Compensation - Tenant unable to obtain a new tenancy

Part II of the 1954 Act deals with instances where a tenant is unable to obtain a new tenancy because of opposition by the landlord on certain grounds. 

There are two important cases that are noteworthy; one deals with contracting out of the compensation provisions; the other with the conditions for double compensation. 
Each case is concerned with the occupation of the tenant immediately prior to the termination of the tenancy.

The right to compensation: s37

• If the court is precluded from making an order for a new tenancy by reason of (e), (f), (g)

          or

• If the Landlord served a s25 notice or s26(6) counter-notice relying only on (e)(f)(g) and Tenant did not apply or did but withdrew the application,

Tenant is entitled to compensation on quitting the holding: s37(1).

The amount of compensation: s37(2)

Basic rate: Appropriate multiplier x rateable value.

Enhanced rate: Appropriate multiplier x twice rateable value.



Restriction on contracting out 
Bacciocchi v Academic Agency Ltd [1998] 3 EGLR 157, CA.

Section 38(2) states:

"Where .. during the whole of the five years immediately preceding the date on which the tenant under a tenancy to which this Part of this Act applies is to quit the holding, premises being or comprised in the holding have been occupied for the purposes of a business carried on by the occupier or for those and other purposes any agreement which purports to exclude or reduce compensation shall to that extent be void".

What is the position where there is a short gap between the tenant leaving the premises and the tenancy coming to an end?

Basic facts

• 20 year lease - Tenant ran a restaurant
• Lease contained a clause excluding compensation on quitting
• Landlord served s25 notice specifying (f) and (g)
• Tenant issued claim for new lease in Jan 94
• Tenant discontinued 11/5/94
• Tenancy came to an end 11/8/94 (s64) 

On the face of it (because he had been in occupation for more than 5 years) T entitled to double compensation - the exclusion clause was void (s38(2)).

Tenants problem

• He physically vacated and handed over keys to his solicitors on Friday 29/7/94, i.e. 12 days prior to 11/8/94 when the tenancy came to an end.
• Judge held that the Tenant was not in occupation of the premises "immediately preceding" 11/8/94.
• Therefore s38(2) did not help him. Tenant appealed.

Court of Appeals's decision

Appeal allowed - Tenant was in occupation for the purposes of s38(2) during the last 12 days and was entitled to compensation. Simon Brown LJ:

" ... whenever business premises are empty for only a short period, whether mid-term or before or after trading at either end of the lease, I would be disinclined to find that the business occupancy has ceased (or not started) for that period provided always that during it there exists no rival for the role of business occupant and that the premises are not being used for some other, non-business purpose. That, to my mind, is how Part II of the 1954 Act should operate in logic and in justice. It has nothing to do with the de minimis principle. Rather, it is recognition that the tenant's physical possession will not invariably require permanent physical possession throughout the whole term of the lease and he ought not to have to resort to devices like storage of goods or token visits to satisfy the statutory requirements of continuing occupation. If of course, premises are left vacant for a matter of months, the court would be readier to conclude that the thread of continuity has been broken."

(Compare Sight & Sound on s37(2) below and cases on “occupation” under s23. In particular

Pointon York Group plc v Poulton [2006] EWCA Civ 1001 where Bacchiocchi was applied).

Condition for double compensation
Sigh and Sound Education Ltd v Books etc Ltd [1998] EWHC 319 (Ch)

Section 37(3)of the 1954 Act states:

"..during the whole of the 14 years immediately preceding the termination of the current tenancy, premises being in the holding have been occupied for the purposes of a business carried on by the occupier."

Termination for these purposes is when the s25 notice expires - s37(7).

The following is an example of a case where the tenant did not receive compensation because he was not in occupation immediately preceding the termination of the tenancy:

Key facts

• Lease of 14 years - on the face of it Tenant is entitled to double compensation.
• Section 25 notice served - relied on(f)(g).
• Tenant issued application for new tenancy but later discontinued.
• Tenant vacated a few days before the contractual expiry date and five months before the date specified in s25 notice.

