APPENDIX B
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
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