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



Letter from the Office of the Deputy Prime Minister to the Clerk[6]

In their 4th Report for the Session 2002-03, the Committee recommended that we omit proposals to modify the procedures for agreements between landlords and tenants to exclude security of tenure ("contract out") and agreements to surrender from the proposed Regulatory Reform Order. Their concerns were twofold:

  • that (as we acknowledged) we lack detailed statistical data about the proportion of applications to exclude security of tenure which the courts have rejected, and the grounds on which they reject them. The Committee considered that without this information, they could not be sure that the courts were not inhibiting the routine contracting out of tenancies;
  • that we did not specifically ask consultees for their views on whether the introduction of the proposed procedure would lead to a significant increase in contracting out or of possible abuse where the landlord is in a dominant position because of his or her strong position in the market.

We wish to explore with the Committee whether there is scope to satisfy them on these points, consequently enabling us to retain the "contracting out" provisions in an amended draft Order presented for second stage scrutiny. We propose to:

  • carry out research to determine the proportion of applications to the court which fail, and why they fail; and
  • consult tenants' representatives, and in particular small business organisations, about the likely impact on contracting out.

I enclose further details of the proposed research and consultation at Annexes A and B.

It would be helpful to know whether, in principle, the Committee would be prepared to withdraw its objections to use of powers under the Regulatory Reform Act 2001 if the outcome of the proposed research and consultation was to satisfy their concerns. The Committee might also wish to bear in mind that if they were content for us to retain these proposals in an amended draft Order brought forward for Stage Two scrutiny, we propose to adopt the two recommendations of the House of Commons Regulatory Reform Committee:

  • that where the tenant had received 14 days advance notice of a proposal for a an agreement to exclude security of tenure, the tenant should be required to sign a simple, prescribed declaration that he or she had received the notice and had accepted the consequences of entering into the agreement to exclude security of tenure or the agreement to surrender; and
  • that where the tenant had not received 14 days notice and as a consequence had to sign a statutory declaration before an independent solicitor, the declaration should come at the end of the form, to avoid any question of the tenant having to pay a second fee for an appended separate exhibit.

The Committee might also wish to bear in mind that we have undertaken to review the workings of the new procedures after they have been in force for one year. We are proposing to report on the outcome of this review to the two scrutiny Committees. Our review would embrace the impact of the modified contracting out procedures, and whether they had affected the degree of contracting out.

6 February 2003

Letter from the Clerk to the Office of the Deputy Prime Minister

Thank you for your letter of 6 February in which you set out the proposed research and consultation that you intend to undertake in order to meet the points raised by the Delegated Powers and Regulatory Reform Committee in its 4th Report.

Your letter was put before the Committee at its meeting yesterday.

The Committee would be pleased to consider any further evidence which you are able to offer in response to the concerns raised by the Committee at first-stage scrutiny. Should the provisions relating to contracting out be included in the draft order submitted for second-stage scrutiny, the evidence which you intend to gather will be highly relevant to the Committee's decision.

13 February 2003

Letter from the Office of the Deputy Prime Minister to the Clerk [7]

1.  I refer to my letter of 6 February following the Committee's Fourth Report, Session 2002-03, about the Office's proposals to reform the workings of Part 2 of the Landlord and Tenant Act 1954, by means of a Regulatory Reform Order (RRO). I am writing to you about the outcome of the research and further consultation we proposed and the implications for presenting the draft Order for second stage scrutiny.

2.  In its conclusions in its Fourth Report the Committee recommended that we omit the "contracting out" provisions from the Order. Its views were that:

  • the evidence presented did not suggest that 1969 amendments to the Landlord and Tenant Act 1954 had made the protection to tenants illusory;
  • the Office had not shown to the Committee's satisfaction, either by presenting reliable statistical evidence, or consulting in sufficiently specific terms, that the present procedure did not deter landlords from contracting out; and
  • if there was any doubt that the Office's proposals might lead to a de facto removal of security of tenure, the correct course would be to proceed by a Bill rather than a Regulatory Reform Order.

3.  In my letter of 6 February I proposed that we would seek to address the Committee's concerns by:

  • carrying out research into the present court handling of section 38 applications: what proportion of applications fail and why they fail;
  • consulting organisations with small business members about the likely impact of the procedural changes on the scale of contracting out.

