Leasehold covenants and issues - Security of tenure under a business lease

Learning Outcomes

After reading this article, you will be able to explain the statutory protection of business tenants under the Landlord and Tenant Act 1954, identify how and when security of tenure applies, describe the process for contracting out, and outline the main grounds on which a landlord can oppose lease renewal. You will also understand the practical implications of leasehold covenants in commercial leases and their relevance for SQE1 assessment.

SQE1 Syllabus

For SQE1, you are required to understand the legal framework and practical operation of leasehold covenants and security of tenure in business leases. In your revision, focus on:

  • The definition and effect of leasehold covenants in business leases
  • The statutory protection of business tenants under the Landlord and Tenant Act 1954 (Part II)
  • The requirements for security of tenure to apply and the process for contracting out
  • The procedures for terminating a protected business tenancy
  • The statutory grounds on which a landlord may oppose renewal
  • The implications of leasehold covenants and security of tenure for commercial property transactions

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

  1. What is the effect of security of tenure under the Landlord and Tenant Act 1954 for a business tenant?
  2. Name two statutory grounds on which a landlord can oppose the grant of a new business tenancy.
  3. What is the required procedure for contracting out of security of tenure?
  4. True or false? A landlord can always refuse to grant a new lease to a business tenant when the contractual term expires.

Introduction

When advising on commercial leases, it is essential to understand both the contractual obligations (covenants) within the lease and the statutory rights of business tenants to remain in occupation after the lease term ends. The Landlord and Tenant Act 1954 (Part II) provides business tenants with security of tenure, subject to certain exceptions and procedures. This article explains the key principles, procedures, and practical issues relevant to SQE1.

Leasehold Covenants in Business Leases

A business lease contains a range of covenants—promises made by the landlord and tenant—which regulate the use, management, and enjoyment of the premises.

Key Term: leasehold covenant
A legally binding promise in a lease, made by either landlord or tenant, concerning the use, repair, or management of the leased premises.

Covenants may be positive (requiring action, such as repair or payment of rent) or restrictive (prohibiting certain actions, such as alterations or subletting without consent).

Security of Tenure: Statutory Protection for Business Tenants

Business tenants in England and Wales benefit from statutory protection under Part II of the Landlord and Tenant Act 1954, known as "security of tenure." This means that, in most cases, a business tenant has the right to remain in occupation after the contractual term ends and to request a new lease, unless the landlord can establish a statutory ground for refusal.

Key Term: security of tenure
The statutory right of a business tenant to remain in occupation and apply for a new lease after the contractual term ends, unless excluded or opposed on specific grounds.

When Does Security of Tenure Apply?

Security of tenure applies if:

  • There is a tenancy (not a licence)
  • The tenant occupies the premises for the purposes of a business
  • The tenancy is not specifically excluded or "contracted out" of the Act

Certain tenancies are excluded, such as tenancies at will, agricultural tenancies, and fixed-term tenancies not exceeding six months (unless certain conditions are met).

Key Term: business tenancy
A tenancy where the tenant occupies premises for the purposes of a business carried on by them.

Continuation Tenancy

If the contractual term of a protected business lease expires, the tenancy does not end automatically. Instead, it continues on the same terms until terminated in accordance with the Act.

Key Term: continuation tenancy
The statutory continuation of a business tenancy after the contractual term ends, pending proper termination under the Act.

Competent Landlord

Certain notices and applications under the Act must be served by or on the "competent landlord," which is usually the freeholder or the landlord with a sufficient interest in the property.

Key Term: competent landlord
The landlord entitled to grant a new tenancy or oppose renewal under the Landlord and Tenant Act 1954.

Contracting Out of Security of Tenure

It is possible for the parties to agree that the statutory protection of security of tenure will not apply. This is known as "contracting out." Strict statutory procedures must be followed for the exclusion to be valid.

Contracting Out Procedure

  1. The landlord serves a warning notice on the tenant, explaining the effect of exclusion.
  2. The tenant makes a declaration acknowledging receipt and understanding of the notice.
  3. The lease must include a reference to the exclusion and the required documentation.

If the procedure is not followed precisely, the exclusion will be invalid and the tenant will have security of tenure.

