Select Committee on Regulatory Reform Second Report


Reply from the Office of the Deputy Prime Minister

Draft Regulatory Reform (Business Tenancies) (England and Wales) Order 2003

Thank you for your letter of 19 November setting out the Committee's request for further information about our proposals. Our response to the questions you raise are as follows.

Detail of the proposed procedures for contracting out of security of tenure/agreements to surrender

Q1.    Why has the Department departed from the Law Commission's proposals in respect of the procedures for contracting out of security of tenure, given that those proposals received substantial support from respondents to the Department's consultation?

The Department considers that ideally tenants should receive the "health warning" in good time before committing themselves to a contracting out agreement. They would then have time to take a considered view on abandoning renewal rights and the practical opportunity to consider alternative options.

The Law Commission's proposals would not necessarily achieve this. While some tenants would become aware of contracting out proposals by seeing them in a draft lease, in other cases, particularly where the landlord was trying to manipulate the tenant, the tenant would not see the "health warning" until he or she was about to sign the lease. It would then be too late to consider alternative arrangements, as the tenant would have made business arrangements on the assumption that he or she would be occupying the premises concerned.

Respondents to the consultation exercise had mixed views on the merits of our contracting out proposals. Few disagreed with the principle that tenants ideally should receive advance notice. Those who favoured reverting to the Law Commission's proposals were mainly concerned about the mechanics of the Department's proposals. We addressed many of these concerns in putting forward revised proposals following the consultation exercise (see Annex F13, page 140, of the explanatory document), in consultation with our Sounding Board.

Q2.    Why, in relation to the case where the minimum 14 days' notice has been given, is there no requirement for the tenant to sign a simple declaration that he has read the health warning and accepted the consequences of entering into the agreement, and for the declaration to be endorsed on the lease?

Where the landlord has given the prospective tenant 14 days notice, the Department considers that it would suffice for the tenant to receive the notice, and for reference to it to be contained in or endorsed on the instrument creating the tenancy. A requirement for the tenant additionally to sign a declaration that he or she has read the health warning and has accepted the consequences would in our view be unnecessarily onerous while not adding to the protection proposed. Such a declaration, made outside the tenancy agreement, would have no legal effect. Any declaration within the body of the tenancy agreement on the other hand would be legally superfluous, as the whole presumption behind a contract is that each party accepts the consequences of each of the terms. The tenant needs to accept the consequences of the agreement to contract out, rather than the procedure for avoiding provisions in the Act that would otherwise make such an agreement legally ineffective.

It would be unlikely that any tenant who had failed to heed the contents of a formal notice would pay any more attention to it when asked to sign such a declaration. Furthermore, the obligation to sign a declaration would have to be linked to the event described in paragraph 2 of Schedule 2 to the draft Order (ie the point at which the tenant agrees to enter into the tenancy). Any requirement for earlier signature could detract from the force of the 14 days notice, would possibly raise logistical difficulties and add to legal costs.

In preparing its proposals, the Department has also borne in mind the need to balance the interests of larger and smaller businesses. Many larger businesses will, as a matter of considered policy fully informed by legal advice, be prepared to agree to contract out of security of tenure. There is a need to minimise the impact on what would be for them purely bureaucratic hurdles, in providing the required degree of protection for smaller businesses which do not have the same access to legal advice.

Q3.    Why (in the case where the minimum 14 days' notice is not given by the landlord), is the tenant required to sign a statutory declaration (under the Statutory Declarations Act 1835), given the problems to which such a declaration appears to give rise?

Wherever possible, we would prefer parties to use the 14-day notice procedure, and the proposals for use of statutory declarations in cases where less than 14 days notice has been given need to be seen in that context. We had first considered requiring all parties to use the 14-day procedure but concluded that this would impose difficulties for tenants needing to occupy property at short notice, for example, where their existing premises had caught fire. We considered imposing tests for parties wishing to avoid the 14-day notice period, for example demonstrating that it would not be practicable to give 14 days notice, but it would be difficult to devise a test which would not be subject to abuse and later legal challenge.

