Leasehold real estate law and practice - Security of tenure ...

Learning Outcomes

This article sets out security of tenure under business leases in England and Wales and its practical application, including:

• The statutory framework in Part II of the Landlord and Tenant Act 1954 and qualifying criteria for a business tenancy
• Excluded tenancies and the lease/licence distinction (exclusive possession, occupation, term certainty)
• The contracting-out process: warning notice, tenant declarations, lease endorsement, and timing requirements
• Statutory continuation, termination and renewal via section 25 notices and section 26 requests, with strict time limits
• Landlord’s grounds of opposition under section 30, evidential standards, and practical tests (e.g., Franses v Cavendish)
• Renewal lease terms and rent assessment (s.33–34; O’May principles and open market rent disregards)
• Statutory compensation on no-fault grounds and calculation by rateable value (including the 14-year uplift)
• Surrender, merger, forfeiture and other ways leases end, and common pitfalls in practice
• Assignment, subletting, consent regimes, and the role and limits of authorised guarantee agreements under the 1995 Act
• Co-ownership, trusts of land, and overreaching in leasehold transactions and their impact on title and notice service

SQE2 Syllabus

For SQE2, you are required to understand leasehold real estate law and practice concerning business tenancies and security of tenure under the Landlord and Tenant Act 1954, with a focus on the following syllabus points:

• the statutory protection for business tenants under Part II of the Landlord and Tenant Act 1954
• criteria for a tenancy to qualify for protection, including "business tenancy" scope, occupational requirements, and categories of excluded leases
• co-ownership, trusts of land, the practical significance of overreaching in purchases involving trusts, and the implications for registered and unregistered land
• procedures for contracting out of security of tenure—statutory warning notice, declarations, endorsement in the lease, and related drafting and advisory points
• distinctions between leases and licences, essentials of exclusive possession, and rules on lease creation/formalities
• step-by-step processes for serving and responding to section 25 and section 26 notices, the strict timeframes and formal requirements, and court application routes
• effective methods of terminating leases (effluxion, surrender, merger, forfeiture), and practical points for documentation and due diligence
• landlord’s statutory grounds for opposition, including mandatory/discretionary grounds, requirements for demonstrating settled intention, and limitations (e.g., five-year rule for landlord occupation)
• statutory compensation for tenants on "no-fault" refusal grounds; calculation based on rateable value and occupation period
• open market rent and renewal lease terms, including relevant disregards and guidance from O’May v City of London Real Property Co Ltd
• role, function, and limits of authorised guarantee agreements (AGAs) and their operation under the Landlord and Tenant (Covenants) Act 1995
• practical application of regulations affecting notices, service, and content, including the consequences of errors under Mannai Investment Co Ltd v Eagle Star

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 does "security of tenure" mean under a business lease?
2. Name at least two circumstances in which a business tenant does NOT have statutory protection for lease renewal.
3. What process must a landlord follow to terminate a protected business tenancy?
4. On what grounds can a landlord successfully oppose a tenant’s statutory right to a new lease?

Introduction

Business tenants in England and Wales are frequently afforded robust statutory protection when occupying premises under a lease. Central to this protection is the concept of security of tenure, conferred by Part II of the Landlord and Tenant Act 1954 (the "Act"), which entitles qualifying tenants to stay on and seek renewal at the end of the contractual term, save where very specific statutory grounds for recovery are met by the landlord. This regime is fundamental to commercial property practice, shaping negotiation, documentation, and dispute resolution for business premises.

Key Term: security of tenure
Security of tenure is the statutory right of a business tenant to continue occupying premises after expiry of the contractual term, unless and until the lease is terminated through the procedures and on the grounds specified in the Landlord and Tenant Act 1954.

Business landlords and tenants alike must understand when and how this automatic protection arises, the ways it can be excluded, and the procedural complexities associated with valid termination or renewal.

Business Tenancy and Scope of Statutory Protection

Statutory protection is available to a business tenancy as defined by the Act: the lease or periodic tenancy must relate to premises occupied by the tenant for the purpose of a business (broadly interpreted to include most commercial activities, sports/social clubs, and charities, but excluding e.g. Sunday schools). The protection arises whether the arrangement is a fixed-term lease, a periodic tenancy, or in some circumstances, an implied tenancy following ‘holding over.’