This work is now complete. I enclose a copy of the research undertaken by Bristol and Sheffield Hallam Universities on the court handling of section 38 applications and our summary of the consultation responses together with copies of the responses themselves.


4.   The research team studied applications received in June 2002 at nine courts in England and Wales. The courts were selected to include those handling the largest volume of business and others to reflect a geographical and regional spread. The nine courts accounted for 35% of all section 38 applications in 2001.

5.  The research confirms anecdotal evidence that very few applications fail. The courts approved 91.5% of applications on initial submission. 88.9% of those refused were subsequently resubmitted. Only 0.8 - 3.3% of cases were unsuccessful. The report shows that applications most often failed initially because of a technical error in the application. The next most common cause of failure was the lack of evidence that the tenant had been legally represented. The researchers found no evidence of judges intervening to protect the tenant from an "unfair" bargain. Their findings confirm our view that the role of the judge is merely to check that the agreement is lawful and genuine, and that the tenant has had an opportunity to receive advice about the prospective loss of statutory rights. The judges are therefore performing an administrative rather than a judicial role, in some cases delegating scrutiny of applications to court officials.

6.  While the research was taking place, the Property Law Website carried out a survey of solicitors who had submitted section 38 applications during 2002. The results were very similar to the findings of the Bristol and Sheffield Hallam research team. 38 solicitors responded. Of 2,416 applications, 95% were approved and only 0.7% were rejected on what the respondents claimed were substantive grounds. I enclose a copy of the report, Appendix 3 of which includes a commentary on the reasons for rejection.


7.  Using a proforma questionnaire, we consulted nine organisations whose members consisted of, or included, small business occupiers, about the likely impact of the proposed new contracting out provisions. The five respondents who replied considered that there would be an increase in contracting out following the reforms.

8.  One respondent, the Federation of Small Businesses, considered that the reforms would increase the degree of contracting out so much that it would be difficult for tenants to obtain security of tenure. Another, the Small Business Bureau, considered that the position would lie between there being some increase in contracting out levels, and it becoming very difficult for tenants to obtain security of tenure. The Property Market Reform Group did not complete the proforma questions, but said that there would be a great increase in contracting out. Two respondents, the Alliance of Independent Retailers and the Institute of Directors, considered that while there would be some increase in contracting out, a significant number of new leases would still have security of tenure.


9.  The Committee may find it helpful to have a statement of our position in light of the outcome of the research and further consultation.

10.  The Office's policy is that business tenants should have the right to renew their leases, unless the tenant has agreed to contract out of security of tenure or the landlord is able to oppose renewal on limited, specific grounds. An important qualification is that the tenant should be aware of the implications of a contracting out agreement before entering into the lease. A contracted out lease would remove the normal rights of the tenant to renew the lease or, if the landlord successfully opposed renewal on certain specific grounds, to receive compensation. Part 2 of the Landlord and Tenant Act 1954 at present seeks to alert tenants to these consequences, by requiring the landlord and tenant jointly to obtain court approval for such an agreement before entering into a lease.

11.  There is no intention to change the policy underlying Part 2 of the 1954 Act. Security of tenure will remain the default option. The Office proposes to change procedures for agreements to contract out, in particular by substituting new safeguards for the present requirement to obtain prior court approval for contracting out agreements.

12.  In considering the impact of the proposed changes, it is worth noting that the original right of security of tenure which the Landlord and Tenant Act 1954 Act conferred is already somewhat circumscribed. The 1969 amendment to the Act permitting agreements to contract out, subject to court approval, has given landlords in a strong market position the ability to prevail on tenants to agree to contract out. If a court refused to sanction such an agreement, the tenant would not be entitled to a lease with security of tenure; the likelihood rather is that the landlord would refuse to grant a lease. The courts have no power to insist that a tenancy should have security of tenure. In this respect, the Act already provides only limited protection. The proposals will not change this position.


13.  The Office's proposals to change the contracting out procedures are intended to simplify the present procedures, without removing any necessary protection, which is why we consider that they are an appropriate use of the powers under the Regulatory Reform Act 2001. The present procedures, involving a joint application to the courts, could be considered burdensome, especially in the many cases where both parties have access to legal advice and are aware of the implications of contracting out.