In the consultation paper, we proposed that where it was not possible to give 14 days notice, both landlord and tenant should sign a simple statement setting out why advance notice could not be given and that they agree that it is reasonable for this to be waived. The statement would contain the proposed "health warning". As an additional safeguard against abuse, the tenant would then be required to sign a statement that he or she had read the "health warning" and accepted its consequences.

However, some of the respondents to the consultation exercise were concerned that this accelerated procedure could be abused and used routinely where 14 days were practicable. We therefore sought a mechanism which, while not increasing existing burdens, would emphasise that an exceptional procedure was being used. The proposed statutory declaration procedure would impose a minor hurdle for the parties (though still a lesser one than the existing requirement to make a joint application to the court), which would have the effect of encouraging use of the 14-day notice procedure where practicable. It would have the following impact on the parties:

  • for the tenant: the statutory declaration procedure, and the need to go to a separate solicitor, would highlight use of an exceptional procedure with implications for his or her statutory rights. This should prompt tenants to pay careful heed to the contents of the "health warning", and would have more impact than the declaratory statement proposed by the Law Commission;

  • for the landlord: the procedure would make it more difficult to manipulate tenants (see paragraphs 11 and 12 below).

Landlords would have some incentive to use the 14-day notice procedure, as it would give them more control over the letting process. Provided they served notice on the tenant within the required timescale and ensured that subsequently the lease (or other instrument creating the tenancy) contained reference to the contracting out agreement and notice, the agreement would be valid. This would be a more straightforward process for them than either the present court procedure or the proposed alternative procedure involving the use of a statutory declaration. In the case of the court procedure, the landlord usually takes the initiative in applying to the court, but depends on the co-operation of the tenant in making a joint application.

With the proposed alternative procedure, the landlord would be entirely dependent on the tenant making the required statutory declaration, for the agreement to be valid. Many tenants might find having to make a separate statutory declaration inconvenient, and might question why they have to make one. If the tenant required accommodation urgently, he or she would no doubt accept the need to follow a special procedure to waive the requirement for 14 days notice. But if the landlord wanted to use the alternative procedure when 14 days notice were feasible, the tenant might well be reluctant to co-operate. The proposed form of notice recommends the tenant to ask the landlord to use the 14-day notice period where this is feasible.

When considering views from consultees on the merits of statutory declarations, it should be borne in mind that the Department subsequently modified its proposals as a result of comments received, and its present proposals differ in certain details to those on which it consulted. Our comments on the doubts mentioned in your letter are as follows:

  • unnecessary compared to the Law Commission's proposals for a prescribed declaratory statement: as noted above, the procedure is intended to complement the 14-days advance notice requirement, which we would prefer to be the norm, and to encourage the use of the latter. As such, we do not consider it unnecessary. While slightly more burdensome than the Law Commission's proposals, it is less burdensome than the existing requirements for court applications;

  • tenant no more likely to read and understand the notice: we disagree. The requirement to go to a separate solicitor would highlight the significance of the procedure more than having to sign it in front of the tenant's own solicitor. Moreover, the fact that the tenant has signed the declaration will not remove any obligation on the tenant's own solicitor to explain fully the implications of contracting out, especially as the "health warning" advises the tenant to seek professional advice. So in many cases the tenant will have the implications explained twice - from reading the "health warning" when signing the statutory declaration and from advice from his or her own solicitor;

  • sanctions for perjury inappropriate: we agree, but the tenant is merely being asked to indicate that he or she has read the health notice and has accepted the consequences of entering into the proposed contracting out agreement. We do not consider that this should give rise to problems of perjury. It was potential perjury implications that persuaded us against imposing a more severe test - for example, of pressing time-bound need;

  • statutory declarations out of step with court reforms: the proposed use of the statutory declaration is not intended to facilitate court proceedings. The statutory declaration procedure would be in the context of an agreement between independent parties without any court supervision. It would essentially be an administrative device to draw the tenant's attention to use of an exceptional procedure. As such, it would not need to mirror current court practice;