Worked Example 1.1

A landlord wishes to grant a 3-year lease of a shop to a tenant but wants to ensure the tenant cannot claim security of tenure. What steps must be taken?

Answer: The landlord must serve a warning notice on the tenant before the lease is granted. The tenant must then make a simple or statutory declaration (depending on timing) confirming receipt and understanding. The lease must refer to the exclusion and the relevant documents must be completed before the lease is signed.

Termination and Renewal of Business Tenancies

A protected business tenancy can only be terminated in accordance with the Act. The main methods are:

  • Service of a section 25 notice by the landlord
  • Service of a section 26 request by the tenant
  • Surrender or forfeiture
  • Tenant's notice to quit (for periodic tenancies)
  • Tenant ceasing occupation for business purposes at the end of the term

Key Term: section 25 notice
A formal notice served by the landlord to terminate a business tenancy, stating whether renewal is opposed and on what grounds.

Key Term: section 26 request
A formal request by the tenant for a new business tenancy, specifying the desired terms.

Landlord's Grounds for Opposing Renewal

A landlord can only refuse to grant a new lease on one or more of the statutory grounds set out in section 30(1) of the Act. These include:

  • Tenant's failure to repair (ground (a))
  • Persistent delay in paying rent (ground (b))
  • Substantial breach of other obligations (ground (c))
  • Suitable alternative accommodation available (ground (d))
  • Uneconomic subletting (ground (e))
  • Landlord's intention to demolish or reconstruct (ground (f))
  • Landlord's intention to occupy for own business or residence (ground (g))

Some grounds are discretionary (the court may refuse renewal) and others are mandatory (the court must refuse renewal if the ground is established).

Worked Example 1.2

A landlord serves a section 25 notice opposing renewal on the ground that they intend to redevelop the premises (ground (f)). What must the landlord prove?

Answer: The landlord must show a genuine, settled intention to carry out substantial works to the premises and that those works cannot reasonably be carried out without obtaining possession. The intention must be independent of the tenant's rights.

Exam Warning

If the landlord fails to specify the correct statutory grounds in the section 25 notice or section 26 counter-notice, they cannot rely on other grounds later. The notice must be accurate and complete at the time of service.

Compensation for Refusal of Renewal

If the landlord successfully opposes renewal on certain "no-fault" grounds (grounds (e), (f), or (g)), the tenant may be entitled to statutory compensation based on the rateable value of the premises, increased if the tenant has been in occupation for at least 14 years.

Key Term: compensation
A statutory payment due to a business tenant denied a new lease on specified no-fault grounds, calculated by reference to the rateable value.

Practical Implications for Commercial Leases

When advising clients, it is important to consider:

  • Whether security of tenure applies or has been excluded
  • The correct procedure for terminating or renewing a business tenancy
  • The landlord's ability to oppose renewal and the evidence required
  • The impact of leasehold covenants on the parties' rights and obligations

Revision Tip

Always check the lease for any reference to exclusion of security of tenure and ensure the statutory procedure has been followed. If in doubt, assume the tenant has security of tenure.

Key Point Checklist

This article has covered the following key knowledge points:

  • Security of tenure gives business tenants the right to remain in occupation and request a new lease after expiry of the contractual term.
  • The Landlord and Tenant Act 1954 (Part II) sets out the statutory framework for security of tenure.
  • Contracting out of security of tenure is only valid if the statutory procedure is strictly followed.
  • A landlord can only oppose renewal on specific statutory grounds and must state these in the notice.
  • Tenants may be entitled to compensation if renewal is refused on certain grounds.
  • Leasehold covenants regulate the ongoing relationship between landlord and tenant in business leases.

Key Terms and Concepts

  • leasehold covenant
  • security of tenure
  • business tenancy
  • continuation tenancy
  • competent landlord
  • section 25 notice
  • section 26 request
  • compensation
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Pleased to share that I have successfully passed the SQE1 exam on 1st attempt. With SQE2 exempted, I’m now one step closer to getting enrolled as a Solicitor of England and Wales! Would like to thank my seniors, colleagues, mentors and friends for all the support during this grueling journey. This is one of the most difficult bar exams in the world to undertake, especially alongside a full time job! So happy to help out any aspirant who may be reading this message! I had prepared from the University of Law SQE Manuals and the AI powered MCQ bank from PastPaperHero.

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