Business Lease Renewals

Major changes have been occurring to the landscape of business tenancy work. Since 15 October 2001, the Civil Procedure Rules 1998 (CPR) invaded the field with the coming into force of Part 56 and Practice Directions (PD). Part 56 consolidated the procedural aspects of a number of property statutes, of major significance being the effect on business lease renewals under Part II of the Landlord and Tenant Act 1954 (‘the 1954 Act’).

Amendments to the 1954 Act have substantially changed the time limits relating to termination and renewal of business leases. The changes to the 1954 Act were introduced by The Regulatory Reform (Business Tenancies) (England and Wales) Order 2003 which came into effect on 1 June 2004.

The reforms will have a major impact on court business. Early widespread opinion is that it is likely to increase litigation. A dilatory approach can no longer be adopted in applications for lease renewals. Applications used to be issued and then matters left, and only resurrected when negotiations failed. Under CPR Part 56 these applications are subject to active case management.

Initiating Proceedings

Previously only a tenant could initiate proceedings for a new lease. Now either party can apply. This new right is particularly valuable where a landlord wants an early termination of the lease, for example to redevelop. Only one set of proceedings can be issued. To avoid a multiplicity of actions, once one party has made an application and served it, the other may not apply. PD: 56, 3.2 sets out the details which determines which application is to proceed first, depending upon the circumstances. The right of both landlord (section 25) and tenant (section 26) to serve notice to terminate a business tenancy continues.

There are new forms in respect of section 25 and section 26 notices (Form 3).

There are two different types of Section 25 notices:

Form 1 is applicable when a landlord does not oppose the new tenancy.

The landlord inserts his proposals for the new tenancy, the new rent and any other terms required. There is no clear guidance on how detailed the new tenancy proposals need to be. The practice is to set out detailed heads of terms. What is clear however, is that a landlord would not be expected to put forward proposals by way of a draft lease: see paragraph 33 Guidance on the changes to Part II issued by The Office of the Deputy Prime Minister.

Form 2 is used when the landlord opposes the grant of a new tenancy.

It is similar to the old form. The landlord has to insert the letter representing the ground under section 30 upon which they are relying.

Counternotices

The failure by a tenant to serve a counter notice within two months of the date of a landlord’s notice was previously the cause of many claims of negligence. Under the reforms, tenants are no longer required to serve a counter notice. The only time a counter notice is now required is when the tenant serves a section 26 notice and the landlord intends to oppose the grant of a new tenancy on one of the statutory basis (section 30(1) remains unchanged). The landlord must in that case, serve a counter notice within two months of service of the tenant’s notice.

The procedure is therefore largely dependent on whether the landlord intends to oppose renewal of a lease. The circumstances in which an application to court could therefore be made can be summarised as follows: –

a. Where a landlord wants to get matters underway a section 25 notice could be served. If say, the landlord wants the tenant to stay on but on new terms. A party can start proceedings immediately after the service of the notice.

b.  A landlord serves a section 25 notice intending to oppose a new lease. Either party can start proceedings straightaway. There is also a new termination procedure whereby a landlord can request the court to rule on whether one of the grounds of opposition can be established.

c. Where a tenant serves a section 26 notice and the landlord serves a counter notice. Either party can apply as soon as the counter notice has been served.

d. In the case of a tenant’s section 26 notice, if the landlord does not intend to oppose, either party can initiate the renewal proceedings.
In both circumstances, where the tenant serves a section 26 notice, two months has to lapse to see whether the landlord serves a counter notice.

Pre-action matters

Court applications must still be issued before the arrival of the termination date specified in the section 25 or section 26 notice, otherwise the tenant’s right to renew will be lost. There is now explicit provision however, allowing the parties to agree extensions to this termination date. Any such agreement must be in writing and made during the currency of the notice and any previously agreed extension. When the parties agree extensions, this avoids the need to issue proceedings simply to maintain protection. There is no limit to the number of extensions that may be agreed. Only if an application is not made to the court before the expiry of any agreed extension, will a tenant lose the right to renew:s29A,s29B(3).

There is no pre-action protocol in relation to lease renewal claims. The parties are nonetheless encouraged to act reasonably to avoid litigation (CPR PD: Protocols, paragraph 4). There should therefore be an early exchange of information. Being aware of the respective positions at an early stage is important. A case should only start its way through the court system if the parties are unable to agree, or one party wishes to expedite matters.

