House of Commons - Regulatory Reform

Select Committee on Regulatory Reform Second Report

Proposal B: Statutory renewal procedures

The statutory renewal procedure involves two stages: an exchange of notices between the parties and an application to the court. Both stages must comply with the strict time limits laid down in the Act. Failure to act within the time specified will result in the tenant losing his right to apply for a new tenancy.

The notice procedure can be initiated by the landlord or the tenant. The landlord may serve a notice under section 25 (commonly called a "section 25 notice") to terminate the tenancy; or the tenant may serve a request for a new tenancy ("section 26 request"). The tenant cannot apply to the court for a new tenancy unless either-

the landlord has served a section 25 notice; or

the tenant has served a section 26 request.

Usually it is the landlord who takes the initiative by seeking to terminate the tenancy by serving a section 25 notice, given that most business tenants do not wish to quit the property since they benefit from the continuation of the tenancy at the existing rent. However, the service of a section 25 notice does not necessarily mean that the landlord wants the tenant to leave. Often it is the means by which the landlord sets in motion the statutory renewal process so that a new lease will be granted at a market rent (which is likely to be higher than the existing rent).

After the service of notices and counternotices, the next stage normally starts with negotiations between the parties based upon the tenant's intention to apply for a new tenancy which emerges from the notices and counternotices. Most new leases under the Act are granted as a result of agreement between the parties. However, the tenant, if he is to preserve his statutory right to a new tenancy, must make an application to the court within strict time limits.

LANDLORD'S SECTION 25 NOTICE AND TENANT'S COUNTERNOTICE

Present position

The landlord's section 25 notice must comply with a number of requirements. It must be in the prescribed form, and specify the date of termination of the tenancy. This must be at least 6 months and not more than 12 months after service of the notice, and not earlier than the contractual term date. The notice must state whether or not the landlord would oppose the grant of a new tenancy, and if he intends to do so, the statutory ground on which he will rely.

A tenant who has been served with a section 25 notice must, within 2 months, serve a counternotice ("tenant's counternotice") indicating whether or not he is willing to give up possession of the property. If he does not serve a counternotice (or states that he is willing to quit) the existing tenancy will terminate on the date specified in the section 25 notice.

Proposals

At present, the landlord's section 25 notice does not have to state the landlord's proposals for a new tenancy in a case where that notice states that he is not opposed to the grant of a new tenancy. In accordance with the Law Commission's recommendation, the Department proposes that the section 25 notice should include this additional information. Accordingly, if the notice states that the landlord is not opposed to the grant of a new tenancy, it should set out the landlord's proposals for a new tenancy: the property to be let, the rent payable and other terms.[25] These are the same particulars that must be included in the tenant's section 26 request if he wishes to renew his tenancy (see para 61 below). The proposal would ensure consistency with the section 26 request, and should help to speed up negotiations between the parties and thus the renewal process.

However, the Department have put forward an additional proposal (which was not included in the Law Commission's report) to meet the concern that tenants could mistake the landlord's proposals as to the terms of the new tenancy as the landlord's final offer rather than as his opening negotiating bid. Accordingly, the section 25 notice would bear a prominent "health warning", pointing out that the landlord's terms are not obligatory, but only a basis for subsequent negotiations; and it would explain that in the absence of agreement between the parties, the terms of the tenancy would be settled by the court. The proposal is designed to help prevent any misunderstanding. The "health warning" will be included in the new section 25 notice form which will be prescribed in regulations made under section 66 of the Act.[26]

The Department also propose (in accordance with the Law Commission's recommendations) that there should no longer be a requirement that the tenant serve a counternotice in response to the landlord's section 25 notice.[27] Although the counternotice can serve to inform the landlord who wants to reclaim possession whether there will be opposition from the tenant, the Law Commission found that it is often given as a matter of routine, saying that the tenant does not wish to vacate, as soon as the section 25 notice is received and before the tenant has taken any definite decision. Accordingly, in such cases the counternotice offers no real indication to the landlord of what may happen. It would therefore be inappropriate to retain, as a compulsory procedural step, such an inconclusive counternotice.

Further, the proposal to get rid of the counternotice would remove a trap for the unwary tenant. A counternotice is required even in cases where the landlord's section 25 notice states that the landlord will not oppose the grant of a new tenancy. So the tenant could omit to serve a counternotice, believing that he need take no action because the landlord will grant him a new tenancy; but then find that his failure to do so has resulted in the loss of his right to apply for a new tenancy.

TENANT'S SECTION 26 REQUEST AND LANDLORD'S COUNTERNOTICE

Present position

Although (as indicated above) it is the landlord who usually takes the initiative in the statutory renewal by serving a section 25 notice, there may be occasions where the tenant may wish to activate the Act's renewal procedures. To do so, he must serve a section 26 request on his landlord. The request, which must be in the statutorily prescribed form, must specify the commencement date for the new tenancy. The specified date can be at any time between 12 and 6 months after the request, provided only that it must not be earlier than the contractual term date. The request must also set out the tenant's proposals as to the terms of the new tenancy.

