Are Renewable Commercial Leases really renewable!?
Many healthcare business owners are under the impression that their commercial lease is repeatable or renewable under the Landlord and Tenant Act 1954 as amended (LTA 1954).
For lawyers who are conversant with Commercial Property the situation is more complex! The legislation basically allows for a commercial lease to be either ‘inside’ or ‘outside’ the LTA 1954. Where outside the LTA 1954 the lease comes to an end at the end of the term of the lease and any further lease or licence is totally at the discretion of the Landlord.
To do this the Tenant normally enters into a statutory declaration ( or simply notice where the parties are not in a hurry) effectively removing their rights of renewal under the LTA 1954. Landlords and their advisers choose this route where for instance there may be development potential for the site and potentially in the short to medium term. This makes life simple and avoids the need to pay any compensation (which is a multiple of the Business Rates ) to the Tenant if they have a commercial lease inside the LTA 1954.
Even the renewable leases are prevented from renewing by the Landlord putting forward one of the grounds for opposition under the 1954 Act.
Those grounds could include the No fault grounds of opposition by the Landlord
A tenant with security of tenure under the LTA 1954 is entitled to compensation if it does not obtain a new lease solely because the landlord establishes one of the no fault grounds. These grounds are set out in paragraphs (e), (f) and (g) of section 30(1) of the LTA 1954:
- (e): the tenant was granted a sublease of part, and the landlord is the superior landlord of the whole and intends to re-let the whole for substantially more rent than the aggregate of the rent obtainable on re-lettings of the parts
- (f): the landlord intends to demolish or reconstruct the property
- (g): the landlord intends to occupy the property for business purposes or as a residence
Calculation of compensation
Compensation is calculated by applying a multiplier to the rateable value of the property. The compensation will be doubled if the tenant and any predecessor have been in occupation of the property for the purpose of the same business for 14 years or more (see Rateable value and Appropriate multiplier).
Therefore, calculations for the compensation are as follows:
- For less than 14 years occupation: the rateable value of the property x the appropriate multiplier x 1.
- For 14 years or more: the rateable value of the property x the appropriate multiplier x 2.
(Section 37(2), LTA 1954.)
The rateable value of the property is established by reference to the valuation list that is in force on the date of service of the notice under section 25 of the LTA 1954, or the request under section 26 of the LTA 1954 (section 37(5), LTA 1954).
Surveyors will assist the landlord and tenant in establishing the rateable value.
Where the holding includes domestic property, as defined in section 66 of the Local Government Finance Act 1988, that part of the holding is disregarded for the purpose of determining the rateable value (section 37(5A)(a), LTA 1954 ). If the tenant occupied the whole or part of the domestic property on the date the landlord served its section 25 notice or counter-notice to the tenant’s section 26 request, the tenant is entitled to additional compensation of a sum equal to the reasonable expenses in vacating the domestic premises (section 37(5A)(b), LTA 1954 ). If the sum cannot be agreed, it can be determined by the court (section 37(5B), LTA 1954 ).
The appropriate multiplier is set out from time to time by a statutory instrument (section 37(8), LTA 1954). The current order is Landlord and Tenant Act 1954 (Appropriate Multiplier) Order 1990 (SI 1990/363) and this sets the multiplier as one.
If the tenant has been in occupation of the property for the purpose of its business for 14 years or more, the tenant will be entitled to double the rate of compensation (section 37(2) and (3), LTA 1954). The 14 year period is calculated backwards from the date of termination that was specified in the notice under section 25 of the LTA 1954, or request under section 26 of the LTA 1954.
If there has been a change in occupier during the 14 year period, the current occupier must not simply carry on the same type of business, but must be a successor to the actual business. It is not clear what successor to the business means, but it is thought that there must be some transfer of the goodwill of the business (Cramas Properties Limited v Connaught Fur Trimmings Limited  1 WLR 892).
Compensation for misrepresentation
The court can order the landlord to pay the tenant compensation if it subsequently appears that misrepresentation or concealment of material facts led to any of the following:
- The landlord obtaining an order for the termination of a tenancy without the court ordering the grant of a new one.
- The court being induced to refuse an order for the grant of a new tenancy.
- The tenant quitting the property after not making, or withdrawing, its application for the grant of a new tenancy.
The court can order the landlord to pay such sum as appears sufficient to compensate for the loss or damage sustained by the tenant as the result of the order, refusal or the fact that the tenant has quit (sections 37A(1) and (2) LTA 1954).
Section 37A of the LTA 1954 requires fair dealing. In the case of Inclusive Technology v Williamson  EWCA Civ 718, the Court of Appeal awarded the tenant compensation under section 37A of the LTA 1954 in respect of the landlord’s misrepresentation. The landlord had served a section 25 notice with a covering letter opposing renewal of the lease on the ground contained in section 30(1)(f) of the LTA 1954. The landlord then decided not to proceed with the works due to a change in market conditions and an increase in the cost estimate of the works. The landlord failed to inform the tenant of its change of plans
Contracting out of the right to compensation
Any agreement to exclude or reduce the payment of compensation is void, unless one of the following exceptions is satisfied:
- The property has been occupied by the tenant (or a predecessor to the tenant’s business) for the purpose of its business for less than five years before the tenancy is terminated.
- The agreement is made after the right to compensation has accrued.
(Section 38, LTA 1954.)
If the parties intend to document their respective liabilities and neither of these exceptions applies, reference to any compensation payment must be drafted with care or the agreement may be void. It should be made clear that the landlord agrees to pay the full amount of any compensation, without exclusion or reduction, and the tenant agrees to pay the full amount of its liabilities.
For an analysis of when to include a clause excluding compensation in a lease.
- As a Landlord avoid concealing any facts re development or you not developing if you are using Ground F!
- As a Tenant who is let say a dentist acquiring a renewable lease from a retiring dentist who is the freeholder then BEWARE that they can take back the premises for themselves!!!! There is a solution which we can negotiate i.e. an option for lease which starts a similar lease the day after the current lease ends.
- As a healthcare business owner and tenant the goodwill can only normally be effectively sold where a lease is sold at the same time. In fact many NHS contracts for primary care attach to the premises
- As a tenant the rules for compensation are relatively complicated
- The compensation does not equate to your actual loss of profit and/or goodwill if the lease ends it is simply a ‘rule of thumb ‘level of compensation! Therefore on acquiring the healthcare business this may have an impact on the initial purchase price and the affordability of any lending particularly where the lease arrangements end earlier than expected for you!