Tenant's problem

• When he left in Sept 97 he ceased to enjoy the protection of Part II 
  Esselte AB v Pearl Assurance plc
  [1996] EWCA Civ 911; [1997] 1 EGLR 73)
• The crucial date for determining the amount of compensation was five months later when the s25 notice expired (s37(3)(a); s37(7)).
• At that date he was clearly not in occupation and so did not satisfy the condition that he had been in occupation "during the whole of the 14 years immediately preceding the termination of the current tenancy" (s37(3)(a)).

Held

Tenant was not entitled to double compensation.

(Compare Bacciocchi immediately above under s38 - where there was only a small gap in time).

Landlord & Tenant Act 1954 - June 2004 Changes

 The Regulatory Reform (Business Tenancies) ( England and Wales ) Order 2003 brought a number of changes to the 

Landlord & Tenant Act 1954 on 1 June 2004.  

In summary, these are:

·       the Landlord’s Section 25 Notice must include the Landlord’s proposals as to the new rent and other terms;

·       there will no longer be a requirement for the Tenant to serve a counter-notice;

·       the Landlord and Tenant may agree extensions of time but the current rent will remain the same unless an application has been made for interim rent;

·       the contracting-out procedure under Section 38(1) will be abolished;

·       both the tenant and landlord will be able to apply for interim rent.

Landlord’s Section 25 Notice

The Landlord must now include their own proposals in the Section 25 Notice.  A new form has been proposed under Schedule 2 of The Landlord and Tenant Act 1954, Part 2 (Notices) Regulations 2004.   

The recent case of Mount Cook v Rosen [2003] 1 EGLR 75 ruled that the proposals should be realistic proposals.  If they are not then this will potentially invalidate the Section 25 Notice.  The notice must also contain a “health warning” suggesting that the Tenant seeks independent legal advice.

Applications to the Court for a New Tenancy

Under the new regime, the Tenant or Landlord can apply to the Court for a new tenancy.   

The Landlord is also able to apply for an Order terminating the current lease without renewal.   

This application does need to be made before the expiry of the Section 25 Notice or the date specified on the Section 26 request.  Further extensions of time can be agreed between the parties.

Interim Rent

Both Landlords and Tenants can now apply to the Court for interim rent during the continuation of the tenancy.  The method of valuation will change where the renewal is unopposed by the Landlord and this should reflect the open market rental value.

Applications to the Court to Exclude the LTA 1954

It will no longer be necessary to apply to the court to dis-apply the security of tenure provisions under the Landlord & Tenant Act 1954.   

The Landlord should serve on the potential Tenant a notice in the prescribed form which contains a “health warning” suggesting that the Tenant seeks independent legal advice.  This should be served on the Tenant at least 14 days before the commencement of the Lease.  If this is done, then the Tenant need only sign a simple declaration confirming receipt of the notice.  Should there be less than 14 days before the commencement of the Lease, then the Tenant will have to swear a Statutory Declaration in the form as prescribed in Schedule 1 of The Regulatory Reform (Business Tenancies) (England and Wales) Order 2003.

Vacation of Premises by Tenant

The reforms give statutory effect to the case of Esselte AB v Pearl Assurance plc [1997] 1 WLR 891 which states that where a tenant ceases to occupy the property for business purposes then security of tenure will cease.  The tenant can then simply vacate without the service of a Section 27 Notice.

Excluding the Landlord and Tenant Act 1954

From 1 June 2004, the procedure changed for excluding the security offered to business
tenancies by sections 24 to 28 of the Landlord and Tenant Act 1954. It is no longer
necessary to apply to the Court to obtain an Order authorising the agreement reached by
the landlord and tenant to exclude the security of tenure provisions. Instead, the new
procedure to be followed involves compliance with the three steps set out below. A failure
to follow this procedure risks the tenant acquiring the security of tenure protection offered
by the Landlord and Tenant Act 1954.
 