Key Term: business tenancy
A business tenancy is a lease or periodic tenancy under which the tenant occupies premises for purposes of a business which it actively carries on, solely or together with others.

A valid "business tenancy" must demonstrate:

• exclusive possession (per Street v Mountford and its progeny), as opposed to a mere licence or service occupancy (where the right to occupy is merely incidental to employment);
• occupation by the tenant (not a subtenant or licensee);
• continuous use for the purposes of a business as defined in section 23 of the 1954 Act;
• that the lease does not fall into one of the statutory exclusions.

The Act excludes certain categories of tenancies (s.43), which do not benefit from security of tenure even if the premises are used for business purposes.

Excluded Tenancies

Statutory protection does not generally apply to:

• tenancies at will or licences (i.e., arrangements with no security and terminable at any time);
• farm business tenancies and agricultural holdings (covered by other specialist legislation);
• mining leases;
• certain service tenancies (e.g., caretaker flats, where occupation is required for employment duties);
• fixed-term tenancies not exceeding six months (unless they contain a right of renewal or the total period of occupation exceeds 12 months due to successive grants);
• tenancies where occupation is not really for business purposes, or is only incidental.

Successive or renewal short-term agreements cannot be used to sidestep protection—the courts will look at the substance rather than mere form.

Contracting Out of Security of Tenure

Despite its statutory character, protection can be validly excluded if—and only if—the formal statutory contracting-out process is followed before the tenant is contractually bound:

• The landlord serves a statutory warning notice (prescribed form) on the tenant, at least 14 days before lease completion (or, failing that, with a statutory/agreed declaration).
• The tenant must make a declaration (either simple or statutory, depending on timing) confirming understanding of and agreement to the exclusion.
• The lease must contain or endorse a reference to this exclusion.

Failure to comply strictly with these steps will render the exclusion ineffective and the tenant will have the statutory protection, regardless of what the lease says.

Key Term: contracting out
Contracting out is the formal process whereby landlord and tenant validly agree, following prescribed notice and declarations, to exclude security of tenure for a business lease, as allowed by the Landlord and Tenant Act 1954.

Contracting out must cover only a "term of years certain" and cannot include a period of continuation, extension, or ‘holding over.’ The exclusion is designed to give sophisticated parties commercial flexibility where stability is not necessary or where the premises are only intended for short occupation.

Worked Example 1.1

A landlord lets a shop to a partnership for two years. The landlord serves a statutory warning notice 21 days before lease grant. The prospective tenants sign simple declarations; the lease references their agreement to exclusion. Is the lease excluded from security of tenure?

Answer:
Yes. Provided the process was properly completed before the tenants became contractually bound, the landlord has validly contracted out of the Act and can recover possession at expiry without statutory restrictions.

Co-Ownership, Trusts of Land, and Overreaching

Where commercial property (including the landlord’s or tenant’s title) is held by several persons for themselves or for others, it is likely subject to a trust of land. Co-ownership occurs whenever more than one legal owner holds land jointly, creating an automatic trust under the Trusts of Land and Appointment of Trustees Act 1996 (TOLATA). This has key practical implications in leasehold conveyancing.

Key Term: co-ownership
Co-ownership arises where two or more persons are entitled to the legal and/or beneficial interest in the same property at the same time.

The legal estate in land, including leaseholds, must be held by joint tenants, with no severance possible. The equitable (beneficial) interest may be held as joint tenants (with the right of survivorship) or tenants in common (with undivided but distinct shares). The way property is split will affect how consent is given to leases, notices, or surrender, and is highly relevant where purchase monies are paid to several trustees.

Key Term: trust of land
A trust of land is an arrangement—express or automatic—under which the legal title to property is held by trustees (maximum of four) for the benefit of one or more beneficiaries, as set out in TOLATA 1996.

When property is sold by trustees, overreaching is the mechanism that removes any beneficial (equitable) interest from the land and attaches it to the proceeds of sale. Overreaching occurs when purchase money is paid to at least two trustees (or a trust corporation). This enables a business tenant or purchaser to take free of existing beneficial interests—particularly important where a lease is involved and there are non-owner beneficiaries. If payment is made to only one trustee, the purchaser may take subject to such beneficial interests if the trust beneficiaries are in actual occupation.

Key Term: overreaching
Overreaching is the statutory mechanism (LPA 1925, ss. 2 and 27) whereby beneficial interests under a trust are lifted from land and become rights to the sale proceeds—provided money is paid to at least two trustees.