A landlord who wishes to oppose the grant of a new tenancy must serve within two months of the tenant's request a counternotice stating his grounds of opposition. A failure to do so will result in the landlord losing any right to oppose.

Proposals

The Law Commission concluded that the landlord's counternotice (unlike the tenant's counternotice[28]) serves a useful function - and for two reasons. First, it informs the tenant of the landlord's grounds of opposition, if there are such, and thereby serves to define the issues between the parties at an early stage. It is to be noted that, in a case where the landlord initiates the renewal procedure by serving a section 25 request, the equivalent information must be included in that notice. Second, it facilitates the operation of the compensation provisions in the Act, which come into play when the landlord successfully opposes the grant of a tenancy on certain grounds.[29] Accordingly, the proposed order (consistently with the Commission's recommendation) does not seek to change the present rules regarding the landlord's counternotice.

NOTICES AND COUNTERNOTICES: ANALYSIS

Removal or reduction of a burden

The proposal would remove the burden of the requirement for a tenant to serve a counternotice to a landlord's section 25 notice.

Imposition of new burden

The proposal would impose a new burden on the landlord in that his section 25 notice will have to contain his proposals for a new tenancy (if he is not opposing the grant of new tenancy). This will ensure consistency with the requirements of the tenant's section 26 notice (see below).

Re-enactment of burden

The burden of the requirement on the landlord that his section 25 notice state whether he is opposed to the grant of a new tenancy, and if so on what grounds he intends to oppose it, would be re-enacted by the proposal.

Proportionality

We are satisfied that the new burden of the requirement to state proposals for a new tenancy is proportionate to the benefit which will result to both parties in speeding up negotiations on the terms of the new tenancy. A number of consultees suggested that this aspect of the proposal would not be helpful, because the proposed terms would have to be suggested so far in advance that the proposals for the new rent would be useless (and possibly counterproductive, in that the landlord would be likely to state an exorbitantly high rent to avoid the possibility that the market may rise significantly before the terms are finalised). However, the notice will also have to contain a "health warning" explaining that the landlord's proposals are merely an opening bid in the negotiations, and do not bind either party.

We are also satisfied that the re-enactment of the burden of the requirement on the landlord to state whether he is opposed to the grant of a new tenancy, and if so on what grounds he intends to oppose it, is proportionate to the benefit to the tenant of having the information he needs to be able to make use of the renewal procedures in the Act.

Necessary Protection

The removal of the requirement for the tenant's counternotice is balanced by the aspect of the proposal which would enable the landlord to apply for renewal of the tenancy. Landlords will thereby be able, if necessary, to ascertain the tenant's intentions by these means, instead of by means of the counternotice. The proposal does not therefore remove any necessary protection for landlords.

Some consultees suggested that there should be some means of enabling the landlord to determine the tenant's intentions without having to take the step of renewal proceedings. However, the Department concluded that the counternotice was not a reliable indicator of the tenant's intention to renew the tenancy, was not procedurally necessary, and was a trap for tenants. Instead, it suggests that a tenant not wishing to renew would be likely to make his or her intentions clear before the landlord took the step of commencing renewal proceedings, since such proceedings would involve significant inconvenience and cost for the tenant as well as the landlord.[30]

COURT APPLICATIONS

Present Law

A tenant who wishes to obtain a new tenancy, and who has not got one by agreement with the landlord, must apply to the court. The application has to be made at least two months, but not more than 4 months, after the landlord gave a section 25 notice to end the tenancy or the tenant gave a section 26 request asking for a new tenancy.[31] Failure to observe these time limits will result in the tenant losing his right to apply for a renewal of the tenancy. The court has no jurisdiction to extend the time limits. The parties can by agreement waive the time limits, but they cannot do so after the tenancy has ended.

The strict time limits are intended to prevent a party from using deliberate delaying tactics to the detriment of the other. However, the negotiations for a new lease often cannot be completed before the time limit for making a court application expires. A tenant must in such a case make a court application in order simply to preserve his rights, even in a case where agreement has virtually been reached. Once an application is made, the tenancy is extended until 3 months until after the application has been finally disposed of.[32]

Problem

These strict limits have been criticised on two grounds. First, they have proved a trap: a number of tenants lose the chance to renew because they or their professional advisers have not made an application in time. Second, a large number of court applications are made purely as a precautionary measure and then abandoned if the parties have reached agreement on renewal terms.[33]

Proposals

The Law Commission's proposals for rationalising the renewal procedure, which have been adopted by the Department, are guided by two considerations: first, that neither party should be able to cause unreasonable delay in the renewal process; and, secondly, that unnecessary court applications should be eliminated.

The main proposals are as follows:[34]

Either party - the tenant or the landlord - should be able to apply to the court for the renewal of a tenancy. This would discourage unnecessary delay, since it would give either party the chance to take the initiative in bringing the matter to the court.

A landlord should be able to initiate proceedings to terminate the tenancy without renewal.