Step 1 - Notice
The landlord must serve on the proposed tenant a notice in the prescribed form
containing a "health warning". The "health warning" explains to the proposed tenant the
effect of entering into a contracted-out tenancy, the most important point being that the
tenant will have no right to stay in the premises once the lease ends. The notice must
be served before the new tenancy is entered into or the tenant becomes contractually
bound to enter into it. However, the landlord should only serve the notice on the tenant
once the terms of the new lease have been agreed (or the lease is substantially in its final
form) so as to avoid the risk of the notice subsequently being held to be invalid. Whilst
not specifically required, it is good practice to attach a copy of the draft lease to the notice
itself.
 

Step 2 - Declaration
Once the notice has been served, the proposed tenant must either sign a declaration or
swear a statutory declaration.
• Notice served at least 14 days before the tenancy is granted/tenant becomes
contractually bound:- tenant signs declaration.
• Notice served less than 14 days before the tenancy is granted/tenant becomes
contractually bound:- tenant swears statutory declaration before a solicitor.
Both the declaration and the statutory declaration must be in the prescribed form. Both
declarations confirm that the tenant has received the landlord's notice containing the
"health warning", that the tenant has read that notice, and that the tenant accepts the
consequences of entering into a contracted-out tenancy.
 

Step 3 - Note in lease
The new lease must refer to:
• the service of the landlord's notice;
• the declaration or statutory declaration made by the tenant; and
• the parties' agreement to exclude the provisions of sections 24 to 28 of the Act.
It is good practice to store copies of the landlord's notice and the tenant's
declaration/statutory declaration with the lease.

Newham London Borough Council v Thomas-Van Staden [2008] EWCA Civ 1414 Facts

The Lease contained a fixed term from 1 January 2003 to 28 September 2004 and included wording stating: ‘any period of holding over or extension…whether by statute or at common law or by agreement’. After the fixed term of the Lease expired the Tenant continued to occupy the Premises and the Landlord subsequently sought possession.

The Lease was excluded from the security of tenure provisions of the Landlord and Tenant Act 1954 (“the Act”). The security of tenure provisions in the Act allow the Tenant to a statutory right to renew the Lease at the end of the Term unless the requirements for expressly excluding it are followed. The Tenant argued that she was protected by the Act as she remained in possession under a periodic business tenancy and the exclusion of the security of tenure provisions in the Lease were invalid.
 
Held
It was held on appeal that the Lease did not validly exclude the security of tenure provisions because the exclusion is only valid if the term is defined as a fixed term. This is a requirement under Section 38(4) of the Act. The term in this Lease was not of a fixed term as it included any period of holding over or extension.  Therefore, the Tenant was entitled to protection under the Act.
 
 

Practice points:• Given the substantial ramifications for the Landlord (inability to regain possession of the premises to redevelop the area without paying compensation to the Tenant) and the fact that the intentions of the parties were not taken into account by the Court, it follows that if the parties intend to exclude the security of tenure provisions then the term of the Lease must be drafted as a fixed term with no allowance being provided for any hold over period.
• If the tenant is protected by the security of tenure provisions then the landlord must ensure that it terminates the tenancy by serving a Section 25 notice under the Act.
• At the end of the fixed term the landlord must either regain possession of the premises promptly or, if the landlord allows the tenant to remain in occupation, enter a new fixed term lease (which excludes the security of tenure provisions of the Act) as soon as possible and should not accept rent under the old lease in the interim.

Section 26 Notice explained - (Landlord & Tenant Act 1954, S26)

A Section 26 Notice is used in England and Wales by a tenant that wishes to renew a commercial lease.

This form is for use by a tenant with a commercial lease in England or Wales. There is no Scottish equivalent.

The Landlord and Tenant Act 1954 broadly gives business tenants security of tenure - the right to renew the tenancy when it comes to an end. Landlords can oppose renewal of the tenancy for certain limited, specific reasons, for example: failure to pay rent, or if the landlord wants to redevelop the premises or get them back for his own use. Landlords can either apply to the court to end the tenancy, or can oppose the tenant's application for renewal.