These principles are central to resolving disputes and transactions involving registered or unregistered land, and to ensuring that contractual counterparties obtain proper title, whether as business tenants or as assignees of a business lease.

Leasehold Fundamentals: Leases, Licences, and Creation

A lease is a legal estate in land—a term of years absolute, whether fixed term, periodic, or otherwise recognisable as a proprietary interest (s.1(1)(b) and s.205(1)(xxvii) LPA 1925). The essential characteristics of a lease are:

• exclusive possession of defined premises,
• a certain term (fixed or periodic; for a defined maximum period or for successive periods as rent is paid),
• correct formalities (usually by deed for over 3 years; written or even oral for some short terms).

A licence is a mere personal contractual right, not a property estate, and does not bind successors in title. The distinction is important, as only leases (not licences) enjoy security of tenure.

Certain statutory exceptions exist for lease creation formalities:

• Leases for over 3 years: by deed.
• Leases for 3 years or less: may be granted orally (parol lease), provided they are in possession, at best rent, and without payment of a fine.

The effect of failing to comply with deed requirements may be to create an equitable lease if there is a valid contract or specific performance is available.

Common types of lease relevant to business tenancies include fixed term commercial leases, periodic tenancies (express or implied through continued payment of rent), and tenancies at will (excluded from protection).

End of Tenancy: Statutory Continuation, Termination, and Renewal

Upon expiry of a protected business tenancy, if it is not validly contracted out or terminated according to the Act, it continues as a statutory continuation tenancy. The tenant remains in occupation under the Act, and the previous contractual lease is superseded by statutory rights, pending valid termination or renewal.

Termination can be achieved through one of the specific statutory methods only:

• Service of a valid section 25 notice by the landlord (prescribed form, specifying a termination date at least six, but not more than twelve, months after notice; must apply to the whole of the leased premises; must state whether renewal is opposed and grounds for opposition, if any).
• Service of a valid section 26 request by the tenant (prescribed form, proposing a new tenancy commencing not less than six, nor more than twelve, months ahead, and not before contractual expiry).
• Surrender (by deed) or merger (where one party acquires both lease and reversion).
• Forfeiture (for breach, if available).
• The tenant ceasing to occupy for business purposes at expiry (section 27(1A)).

Key Term: section 25 notice
A notice in prescribed form served by the landlord to terminate a business tenancy and either propose a new lease or oppose renewal, stating sufficient grounds.

Key Term: section 26 request
A notice in prescribed form served by a business tenant seeking to initiate renewal; must specify a suggested commencement date for the new lease and proposed terms.

The Act imposes strict time limits: the date in the notice must not be earlier than the lease could be ended at common law (i.e., after contractual expiry), and the officeholder must serve or apply in time or lose the right to insist on renewal.

A protected business tenancy continues unless validly terminated, and the tenant can usually hold over and carry on trading, only being required to vacate if the landlord successfully relies on one or more statutory grounds and the relevant notice process.

An important practical implication is that if neither valid section 25 nor 26 notice is served, the tenant may "hold over" indefinitely, with periodic payment of rent and continued statutory protection.

Termination Practicalities: Surrender, Merger, Forfeiture

Key Term: surrender
The express or implied yielding-up of a lease by the tenant, accepted by the landlord, so that the lease merges into the landlord’s reversion and comes to an end, usually by deed.

Surrender is frequently used to bring a lease to an end before contractual expiry, for example, allowing a new lease, or as part of a settlement. It releases both landlord and tenant from future liabilities (unless agreed otherwise), but does not affect liabilities accrued at the date of surrender. The deed of surrender must be clear and comprehensive.

Key Term: merger
The merger of a lease into the reversion occurs when the same person/entity acquires both the leasehold and the freehold (or superior interest), extinguishing the lease by operation of law.

Forfeiture, in the commercial context, is rarely a means of avoiding security of tenure but may be relevant where there is a serious breach by the tenant. Peaceable re-entry must be exercised with care; often courts become involved, especially if the lease contains forfeiture clauses.