  • tenant would be prejudiced in contesting the validity of the notice: we do not consider that essentially there is any difference between the existing arrangements for court approval, the Law Commission's proposals or our proposals in this respect. In all three cases, the procedures, if followed correctly, would make it difficult for the parties to challenge the validity of the agreement once it was in force. Indeed, this is of some importance in ensuring that both parties are clear about the status of the lease and are confident that it cannot be challenged while it is in effect. The Committee has drawn attention in particular to differences between the Law Commission's proposals and our proposal for a statutory declaration where the tenant has not received the "health warning" 14 days before entering into a commitment to take the lease. In both cases, the tenant would be signing a declaration (in one case, a declaratory statement, in the other a statutory declaration) to the effect that he or she had read the "health warning" statement. There is a slight difference in the subsequent wording, however. The Law Commission's proposals would require the tenant to acknowledge that he or she had "understood" the terms of the agreement and the "health warning" statement, while the wording in our proposed statutory declaration would require the tenant to say that he or she "accepts the consequences" of entering into the agreement to exclude security of tenure. We used this different formulation because of potential evidential problems in subsequently establishing whether a tenant had "understood" the terms of the agreement. However, in either case it would be difficult to unravel an agreement that had been entered into, unless it could be shown that there had been fraud or that the tenant was clearly not in a position to understand or accept the consequences of the agreement (for example, if he or she lacked the capacity to enter into contractual relations for some general reason of law).

Inconsistencies in the legislation

Q4.    Is there any reason for the retention of the requirement for one month's occupation in respect of section 24(2)(a), and section 27(1) and (2)?

These three provisions were amendments introduced by section 4 of the Law of Property Act 1969. They deal with notices to quit and stem from recommendations in the 1969 Law Commission report to which the Committee refers. The Law Commission was concerned about potential abuse under the law as it then stood: the tenant could serve a blank notice to quit before the parties had signed the lease, which could then, once the tenancy had been granted, have the effect of removing the right to renew. The Law Commission recommended that a notice to quit should be ineffective if the tenant had given it before he or she had been in occupation for on month, and these provisions gave effect to that. These considerations still apply, and the Law Commission did not make any recommendations to amend these provisions in their 1992 report.

Q5.    If so, why do the same considerations not apply to immediate instruments of surrender?

At present, there are similar provisions for instruments of surrender as for notices to quit. An amendment under the Law of Property Act 1969 introduced a requirement (section 24(2)(b) of the 1954 Act) that instruments of surrender would not be valid if they were contracted within the tenant's first month of occupation. However, in their 1992 report, the Law Commission drew attention to ambiguities in the law and recommended repeal of this provision. They wanted to draw a distinction between immediate surrenders and agreements to surrender (ie an agreement to surrender the lease at some defined point in the future). The Law Commission recommended achieving this by repealing section 24(2)(b) and by instituting requirements for a "health warning" for agreements to surrender in place of present requirements to obtain prior court approval.

With surrenders, the potential for abuse lies in an agreement for surrender, rather than in an immediate instrument of surrender (which, to be effective, would have to be accompanied by the tenant leaving the premises). As noted above, agreements for surrender would be subject to the proposed "health warning" safeguards, irrespective of when they were entered into. As far as immediate instruments of surrender are concerned, there is no need for special protection in the first month of the tenancy. A landlord would be unlikely to let a property with a view at the outset of getting the tenant to leave in the first month of occupation. Once in occupation, the tenant is in a strong position to resist pressure from the landlord for an immediate surrender. On the other hand, there may be cases where a tenant finds within the first month of taking the tenancy that he or she cannot afford the rent. In those circumstances, we would not want to put any obstacles in the way of an immediate surrender if the landlord is willing to accept it.

Interim rent: new burden

Q6.  Does the Department consider that this provision imposes a new burden?

In practice, parties are likely to pursue interim rent applications during the course of renewal proceedings, and under the new proposals there is no incentive for either party to delay an application for interim rent. However, it is in theory possible that a party could bring proceedings many years afterwards and hence the proposal to impose a time limit.