To request a new tenancy and propose terms for renewal the tenant would need to send the landlord a Section 26 Notice. This must be sent between 6 and 12 months before the tenant wants the new tenancy to commence - which itself must be after the normal expiry date of the lease. 
 It cannot be sent if the landlord has already sent a Section 25 Notice.

If the landlord is willing to renew the lease, the landlord will consider the tenant's proposals for a new tenancy set out in the Section 26 Notice. If both parties agree on the terms, the new tenancy will begin on the date set out in the Notice. 
If the parties cannot agree on the terms of a new tenancy, either party may apply to the court to order the grant of a new tenancy and settle the terms upon which they cannot agree.
If the landlord opposes a new tenancy the landlord must apply to the court to end the tenancy citing one or more of the specific reasons set out in the Landlord and Tenant Act 1954. The court will not order a new tenancy where the landlord successfully argues that one or more of the specific reasons apply. If the landlord is unsuccessful in opposing renewal, the court will order the grant of a new tenancy and settle its terms.

The landlord must respond to a tenant's Section 26 request within two months of receiving it if he wishes to oppose the grant of a new lease.

Please note that this form states that if the tenant may be entitled to acquire the freehold or an extended lease, then Form 7 in Schedule 2 to the Landlord and Tenant Act 1954, Part 2 (Notices) Regulations 2004 must be used instead of this form. This refers to situations where the tenant may have rights under the Leasehold Reform Act 1967 where the property is a "house" and the tenant is occupying it as such. We do not provide Form 7 since our commercial lease documents are intended for use with commercial premises such as offices, warehouses or workshops.

None of the above is applicable if the tenant and landlord had opted out of the Landlord and Tenant Act 1954 when the lease was first agreed.

Section 25 Notice explained - (Landlord & Tenant Act 1954, S25)

A Section 25 Notice is used in England and Wales by a landlord at the end of a commercial lease. Version depends on whether opposing or proposing renewal.

There is no Scottish equivalent.

The Landlord and Tenant Act 1954 broadly gives business tenants security of tenure - the right to renew the tenancy when it comes to an end.

Landlords can oppose renewal of the tenancy for certain limited, specific reasons, for example: failure to pay rent, or if the landlord wants to redevelop the premises or get them back for his own use. Landlords can either apply to the court to end the tenancy, or can oppose the tenant's application for renewal.

To end a current tenancy and propose terms for renewal or prevent the tenant renewing the landlord would need to send the tenant a Section 25 Notice.

There are two different Section 25 Notices depending on whether the landlord is willing to renew the tenancy or not: one opposing renewal and one proposing renewal.

A Section 25 Notice must be sent between 6 and 12 months before the landlord wants the current tenancy to end - which itself must be after the normal expiry date of the lease. It cannot be sent if the tenant has already sent a Section 26 Notice.

What happens next depends on what the landlord or tenant does:

• If the tenant applies to the court for a new tenancy, the landlord will need to oppose the application in court, citing one or more of the specific reasons for ending the tenancy.
• If the tenant does nothing, the tenancy will automatically end on the date set out in the landlord's Section 25 Notice.
• The landlord could apply to the court to end the tenancy. Again, the landlord would have to persuade the court that one or more of the specific grounds applied.

The tenant does not have to respond to a Section 25 Notice, but it would be sensible to get professional advice about the terms for the new tenancy and/or to try to negotiate an agreement to avoid going to court. The court will not order a new tenancy where the landlord successfully argues that one or more of the specific reasons apply. If the landlord is unsuccessful in opposing renewal, the court will order the grant of a new tenancy and settle its terms.

Please note that this form states that if the tenant may be entitled to acquire the freehold or an extended lease, then Form 7 in Schedule 2 to the Landlord and Tenant Act 1954, Part 2 (Notices) Regulations 2004 must be used instead of this form. This refers to situations where the tenant may have rights under the Leasehold Reform Act 1967 where the property is a "house" and the tenant is occupying it as such. We do not provide Form 7 since our commercial lease documents are intended for use with commercial premises such as offices, warehouses or workshops.

None of the above is applicable if the tenant and landlord had opted out of the Landlord and Tenant Act 1954 when the lease was first agreed.