Landlord’s Statutory Grounds for Refusing Renewal

A landlord who wishes to oppose the grant of a new tenancy under the Act must be able to prove one or more statutory grounds set out in section 30. These include both discretionary ("ought not to be granted") and mandatory ("shall not be granted") grounds:

• Failure by the tenant to repair, or persistent delay in rent payment (discretionary);
• Substantial other breaches of obligation or nuisance (discretionary);
• Suitable alternative accommodation is available (mandatory ground, s.30(1)(d));
• Landlord intends to demolish or reconstruct the holding and cannot do so without obtaining possession (mandatory ground, s.30(1)(f));
• Landlord intends to occupy the holding for its own business or residence, subject to a minimum ownership period of five years (mandatory ground, s.30(1)(g));
• The tenancy was created by subletting part and letting the whole would be more beneficial.

Key Term: open market rent
The true market rent for a leased property as determined at the date of renewal, disregarding factors such as the tenant’s occupation, goodwill, or voluntary improvements, following rules set out in s.34 of the Act.

Claims for redevelopment (ground (f)) or own occupation (ground (g)) require the landlord to prove a "firm and settled intention," practical plans, and—especially in the case of occupation—to have owned the relevant interest for five years immediately before the termination date.

• For own occupation, this includes the landlord’s company or (for a company landlord) a controlling shareholder.
• "Intention" cannot be based solely on a conditional or hypothetical plan for possession; the test is whether the landlord would proceed with works/occupation even if the tenant were to vacate voluntarily (as clarified in Franses v Cavendish Hotel).

Worked Example 1.2

A landlord serving a section 25 notice wishes to oppose a new lease on redevelopment grounds, but cannot show concrete plans or available finance for the works. The tenant contests the refusal.

Answer:
The court is unlikely to accept the opposition. The landlord must satisfy the tribunal that intention is settled and practical steps have been taken—such as obtaining planning consent, funds, and detailed plans—for a possession claim under ground (f).

Where the landlord’s intention is found wanting on a mandatory ground, the tenant’s renewal right remains intact; opposition will fail.

Renewal Procedures: Court Process and Renewal Lease Terms

Where refusal is opposed, the tenant (or landlord) must apply to the court before the notice expires, or the right to a new tenancy is lost. The court will resolve two main issues:

• Are the landlord’s grounds proven?
• If so, is the tenant entitled to compensation (see below)?
• If not, on what terms should the new lease be granted?

If renewal is ordered, the court determines the terms of the lease under the Act’s rules. The usual approach—following O’May v City of London Real Property Co Ltd [1983] 2 AC 726—is to use the terms of the existing lease as a template, updating as required for modern standards, with the onus on the party seeking change to justify it.

Key Term: open market rent
The rent for the renewal lease is assessed by reference to the market at the time of renewal, disregarding any goodwill generated by the tenant, tenant's occupation, or voluntary improvements (s.34(1)), ensuring the rent reflects the letting value for a hypothetical new occupier.

Lease terms will rarely exceed 15 years (s.33), and may include or extend rent review provisions, depending on evidence of market practice and property type.

Key Term: holding
The premises comprised in the existing tenancy, excluding any part not occupied by the tenant and not subject to the statutory renewal (s.23(3) LTA 1954).

Worked Example 1.3

A tenant applies for a renewal lease but disputes a clause restricting assignment and requiring a full personal guarantee by the directors. The current lease had no such terms.

Answer:
Provided there is no compelling evidence that market conditions require the change, the court will generally not impose materially different terms without good reason (O’May). The onus is on the landlord to demonstrate that the change is fair and reasonable.

Compensation for Tenants

If the landlord defeats a renewal claim on one of the “no-fault” grounds—such as own occupation (g), redevelopment (f), or suitable alternative accommodation (d)—statutory compensation is payable to the tenant. The calculation is set by reference to the rateable value of the holding at the date of termination, and is doubled if the tenant (or its predecessors) have been in occupation for at least 14 years immediately prior to termination.

Key Term: statutory compensation
Compensation payable to a business tenant on refusal of a renewal where the landlord is successful on certain opposition grounds, calculated on the rateable value in accordance with s.37 LTA 1954.

Key Term: rateable value
The value of non-domestic property as assessed by the Valuation Office Agency, forming the basis for business rates and compensation calculations.

Tenants who have benefitted from a long period of security may, as compensation, receive a sum up to twice the rateable value, mitigating the hardship occasioned by forced relocation or redevelopment.

Worked Example 1.4

A shop tenant subject to a protected tenancy is refused renewal as the landlord seeks to run its own business on the property. The premises’ rateable value is £24,000. The tenant and predecessor have used the shop as a bakery for 18 years.