We agree that the imposition of a time limit could technically be regarded as a new burden, as it imposes a constraint on the ability to apply for interim rent. On the other hand, the absence of a time limit could be onerous for the other party, who could find themselves unexpectedly having to pay or refund rent many years later.

Q7.    If so, how may the imposition of this new burden be justified in terms of the Regulatory Reform Act?

Having considered that the imposition of a time limit could be regarded as a new burden, the Minister is satisfied that such a provision would be proportionate. Bearing this particular provision in mind alongside other burdens identified in the explanatory document laid before Parliament on 22 July, he considers that the provisions of the Order, taken as a whole, strike a fair balance between the public interest and the interests of the persons affected by any burdens created. The provision would therefore meet the requirements of the Regulatory Reform Act.

Subject to the outcome of Stage One scrutiny, we will include an appropriate reference to this in the explanatory document laid at Stage Two scrutiny.

Article 25: confirmation of 'Esselte' decision

Q8.    How does the Department respond to the criticism that the argument that a landlord wishing to ascertain the tenant's intentions could initiate proceedings for renewal runs counter to the intention of eliminating unnecessary court proceedings?

The Department considers it unlikely that unnecessary court proceedings would arise in these circumstances. A landlord proposing to apply to court to ascertain the tenant's intentions would first need to write a "letter before action" to the tenant. To avoid the expense of unnecessary court proceedings, the tenant would be most likely to respond saying that he or she did not wish to apply for a new tenancy. If the tenant did wish to renew the tenancy, the court proceedings would facilitate renewal, and therefore would not be unnecessary.

Q9.    Explain how the tenant's ability to have an order for grant of a new tenancy revoked affects the question of whether he should be required to give notice before giving up the tenancy at the end of the contractual term.

In deciding whether or not tenants should have to give notice of the termination of a fixed tenancy, it is relevant to consider the benefits to the landlord of such a requirement. Such a requirement would assist the landlord by identifying those tenants who definitely did not want to continue renting their property and who by giving notice brought the tenancy to an end at the end of the fixed term. However, it would not assist the landlord in identifying tenants who were definitely planning to continue occupying the property. Tenants who had not given notice would be under no obligation to take a new tenancy. Even after the grant of a new tenancy, the tenant would be able to apply for revocation within two weeks of the court making the order.

We acknowledge that the tenant's ability to apply for revocation of a grant of a new tenancy does not affect the issue of whether tenants should have to give notice of termination of a fixed term tenancy, to the extent that landlords should be able to identify tenants who are definitely not proposing to renew their leases. But it is relevant to the issue of whether such a requirement would identify with any degree of certainty those tenants who are definitely planning to remain in occupation.

Q10.  In the light of the questions above, can the Department explain how the re-enactment of this burden is proportionate to the benefit expected to result?

The Department acknowledges that either option for section 27(1) of the 1954 Act would impose a burden on one of the parties. A requirement for the tenant of a fixed term tenancy to give three months notice would impose a trap, and hence a burden, for the tenant. On the other hand, such a requirement would enable the landlord to ascertain, in some cases, that the tenant had decided not to renew the tenancy, and therefore enable him or her to seek a new tenant to ensure continuity of occupation without any loss of rental income. The absence of a requirement for the tenant to give notice would therefore amount to a burden on the landlord.

Our approach has been to opt for what we consider the lesser burden. A tenant who failed to meet a requirement to serve three months notice would have continuing obligations under a continuation tenancy extending beyond the fixed term. The tenant might only appreciate this after the end of the fixed term, at which point he or she would have to serve three months notice under section 27(2). The tenant could therefore face a continuing rental liability for some months beyond the time he or she had presumed, because it was in the contract, that the tenancy would come to an end. By comparison, the burden on the landlord of not receiving such a notice would mean that that in some cases he or she would not know that the tenant had decided not to renew the tenancy. If there were no means of ascertaining this, the landlord would not be able to seek a new tenant until the existing tenant had left the property at the end of the fixed term, and so could face a loss of rental income for a certain period. However, as noted above, the landlord would, under the Department's proposals, have a means of ascertaining the tenant's intentions, by applying to court for a new tenancy.