Section 21 Notice explained - (Housing Act 1988, S21)

Section 21

A Section 21 Notice is the shortened name used to refer to the Housing Act 1988, section 21 provisions. 

A Section 21 Notice is for use by a landlord in terminating an assured shorthold tenancy agreement in England & Wales, before or after the end of the fixed term.

To legally terminate an Assured Shorthold Tenancy Agreement in England or Wales at the end of the fixed term, the landlord must serve a Section 21 Notice on the tenant and must give the tenant a minimum of two months' notice. In this case the notice is actually served before the end of the term.

If possession is sought by the landlord during the fixed term then it can only be obtained if a breach of contract has been proved and a Section 21 Possession Notice would not be appropriate. A Section 8 Possession Notice should be used instead.

Section 21 is divided into subsections with different rules applying to -

(a) notice served during the fixed term of a tenancy and

(b) notice for possession that is served during a statutory periodic tenancy (ie later expiry of fixed term).

Notice served before end of fixed term (Housing Act 1988) Section 21(1)(b)

This notice applies to a fixed term Assured Shorthold Tenancy where Notice for Possession is served during the fixed term. 

Notice under this subsection can be served on a tenant at any time during the fixed term of the tenancy (but not before the fixed term begins) providing the tenant receives a minimum of two months' notice. This is the case even if the two months' notice ends after the Tenancy Agreement has expired.

For example, if Notice Requiring Possession is served on the last day of the Tenancy Agreement, the tenant does not have to give up possession of the property until two months after the date that the notice was served or until the date written in the notice if it is further than two months away. It should be noted that where the tenant is in the initial six months of the tenancy, then the Section 21 Notice cannot expire before the end of that six months.

The notice should be sent by recorded delivery, allowing 3 days for delivery.

Notice served after expiry of fixed term (Housing Act 1988) Section 21(4)(a)

This notice applies to a statutory periodic tenancy which is a tenancy that automatically continues after the expiry of a fixed term Assured Shorthold Tenancy. A minimum of two months' notice is required and the day on which the notice expires must be the last day of a period of the tenancy. The period of a tenancy depends on how often the rent is paid. Thus, if the rent is paid monthly, then the period of the tenancy is one month. The periodic tenancy begins immediately after the fixed term expires.

For example, if the period of the tenancy is monthly and if the first day of the current period is 6th May then the last day of that period would be the 5th June and so a notice served during the current period would need to be completed so as to expire on the last day of a period after a further two months (i.e. 5th August).

The notice should be sent by recorded delivery, allowing 3 days for delivery.

Notice can be used in England and Wales where one or more of the above grounds are being relied on.

Section 8 Notice explained - (Housing Act 1988, S8)

Section 8 Notice

 

A Section 8 Notice ( full name: "Section 8 Possession Notice") is for use and may be used by a landlord to terminate an Assured Shorthold Tenancy Agreement (AST) during the fixed term if the tenant has failed to pay rent or has breached any other terms of the Tenancy Agreement. The landlord must rely on certain grounds set out in Schedule 2 to the Housing Act 1988, which are listed below.

The landlord cannot evict the tenant without obtaining an order for possession issued by a court.

Before applying to the court for such an order, the landlord must serve a Section 8 Possession Notice on the tenant. 
The notice states that the landlord intends to seek possession of the property and states the ground or grounds on which possession is sought.

The amount of notice required to be given to the tenant will depend on the ground: if the landlord is relying on ground 2, two months' notice must be given.

If the landlord is relying on grounds 8, 10, 11, 12, 13, 14, 14A, 15 or 17, two weeks' notice must be given.

Grounds 2 and 8 are mandatory, which means that if a landlord proves that one of these grounds applies, the court has no choice but to award him possession. The other grounds are discretionary and the court will only award possession if it is reasonable to do so.

Ground 2: The property is subject to a mortgage which pre-dates the tenancy and the lendor wishes to exercise its rights over the property, i.e. repossess it. A notice under this ground must be served before the creation of the tenancy.