14.  The issue the Committee has raised is essentially whether removal of the requirement for court approval would remove or reduce a necessary protection for tenants. In any discussion of the Office's proposed changes to contracting out procedures, it is relevant to consider what protection the existing court procedure provides. In their 1992 report, reflecting the outcome of consultation carried out in 1988-89, the Law Commission acknowledged that some constraint was needed, but said:

"…the purpose and nature of that constraint must be such as to ensure that the prospective tenant only agrees to contract out if he understands the nature of the statutory rights which he is agreeing to forego. A court application is not the only, nor necessarily the best, way to achieve that purpose. As it operates at present it is not even an effective way to do so."

15.  As mentioned, the courts have no power to insist on a tenancy being granted with security of tenure. They can however refuse to sanction an agreement to exclude security of tenure. The Office's research however confirms that agreement is rarely withheld, and in particular confirms that the courts do not consider the nature of the bargain. The report from Bristol and Sheffield Hallam Universities shows that the courts intervene in four circumstances:

  • where the application is technically deficient, for example there is a missing signature. Nearly all of these applications are corrected and returned for subsequent approval;
  • where the application is invalid on a point of law. An example of this would be where the tenancy runs for less than six months and there is no right to renew;
  • where the tenant is unrepresented and has not had the opportunity to seek legal representation;
  • in a very few cases, the judge used his or her discretion to refuse an application, for example where the application did not include a statement of the reasons why the parties wished to contract out.

16.  There is no evidence of judges deciding cases on the merits of the bargain between landlord and tenant. We are not aware of any instances of court hearings where the tenant has been able to argue against the loss of renewal rights. As applications are routinely approved, it is hard to see how the need to apply to court deters landlords from exploiting a dominant position in the marketplace and insisting on a contracted out tenancy. The only necessary protection afforded by the need for a court application is to ensure that the tenant understands the nature and effect of the bargain he is entering. In the Office's view the protection afforded by the health warning will be as effective, if not more effective, than the protection afforded by a court application.

17.  One significant deficiency of the present procedures is that tenants who have not taken legal advice are not necessarily urged to do so. Where tenants are unrepresented, the courts will usually look for confirmation that the tenant has had the opportunity to take legal advice but has declined to do so. They will usually accept as evidence a proforma signed by the tenant (or the tenant's solicitor) that he or she is aware of, and understands, the legal rights they are giving up as well as appreciating that they could, if they so wished, have taken legal advice. Such a proforma can be presented to the tenant as part of the formalities that are necessary to obtain a lease on the landlord's terms. There is no guarantee under the present process that the tenant will hear or see any guidance that it is best to seek professional advice before entering into such an agreement.

18.  The Office's proposals, as they will be revised following one of the recommendations from the House of Commons Regulatory Reform Committee, will provide better protection for the tenant in this respect. In all cases, the tenant will sign a declaration that he or she has read the plain English "health warning" about the implications of contracting out, before entering into the lease. Where tenants have legal representation, their solicitors will ensure that their clients fully understand what they are doing before agreeing to contract out. Where tenants are not represented, they will see the following wording in boldfaced, underlined type at the beginning of the "health warning":

"You are being offered a lease without security of tenure. Do not commit yourself to the lease unless you have read this message carefully and have discussed it with a professional adviser."

19.  Over the years, there has been a considerable increase in applications for court approval of contracting out agreements. In 1986 (as reported by the Law Commission), there were 11,651 applications. The figure currently is in the order of 50,000 per year. In the current market, many tenants, particularly small business tenants, are seeking short leases, to avoid commitments extending beyond their immediate business planning horizons. In the past, landlords have generally preferred granting longer leases providing security of income, but in response to demand for shorter leases, have been prepared to grant them on condition that the tenant agrees to exclude security of tenure. In 1999, the British Property Federation published a standard form of lease, for tenancies up to three years, the terms of which include an agreement to exclude security of tenure. Several factors now point to a prospective increase in the number of shorter leases: the Office's policy of promoting greater choice and flexibility in the commercial leasing market, through a voluntary Code of Practice; changes in the treatment of leases in company accounts; and the recent Budget changes in Stamp Duty.

