Proposal C: Scope of the act—ownership
and control of the business
Present law
To qualify to renew his tenancy under the Act , the
tenant must occupy the property for a business carried on by him.[43]
One of the grounds on which the landlord can oppose the grant
of a new tenancy is by establishing that he intends to occupy
the property for the purposes of a business carried on by him.[44]
These provisions do not present problems where ownership
of the property and ownership of the business are in the same
hands. Problems arise, however, where the landlord or tenant carries
on his business through the medium of a company, e.g. where the
property is occupied by the tenant, and the business run by a
company. This is because under the general law companies are regarded
as separate from their shareholders. This is the case even where
one person beneficially owns all the company's shares.[45]
This rule can prove a trap for the unwary individual tenant who
decides to incorporate his business.
The 1954 Act has already gone some way in lifting
the "corporate veil" in some cases by treating companies
as identical to the individuals who control them. So, for example,
a landlord who is an individual can reclaim possession of property
on the ground that a company controlled by him will carry on business
there.[46]
Also, the Act provides that a landlord or tenant which is a company
is treated for the purposes of occupation and of carrying on or
intending to carry on a business as equivalent to any other member
of the group.[47]
Two companies are members of a group if one is the subsidiary
of the other, or if both are subsidiaries of a third company.
However, in cases not covered by the statutory exceptions,
the rule requiring on the one hand that tenants and occupiers,
and on the other hand that landlords and intending occupiers,
be identical remains. So, for example:
- an individual trading through the medium of a
company has no renewal rights if it is the company which is carrying
on business at the premises
- a company tenant cannot claim to renew the tenancy
where its controlling shareholder carries on business at the property
- a company landlord cannot reclaim possession
in order to allow its controlling shareholder to trade in the
property.
Further, the provisions for a group of companies
do not apply where, instead of the companies all being subsidiaries
of one holding company, each is controlled by an individual.
Problem
The inconsistency of the present position can be
seen from the following example. As indicated above, a landlord
can reclaim possession of property on the ground that a company
controlled by him will carry on business there: here, the "corporate
veil" is lifted. But it is not in the converse case: a company
landlord cannot reclaim possession in order to allow its controlling
shareholder to trade in the property. The present position whereby
the "corporate veil" has been lifted in some cases,
but not in others, has been reached by a piecemeal response to
particular cases, rather than by the consistent application of
a coherent principle.
Proposals
The Department accepts the Law Commission's view
that the rights of landlord and tenants under the Act should not
depend on the way they choose to organise their business affairs.
Accordingly, an individual and a company which he controls should
be treated as equivalent for the purpose of the statutory renewal
procedure.
Specifically, this would produce the following results.[48]
Firstly, the tenant would
be able to satisfy the criteria for renewal - that the tenant
occupies the premises for the purpose of a business carried on
by him - by showing that the occupation of the property or carrying
on the business there is (in the case of an individual tenant)
by a company he controls or (in the case of a company tenant)
by its controlling shareholder. Thus the Act would apply where-
the tenant is an individual and the business is carried
on by a company which he controls; or
the tenant is a company and the individual in control
of it carries on the business.
Secondly, the landlord
would be able to oppose the tenant's application for a new tenancy
if he intends to occupy the property for the purposes of a business
carried on by him. This ground of opposition already extends to
the case where the business is to be carried on by a company controlled
by the landlord. Under the proposal, this ground would also apply
in the converse case, i.e. where the landlord is a company and
the business is to be carried on by the individual who controls
it.
The Act provides that the landlord cannot oppose
the grant of a new tenancy on the ground that he intends to occupy
it for his business purposes if his own interest in the property
has been purchased or created less than 5 years before the termination
of the current tenancy.[49]
The purpose of this provision is to prevent persons wanting premises
with vacant possession from buying them over the heads of sitting
tenants and then opposing their normal security of tenure on the
ground that they are required for the landlord's own use. Under
the third of these aspects of the proposed reforms, this
limitation would also apply to cases in which a landlord seeks
possession so that a company in which he has a controlling interest
may occupy the property. Accordingly, an individual who acquired
control of the landlord company within the preceding five years
would not be able to oppose the grant of a new tenancy, on the
ground of intended occupation, where the tenancy was in existence
when he assumed control.