Ground 8: At the date of service of the notice and at the date of the hearing, the tenant has not paid the rent, and either rent is payable weekly or fortnightly and at least eight weeks' rent is unpaid; or rent is payable monthly and at least two months' rent is unpaid; or rent is payable quarterly and at least one quarter's rent is more than three months in arrears. Note: When claiming possession under this ground, it is advisable to cite more than one ground since, if the tenant pays off part of the arrears shortly before the hearing, this ground can no longer be proved and possession proceedings will have to be abandoned. It is, therefore, common practice to cite more than one ground for rent arrears (i.e. grounds 8, 10 & 11), if applicable, and to also wait until at least two months' rent (or eight weeks in the case of a weekly tenancy) is unpaid before issuing the Section 8 Notice.

Ground 10: Any amount of rent is in arrears at the date of service of the notice and remains unpaid on the date on which the proceedings for possession are begun.

Ground 11: The tenant has repeatedly failed to pay rent.

Ground 12: The Tenant has breached any term of the tenancy agreement (other than one relating to the payment of rent).

Ground 13: The property has deteriorated due to neglect by the tenant or by someone living with him and the tenant has failed to remove that person.

Ground 14: The tenant or someone living with him has caused a nuisance to neighbours, visitors or others in the locality or has been convicted of using the property for immoral or illegal purposes or has been convicted of an indictable offence committed in the locality.

Ground 14A: The property is occupied by a couple and one of them has left due to violence or threats of violence from the other partner or from a member of that partner's family who was living in the property also. This notice can only be used by a registered social landlord or a charitable housing trust. The tenant who has left must also be sent this notice.

Ground 15: The furniture has been ill-treated by the tenant or by someone living with him and the tenant has failed to remove that person.

Ground 17: The landlord was induced to grant the tenancy by a false statement made knowingly or recklessly by either the tenant or a person acting at the tenant's instigation.

Drafted for use in England and Wales

Residential Property Pensions

Buy residential property with your pension fund
Many have often considered investing in property as an alternative to the traditional pension scheme. Following the ‘invention’ of the buy-to-let mortgage, the capacity to explore the route of investing in property to achieve long-term financial independence, became real. Now there is another alternative retirement investment market to open to the UK - namely property pensions.

The concept
In 2006 new measures came into force that allowed those with a pension scheme to have investment control to invest directly into residential property.

How will it work?
Those with a SIPP (or Self Invested Personal Pension) can already invest in commercial property and can borrow up to 75% of the property’s valuation, from April 2006 the Government’s new pension simplification rules enable investment in residential property as well, and to be able to borrow up to 50% of the pension fund’s value for the purposes of buying property. Those with a Small Self Administered [pension] Scheme (SSAS) will have this opportunity as well.

Tax benefits
On the face of it there is no direct taxation advantage in placing ones main residence into ones pension fund, however, one can gain significant taxation advantages if one places a buy-to-let or a holiday home that you rent out into your pension scheme for example.
These types of property investment traditionally incur both an income taxation burden on any rental income received and a capital gains tax burden on any resale profit. However, placing such property assets into ones pension scheme enables one to achieve significant taxation benefits as the properties will be free of capital gains tax and any income tax on rental income received.

Downsides
All bills relating to the maintenance and upkeep of the property must be paid out of the pension fund and any holiday home included in the pension scheme will require for some income tax to be paid as personal use of the property will be deemed a ‘benefit-in-kind’.

Features & benefits
Ability to borrow up to 50% of the pension fund’s total value for the purposes of further property purchase - if the fund is worth £100,000, a further £50,000 for the purchase of property can be borrowed.
This would be 25% less than the amount one can currently borrow against commercial property.

How it works
A person earning £100,000 in the tax year 2006/07, could borrow up to 100% of these earnings through equity release or by taking out a mortgage and the money raised could be put towards investment in a residential property for the pension fund – resulting in a 40% tax relief on the contribution or £40,000

Other considerations
Purchasing a property for ones children or another beneficiary as part of a pension fund may require for sale of the property to pay for the pension – the beneficiary should be made aware of this.