is quite possible that a Tenant will use the rules to accelerate the date of the full Court Hearing in the hope that the Landlord will not be able to prove its intention to redevelop. Very careful thought will need to be given about when to serve the notice having particular regard to the likely date for the grant of planning permission.

The new rules may lead to an increase in the use of PACT (Professional Arbitration on Court Terms) which is an arbitration system where the arbitrator is someone used to property matters (very similar to the independent surveyor who determines a disputed rent review). Whilst a renewal is being dealt with under PACT the Court proceedings are stayed.

There is, however, good news! The workings of the Landlord and Tenant Act 1954 have been criticised for a considerable period of time. It is quite possible that within a year or so there will be further changes to the renewal system and also to the requirement to obtain the contracting out Order from the Court to exclude the Tenant’s security of tenure. Watch this space!

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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