The fourth and final of these particular provisions
deals with the following situation. The Act currently provides
for a landlord or a tenant to be treated for the purposes of occupation
and of carrying on or intending to carry on a business as equivalent
to any other member of its group.[50]
So, where the tenant is a company which is a member of a group
of companies, another company in the group may occupy the property
and carry on business there, and this satisfies the condition
that the tenant is in occupation for business purposes. Similarly,
a company landlord can oppose the grant of a new tenancy on the
ground that the property is required for occupation by another
company in the group to carry on business. However, the Act's
definition[51]
of a group of companies is confined to the case where the subsidiary
companies are all owned by a holding company: two companies are
members of a group if one is the subsidiary of the other, or if
both are subsidiaries of a third company. It does not cover the
case where a number of companies are associated because they are
all controlled by the same individual shareholder.
Under the proposed reform, companies will also be
group members if they are controlled by an individual, rather
than by another company. Accordingly, for example, a company
tenant would have the right to renew a tenancy if the business
was carried on by another company, and both were controlled by
the same individual.
In relation to the above proposals, the current definition
of controlling interest in a company[52]
is to be replaced by a new definition. The new definition of control
of a company by an individual is based on the definition of control
of one company by another introduced by the Companies Act 1989.[53]
Removal or reduction of a burden
These aspects of the proposal reduce burdens by extending
the circumstances in which tenants may satisfy the criteria for
renewal, or in which landlords may oppose the grant of a new tenancy.
Imposition of new burdens
The proposals would impose new burdens on tenants
by extending the circumstances in which landlords may oppose
the grant of a new tenancy: a company which is the landlord will
be able to oppose the grant of a new tenancy in order to allow
its controlling shareholder to trade there. Also, the proposals
would increase the burden on landlords by extending the circumstances
in which tenants may apply for renewal (see para 92 above).
Proportionality
We are satisfied that the new burdens imposed
on landlords and tenants, as described in paragraph 99 above,
would be proportionate to the corresponding benefits for tenants
or landlords, as described in paragraph 98 above, which would
result.
Necessary protection
We are also satisfied that these proposals would
not remove any necessary protection. The
proposal to treat an individual and any company he controls as
equivalent, when assessing qualifications for the statutory procedure,
would apply equally where the landlord or the tenant controls
the company, and would be fair to both parties. It would not remove
any necessary protection for either, but would remove current
anomalies by ensuring that the rights of tenants to renew their
leases and those of landlords to occupy the premises for their
own business would be on a comparable footing.
The current protection afforded to tenants by the
Act in preventing persons wanting premises with vacant possession
from buying them over the heads of sitting tenants, and then opposing
their normal security of tenure on the ground that they are required
for the landlord's own use, would be preserved and extended to
cover the widened circumstances provided for by the proposal.[54]
Other protection for tenants in respect of the determination of
new rent would also be extended to cover the widened circumstances.[55]
43 S 23(1). Back
44
S 30(1). Back
45
Eg, in Cristina v Seear [1985] 2 EGLR 128 tenants carried on business
through limited liability companies. The Court of Appeal held
that the companies rather than the tenants were carrying on the
business, despite the fact that the tenants held all the shares
in, and controlled, the companies. Back
46
S 30(3) Back
47
S 42 Back
48
See proposed order, articles 13, 14, 16 and 17. Back
49
S 30(2) Back
50
S 42 Back
51
S 42(1) Back
52
S 30(3) Back
53
Article 17 Back
54
Proposed order, article 14(2) (new s30(2A)). Back
55
Proposed order, article 15 (new s34(2A)). Back
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