Additionally, there are three further proposals, all aimed at ensuring that proceedings under the Act should not proliferate and impose an unnecessary burden on the parties and on court resources:

If a landlord is unsuccessful in proceedings to end a tenancy without renewal, it should not be necessary for the tenant to start new proceedings an order for the grant of a new tenancy. In these circumstances, the court should be able to order the grant of a new tenancy and settle its terms.

In order to prevent duplication of proceedings, neither party should be able to bring an action if the other had already begun proceedings. This would mean that a party would be precluded from making a renewal application if the other had already made such an application, or if the landlord had applied to terminate the tenancy without renewal. Nor could the landlord apply to terminate the tenancy without renewal if either party had made a renewal application.

The landlord should not be able to withdraw his application (for renewal or termination of the tenancy without renewal) without the tenant's consent. This is intended to be a safeguard for the tenant. The rule preventing concurrent proceedings (see bullet point immediately above) would be open to abuse if the landlord could start proceedings and immediately discontinue them so as to stop the tenant from renewing his tenancy.[35]

The Department has also put forward proposals regarding the time limits for applications to court. One effect of the current stringent time limits is that many court applications are started as a purely precautionary measure, but later abandoned. The Department's proposals (which follow the Law Commission's recommendations) are aimed at eliminating unnecessary court proceedings (thereby achieving savings in costs and court resources).

Accordingly:

the landlord or the tenant would be able to apply to the court at any time before the date specified in the landlord's section 25 notice to terminate the tenancy, or the tenant's section 26 request for a new tenancy.[36] This would itself have the effect of extending the period currently allowed by at least 2 months.

the landlord and tenant would then be able to agree to extend the date by which an application may be made.[37]

The proposal also deals with the question of whether there should continue to be a time before which an application cannot be made. At present an application made less than 2 months after service of the landlord's section 26 notice or the tenant's section 26 request cannot be entertained by the court. In accordance with the Law Commission's recommendations, the Department propose to modify this requirement. The guiding principle is that there is no sound procedural reason for requiring an application to be delayed once it is clear whether the landlord intends to oppose a renewal and, if so, on what ground.

Accordingly:[38]

once the landlord has given a section 25 notice, a party would not have to wait for two months before making an application to the court

if the tenant serves a section 26 request, a party would have to wait for two months before making an application to the court unless the application is made after the landlord has given a counternotice within that period.

The reason for these two slightly differing rules stems from the fact that in the situation mentioned in the first bullet point above, the tenant will no longer be required to serve a counternotice in response to the landlord's section 25 request.[39] This being so, there is no reason for requiring an application to the court to be delayed. On the other hand, as indicated earlier, the landlord's counternotice in response to a tenant's section 26 notice is to be retained.[40] If the tenant serves a section 26 request, the landlord may within two months give a counternotice that he will oppose a renewal and state the grounds of opposition. In this case proceedings should not be started until the position is clear, and as a result it is necessary to wait for the service of the landlord's counternotice (or the expiry of the time allowed for its service).

Removal or reduction of a burden

The proposals would remove a burden by allowing landlords to apply to the court either for renewal of the tenancy or for termination without renewal, neither of which are currently possible (the initiative in respect of court proceedings being entirely with the tenant). They would also significantly relax the time limits within which applications may be made.

A number of consultees suggested that there was in fact no need for any time limits. In response, the Department accepted that the retention of time limits for applications to the court may not be procedurally necessary. However, it went on to argue that "the abolition of time limits would require amendments to sections 24 and 25 of the Landlord and Tenant Act 1954, with potential repercussions well beyond the scope of the March 2001 consultation paper." As a result, it does not intend to abolish the time limits altogether, but rather to keep the position "under review."[41] We look forward to seeing the Department's conclusions regarding these time limits in its review of the working of the order.[42]

Necessary protection

We are satisfied that the proposals would not remove any necessary protection. The proposals at paras 75 and 76 above would ensure that neither landlord nor tenant would be able to cause unreasonable delay in the renewal process. They would also have the effect of preventing unnecessary court proceedings. The proposals at paragraphs 78 and 80 would replace the present rigid time limits for court application (which have proved to be a trap for the unwary tenant, and which have also resulted in a large number of court applications being made purely as a precautionary measure) with a more flexible regime which would avoid these problems.

25 Proposed order, article 4(2) (new s 25(8)). Back

26 The proposed health warning is set out at p. 82 of the Dept's Explanatory Memorandum. Back

27 Proposed order, Sch 6 (repeal of s 25(5) (tenant's counternotice)). Back

28 See para 59 above. Back

29 See para 139ff. below. A tenant whose landlord states his intention to resist renewal on certain grounds may claim compensation without starting court proceedings: s 37(1), as amended by the Law of Property Act 1969, s 11. The tenant should therefore be made aware of what the landlord proposes before the expiry of the time limit for taking proceedings. Back

30 Explanatory statement, page 15. Back

31 S 29(3). Back

32 S 64(1). Back

33 It is usual to apply for an adjournment at the same time as submitting the application to the court. Back

34 Proposed order, articles 3(1) and 5 (new s 29). Back

35 Under s 64(2) the tenancy would terminate 3 months after the withdrawal of the application. Back

36 Proposed order, article 10 (new s 29A). Back