The Department considers that the landlord would face the lesser burden, and so has decided to make it clear that a tenant who left the premises by the end of the fixed term would not face any continuing rental liability. We acknowledge that, given the present interpretation by the courts, this amounts to a re-enactment of the current provisions. We will therefore make it clear, in our explanatory document for Stage Two scrutiny, that we will be re-enacting a burden on landlords, and set out the justification for this.

Subordinate provisions: procedures in respect of the National Assembly for Wales

Q11.  What was the Department's rationale for choosing this particular option for the exercise of the power to make subordinate provisions orders in relation to Wales?

The Department chose the option of giving the National Assembly for Wales powers to make subordinate provisions concurrently with a Minister of the Crown after consultation with the Assembly Minister for Finance, Local Government and the Communities and with her agreement. This is subject to confirmation by the National Assembly, who will be debating the draft RRO in plenary before giving consent to the proposed Order.

At devolution, the National Assembly for Wales assumed responsibility for Ministerial functions in Wales for the Landlord and Tenant Act 1954,[127] which the Secretary of State for Wales had previously exercised administratively. They included in particular the prescribing of various statutory notices. Except for the prescribing of certain Welsh language forms, these functions have always been exercised uniformly for England and Wales. As the National Assembly has this regulation making function under the 1999 Transfer of Functions Order, it was considered anomalous and not in keeping with the spirit of devolution to deny the National Assembly the opportunity to make its own subordinate provisions orders for Wales under the Regulatory Reform Act. On the other hand, the property markets in England and Wales are closely intertwined, and the Department and the Welsh Assembly Government agree that it would not be desirable to have different arrangements in each country, unless there is a good reason (for example, the use of Welsh language forms in appropriate cases).

In proposing that the making of subordinate provisions orders should be a concurrent power in relation to Wales, we anticipate close consultation and co-operation between the ODPM and the Welsh Assembly Government. We expect that the National Assembly would usually exercise this power, but making it concurrent leaves open the possibility of ODPM exercising it in exceptional circumstances (for example, following an unexpected court decision). In the latter event, there would be close consultation with the Welsh Assembly Government.

Form of the statutory declaration

Q12.  Does the Department believe that, for the reasons given above, the way the statutory declaration is currently set out would result in the charging of an unnecessary additional fee to those tenants who are required to sign such a declaration?

This would not be a major consideration, as the fee for an additional document would be £2, on top of the £5 fee for the statutory declaration. Our own view is that a separate fee would not be required, but to place the matter beyond doubt, we propose, subject to the Committee's views, to retain a single document, but to place the declaration (the jurat) at the end of it.

The Department's plans to review the working of the Order

Q13.  What are the Department's plans to review the working of the Order?

The Department plans to review the working of the Order, alongside other possible changes to landlord and tenant legislation. It proposes to review the changes after they have been effect for twelve months. On the working assumption that the changes would be implemented at the end of September 2003, it would complete its review by the end of December 2004.

Q14.  Given the potential significance of the changes which are being made, will the Department undertake to report to the Committee on the working of the new arrangements?

The Department would be pleased to report to the Committee on the outcome of its review of the proposed changes.

Consultation with the voluntary sector

Q15.    What consultation has taken place with the voluntary sector on these proposals?

We consulted consumer bodies including the National Consumer Council and the National Association of Citizens Advice Bureaux, but not specifically the voluntary sector. The professional bodies we consulted have members working in the voluntary sector who would have been able to identify any issues that are peculiar to the voluntary sector.

Effect of the proposals to exclude security of tenure on current lease terms dealing with sub-tenancies

I will write to you shortly about this matter.

Patrick Martin
Land and Property Division

25 November 2002

127   Under the National Assembly for Wales (Transfer of Functions) Order 1999 (SI 1999/672): see the entry for the Landlord and Tenant Act 1954 in Schedule 1. Back

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2002
Prepared 19 December 2002