Select Committee on Delegated Powers and Regulatory Reform Twenty-Fifth Report

Ordered to Report



1.  On 22 July 2002, the Government laid before Parliament a proposal for a draft Regulatory Reform (Business Tenancies) (England and Wales) Order 2002, together with a Statement by the Office of the Deputy Prime Minister (ODPM). We reported on the Government's proposal on 12 November 2002.[2] On 17 September, the Government laid a draft order for "second-stage" scrutiny, together with a second Statement ("the second Statement").

2.  The order relates to the leasing of commercial premises in England and Wales. Its purpose is to amend the provisions of Part II of the Landlord and Tenant Act 1954 ("the 1954 Act") in such a way as to maintain the principle of the 1954 Act whilst enabling the renewal or termination of business tenancies to be undertaken more easily.

3.  In our earlier report, we concluded that the proposal was appropriate to be made under the Regulatory Reform Act 2001 ("the 2001 Act") save in one respect concerning the provision relating to agreements to exclude security of tenure ("contracting out") and similar provision relating to agreements to surrender a tenancy.

4.  Although the 1954 Act did not originally contain provision to enable contracting out, following a Report of the Law Commission, section 5 of the Law of Property Act 1969 (amending section 38 of the 1954 Act) allowed landlords and tenants to agree to exclude security of tenure if the agreement were authorised by the court. In 1992, the Law Commission concluded that requiring an application to the court to approve contracting out agreements was not an effective filter to prevent an abuse of what was generally assumed to be the landlord's dominant position. The Law Commission recommended an alternative procedure not involving application to the court. The contracting out proposal contained in the order originates in the Law Commission Report although the procedure proposed is different. Under the order, the approval of the court for agreements to exclude security of tenure would no longer be required; a "health warning" procedure would apply instead.

5.  At "first-stage" scrutiny of the proposal, the Committee concluded that it was not satisfied, either by reliable statistical evidence or the results of the consultation, that the proposed order would not remove a necessary protection for tenants. The ODPM responded to the Committee's concerns in two ways: by commissioning research into failed applications to contract out and by undertaking a further consultation about the likely impact of the proposed new contracting out provisions.

6.  The research is described both in letters from the ODPM to the Committee dated 6 February and 26 June (see the Annex to this Report) and in paragraphs 11 to 13 of the second Statement. The aim of the research was "to provide a robust estimate of the number and percentages of section 38 applications that were not accepted or failed, and the reason for failures". The consultation elicited responses from five organisations (out of nine approached) whose members consisted of, or included, small business occupiers about their views on the likely impact of the proposed new contracting out provisions. The consultation is described in the letter of 26 June (see Annex to this Report) and in paragraphs 14 and 15 of the second Statement.

7.  We considered this additional evidence, along with the reasoning set out in the accompanying letter, and concluded that, in the light of the evidence concerning both the nature and number of section 38 application refusals, we were satisfied that the proposed warning provided as effective a protection for tenants as that provided under the present arrangement involving the court and that, therefore, no necessary protection was lost under the contracting out provisions under the proposal. The ODPM were informed of our view in a letter dated 14 July (also set out in the Annex to this Report).


Regulatory Reform Committee of the House of Commons

8.  In response to a recommendation by the Regulatory Reform Committee of the House of Commons,[3] the ODPM has changed in minor respects the proposed procedure for agreements to exclude security of tenure and agreements to surrender. These changes are described in paragraphs 7 and 28 of the second Statement. Under the amended procedure, tenants who have received at least 14 days' notice of a proposed agreement to exclude security of tenure must also sign a simple, prescribed declaration that he or she has received the required "health warning" notice and has accepted the consequences of entering into the agreement. A similar requirement also applies to tenants who have received at least 14 days' notice of a proposed agreement to surrender. The ODPM acknowledges that the amendments create a new burden but takes the view that the burden is justified on grounds of maintaining necessary protection for the tenant, and that the other provisions of the 2001 Act relating to the creation of new burdens are satisfied. We agree.

9.  In its report, the Commons Committee also referred to two "additional burdens" which the Committee identified at "first-stage" scrutiny but which the ODPM did not fully address in its original Statement accompanying the proposal. These are mentioned at paragraph 26 of the second Statement and fully explained in Annex F to that Statement.

Other changes

10.  In addition, the ODPM has made a number of detailed changes to the draft order which it describes as "all of a minor, tidying up nature" which "do not fundamentally change any of the proposals". These changes are made mainly as a result of representations received since "first-stage" scrutiny and they are set out in paragraphs 31 to 44 of the second Statement. They concern provisions relating to applications to court by either the landlord or tenant for a new tenancy under section 24 of the1954 Act (Article 3 of the draft order), applications to court by the landlord to terminate a tenancy without renewal and section 64 of the 1954 Act (Article 5) and transitional provisions relating to existing leases which include reference to the section 38 procedure (Article 29). The ODPM suggests that the amendments to Articles 3 and 5 could be construed as new burdens. We accept the conclusion of the ODPM that if this is the case, then the provisions satisfy the requirements of the 2001 Act.


11.  In our first Report on this proposal, we concluded that it was appropriate to be made under the Regulatory Reform Act 2001 save in respect of those provisions relating to "contracting out" (Articles 21 and 22 and Schedules 1 to 4). In the light of further evidence provided by the ODPM concerning the nature and number of applications to contract out which are refused by the court, we now conclude that the contracting out provisions are appropriate for inclusion in the draft order. We also conclude that amendments to the order which have been made following "first-stage" scrutiny are also appropriate for inclusion in the draft order. We therefore recommend that the order, as it now stands, is in a form satisfactory to be submitted to the House for affirmative resolution.

2   4th Report, HL Paper 22, Session 2002-03. Back

3   2nd Report, Session 2002-03, HC 182. Back

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