The Court rules were amended as a result of the provisions in the 1954 Act allowing extensions to the deadline for applying for a new tenancy. It is no longer an automatic provision that a three-month stay on proceedings is imposed at the request of the landlord. The courts retain a degree of flexibility in managing cases, which could be used to allow the parties more time if the court considered it would be in their interest. The delays inherent in lease renewals prior to April 1999 however, will no longer be tolerated. The old rules continue to include a three-month stay (Rule 20, CPR (Amendment) Rule 2004) in circumstances where a section 25 notice or section 25 request were served before 1 June 2004.

Early exchanges

Parties have always been able to request of each other information. The problem in the past is that there was no compulsion to supply that information. There is now a duty imposed by section 40, requiring answers to any request for information by either one of the parties, within one month of service.

A request for information on Form 4 can be made at any time within two years of the contractual termination date. There is no prescribed form for replies. Any changes to the responses within a six-month period from service of the request must be reported. Failure to reply is now a breach of statutory duty actionable in its own right, including relief by way of an order for specific performance (failure of which is contempt) and an award of damages.

A landlord should be encouraged at an early stage to provide the tenant with information to support any grounds of opposition to renewal. If, for instance, the landlord proposes to redevelop, the relevant document should be disclosed with the grounds of opposition.

Further, as there is nearly always some issue as to the rent to be paid, whether or not the landlord opposes the tenancy, the parties should be encouraged at an early stage to agree a single joint expert. A suggestion is to serve a list of three experts with the section 25 notice, inviting the tenant to choose one of three. The parties should be prepared to discuss and where possible, agree other directions before proceedings have to be issued. If the parties cannot agree a joint report the court could conceivably authorise separate experts, provided the issues are sufficiently complex. When separate experts are instructed, the court requires them to meet on a ‘without prejudice’ basis to narrow issues and this should be reflected in the draft order for directions. The courts are now inclined to appoint a single joint expert, even where traditionally, each party seeks their own expert, on an issue which is often about rent comparable. Where the parties are able to agree the appointment of one expert, there would be a saving in costs.

Venue

A claim must generally be started in the county court for the district in which the land is situated (CPR 56.2(1): PD 56, paragraph 2.2).

Only in ‘exceptional circumstances’, such a complicated dispute of fact or on a point of law of general importance, will it be justified in starting the claim in the High Court.

One important exception is that a joint claim to authorise an agreement under section 38(4) of the 1954 Act (to exclude business tenancies from the protection of the 1954 Act or to authorise agreements to surrender) may be brought in the High Court or in any county court (CPR 56.2(4)).

Starting the Claim

Opposed lease renewal applications proceed under CRP Part 7, using Claim Form N397. Unopposed renewals proceed under Part 8, using Claim Form N208. Both require a statement of truth in accordance with CPR 22.

Under CPR Rule 8.9(c) claims commenced under Part 8 are automatically allocated to the multi-track. There are detailed Practice Directions setting out what should be included in each of the claim forms depending on the different circumstances.

Preliminary Issue

Any preliminary issue for instance, on a question as to the validity of a notice, may be tried first to save costs. The nature of the preliminary issue should be identified and accurately described in a draft order. Consequential directions of the trial of the preliminary issue should be specified.

Disclosure is initially standard disclosure and the procedure in CPR Part 31 must be complied with. If there is to be a trial of a preliminary issue, the documents to be disclosed are limited to those which go to that issue.

Contesting the Claim

If a landlord intends to contest the claim in any way, including where renewal is not opposed, but the terms of the new tenancy are in dispute, an acknowledgement of service must be filed and served within 14 days of the service of the claim form. Court rules now make it clear that the landlord would be expected to lead first in the provision of evidence as to why the renewal is opposed. Previous strict time limits as to when evidence had to be submitted have now been modified. The court will give appropriate directions as to the evidence required, depending on the issues.

Conclusion

Many of the changes to the procedures under the 1954 Act are to be welcomed in taking away some of the pitfalls which traditionally abounded the Act. The changes have made a remarkable improvement to the workings of the 1954 Act, bringing it in line with the spirit of the CPR.

Where a section 25 notice or a section 26 request was made by 31 May 2004, the old Rules will still apply. Transitional provisions often do complicate matters: see Allyson Colby and Katherine Fenn article in The Estates Gazette, 26 June 2004 ‘No Semblance of Order’ which discusses the status of court orders issued before 1 June 2004. There will be cases running under the old regime, and this may contribute to more litigation in this field.

Guidance issued by The Office of the Deputy Prime Minister on the new procedures relating to business tenancies, includes appendices containing the prescribed forms :www.odpm.gov.uk/businesstenancies

Part 56 and Practice Directions can be found at www.hmso.gov.uk and the new forms at www.courtservice.gov.uk

For further information email Debra Wilson or call 020 7940 4060.

*Disclaimer: The information on the Anthony Gold website is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. It is provided without any representations or warranties, express or implied.*