Answer:
The tenant is entitled to statutory compensation calculated at double the rateable value, i.e., £48,000, since the occupation exceeds 14 years and refusal is for landlord occupation (a no-fault ground).

No compensation is payable where renewal is refused due to tenant fault (e.g., disrepair, substantial breaches, persistent arrears).

Assignment, Subletting, and Authorised Guarantee Agreements (AGAs)

Business tenants may wish to assign or underlet their leases. Leases typically contain alienation covenants, qualified or fully qualified, and statutory provisions regulate the landlord's right to refuse consent to assignment or subletting (e.g., LTA 1927, LTA 1988). On assignment of a "new" lease (post-1996), the outgoing tenant is automatically released from future liability, unless a valid authorised guarantee agreement (AGA) is entered.

Key Term: authorised guarantee agreement (AGA)
An agreement under s.16 of the Landlord and Tenant (Covenants) Act 1995 where an outgoing tenant, as a condition of the landlord’s consent to assignment, agrees to guarantee the immediate assignee's performance of the tenant covenants, within statutory limitations.

An AGA is commonly used in commercial leases but cannot require the outgoing tenant to underwrite subsequent assignees.

Subletting and Privity

A business lease may permit the tenant to sublet all or part of the premises, subject to landlord’s consent. Subleases must be for shorter duration than the head lease, or will be considered assignments. Where subletting occurs, a direct relationship (privity of estate) with the head landlord is generally not created unless the lease or accompanying deed so provides.

In subletting scenarios, covenants in the head lease typically continue to bind the original tenant (subject to liability limitations post-1996 and the operation of any AGAs). Exclusion of security of tenure in underleases should be confirmed where relevant.

Ending Leases: Expiry, Notice, Surrender, Forfeiture

Leases for a fixed term expire by effluxion of time, unless continued under the Act or by agreement. Periodic tenancies may be terminated by notice to quit. Surrender and merger bring the lease to an end before expiry. Forfeiture is available for breach if a forfeiture/re-entry clause is included and subject to statutory procedures (e.g., s.146 LPA 1925).

Special Considerations: Co-Ownership and Sale of Leasehold Interests

Many leased properties (especially investment or partnership premises) are owned under co-ownership structures, with the lease held on trust for beneficiaries (e.g., multiple firm partners). Transfer of such holdings, and the application of overreaching and trust mechanisms, must be understood. The sale or letting of a lease subject to a trust requires proper attention to the number of trustees and compliance with overreaching to protect buyers and avoid the risk of equitable interests binding successors.

Key Point Checklist

This article has covered the following key knowledge points:

• Security of tenure is a statutory business tenant right to renew, governed by Part II of the Landlord and Tenant Act 1954.
• Most commercial business leases are protected unless excluded by statute, contracting out, or failure to meet requirements for a business tenancy.
• Statutory exclusion of protection requires strict compliance with warning notice, tenant declaration, and lease endorsement formalities.
• Protected business tenancies continue after contractual expiry unless ended per the statutory mechanisms, usually by valid section 25 or 26 notice.
• Only certain lease types and occupancies qualify, and numerous categories of tenancy (including tenancies at will, service tenancies, short tenancies, licences, and certain types of co-occupation) are excluded.
• Landlords may only oppose renewal on specific statutory grounds, which must be clearly pleaded and strictly proved; redevelopment and own occupation require “firm and settled intention.”
• The courts will determine the terms, length (up to 15 years), and open market rental for a renewed lease, following the template of the previous lease unless justified by evidence (O’May).
• Compensation is payable to tenants where renewal is refused on “no-fault” grounds, based on rateable value and occupation, but not where refusal is for tenant default.
• AGAs are permitted in post-1996 leases (Landlord and Tenant (Covenants) Act 1995) but only to guarantee the immediate assignee’s performance.
• Co-ownership and overreaching are critical in the conveyancing of leaseholds held under trusts to protect against overriding interests on sale.
• Proper termination, notice, and renewal procedure must always be followed; errors can deprive a party of security or recovery rights.

Key Terms and Concepts

• security of tenure
• business tenancy
• contracting out
• section 25 notice
• section 26 request
• holding
• co-ownership
• trust of land
• overreaching
• surrender
• merger
• open market rent
• rateable value
• statutory compensation
• authorised guarantee agreement (AGA)