20.  It is therefore highly likely that in the period following the reforms, there would be an increase in shorter leases accompanied by an increase in contracting out agreements, for reasons unrelated to the proposed reforms. The small business organisations responding to the consultation exercise suggested that the removal of the requirement to apply to court would in itself result in an increase in the number of tenancies which are contracted out. Whether or not that proved to be the case, the proposed reforms aim to provide a simpler and less costly procedure for contracting out, while not losing any necessary protection. They would satisfy the demand for short, flexible contracted out tenancies, while giving tenants a better understanding of the effect of contracting out.


21.  The Committee may be aware of a recent article by Hazel Williamson QC published in the Estates Gazette. Besides being an eminent QC and a deputy high court judge, the author is a member of the Office's Property Advisory Group. The article appeared before the results of the research became known, and we do not consider it well founded. I attach a copy of the article, together with a commentary on it.


22.  As argued above, there may be more contracting out following the introduction of the proposals, especially with the present impetus towards short leases, but our reforms would not result in the loss of a necessary protection for tenants.

23.  The research by Bristol and Sheffield Hallam Universities confirms our view that the courts play a very limited role in considering applications for approval to exclude security of tenure. Bearing this in mind, we consider that our proposals should be no less effective in protecting tenants, and in some respects more so. They provide for clear "health warnings" to prospective tenants, including emphatic guidance that they should take professional advice before agreeing to contract out, coupled with a requirement for the tenant to declare that he or she has read the warning and has accepted its consequences.

24.  We do not consider the reforms are controversial. This area of law has now been the subject of four consultation exercises. Tenants' organisations have not raised concerns about the proposals, despite having active concerns about certain other aspects of current leasing arrangements.

25.  In your letter of 13 February, you confirmed that any further evidence we presented in response to the Committee's concerns would be highly relevant to its consideration of proposals to retain the modified contracting out provisions in an Order presented for second stage scrutiny. Bearing that in mind and the observations above, we are contemplating laying for second stage scrutiny a slightly revised draft of the Order that would include provisions to amend the section 38 procedures as originally proposed.

26.  However, before formally laying a revised draft of the Order and an accompanying explanatory document, we would welcome the views of the Delegated Powers and Regulatory Reform Committee about the inclusion of the proposed "contracting out" provisions. Although the House of Commons Regulatory Reform Committee did not express the same reservations about the "contracting out" provisions, we would also welcome their views on these proposals. I am therefore copying this letter with copies of the research and consultation responses to Martyn Atkins.

26 June 2003

Letter from the Clerk to the Office of the Deputy Prime Minister

Thank you for your letter of 26 June, setting out the outcome of the research and further consultation which you undertook in the light of the Committee's comments in its 4th Report (Session 2002-03) on the "contracting out" provision of the proposed Regulatory Reform (Business Tenancies)(England and Wales) Order 2003. The Committee considered your letter and the accompanying documents at its meeting on Wednesday 9 July.

The Committee's principal concerns, expressed in its 4th Report, were twofold: first, that the effect of the new provision should not be such as to increase the number of "contracted out" cases to an extent which would undermine the protection afforded by the Landlord and Tenant Act 1954; and second, that the (present) involvement of the court should be shown to be as ineffective as alleged in protecting tenants' interests.

On the first point, the Committee remarked on the inconclusiveness of the consultation that was undertaken but recognised the limited scope of the exercise. On the second point, the Committee noted in particular the statistical evidence summarised in paragraph 7 of your letter which indicated that the refusal rate for applications to contract out of security of tenure by landlords and tenants of business tenancies was likely to be significantly lower than had appeared to be the case when the Committee considered the matter at the end of last year. The Committee also noted your description, in the same paragraph, of the reasons why applications were refused by the court. Although members of the Committee expressed some concern that there remained a small number of applications which were refused on the ground that there was no evidence that the tenant had been legally represented, the Committee concluded that, in the light of this further evidence concerning both the nature and number of refusals, they were satisfied that the proposed health warning provided as effective a protection for tenants as that provided under the present arrangement and that, therefore, no necessary protection is lost by this alternative provision.

14 July 2003

6   Enclosures and annexes not printed.  Back

7   Enclosures not printed. Back

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