Select Committee on Delegated Powers and Regulatory Reform Fourth Report


FOURTH REPORT


By the Select Committee appointed to report whether the provisions of any bill inappropriately delegate legislative power, or whether they subject the exercise of legislative power to an inappropriate degree of parliamentary scrutiny; to report on documents and draft orders laid before Parliament under the Regulatory Reform Act 2001; and to perform, in respect of such documents and orders and subordinate provisions orders laid under that Act, the functions performed in respect of other instruments by the Joint Committee on Statutory Instruments[1].

ORDERED TO REPORT

PROPOSAL FOR THE DRAFT REGULATORY REFORM (BUSINESS TENANCIES) (ENGLAND AND WALES) ORDER 2003

INTRODUCTION

1.  The proposals relate to the leasing of commercial premises in England and Wales, currently governed by Part II of the Landlord and Tenant Act 1954. The 1954 Act gives tenants the right to remain in their premises when their tenancy ends and to seek a new tenancy based on the current open market rent. Landlords can oppose renewal on a number of specified grounds; some of these involve the tenant being at fault (e.g. failure to pay rent), but some do not (e.g. the landlord intends to redevelop the premises). The background is more fully explained on pages 2 and 3 (paragraphs 4 to 7) of the Department's Statement laid under section 6 of the Regulatory Reform Act 2001 ("the 2001 Act"). Attached as Annex 1 to this Report is the correspondence between this Committee and the Office of the Deputy Prime Minister. Annex 2 contains the transcript of evidence of officials of the Office of the Deputy Prime Minister. We thank them for the assistance they gave us.

2.  The proposals are intended to maintain the principle of the 1954 Act whereby a balance is struck between the rights of the landlord and those of the tenant. There are, broadly, a number of related reforms presented as a package:

(a)  Approval of the court to agreements to exclude security of tenure would no longer be required. Instead, the landlord would normally be required to draw the consequences of such an agreement to the tenant's attention at least 14 days in advance ("health warning" procedure) (Articles 21 and 22 of the draft Order).

(b)  Approval of the court to agreements to surrender a tenancy at some time in the future would similarly no longer be required. Instead a health warning procedure would apply (Articles 21 and 22).

(c)  It would be made clear that a tenant who vacates the premises before the end of the contractual term, or who gives 3 months notice before that date to end the tenancy, has no continuing obligations after that date (Article 25).

(d)  The requirements on landlords and tenants to give each other information to operate the relevant statutory procedures would be extended, in particular so as to require a six-month updating (Articles 23 and 24).

(e)  A landlord not opposing the grant of a new tenancy would be required to set out proposals for the terms of a new tenancy when terminating the old one (Article 4).

(f)  The procedure for terminating and renewing tenancies would be changed to remove current requirements for notices and counter-notices to be served to specific deadlines, the missing of any of which can prove costly for a tenant (Articles 4 and 5).

(g)  The landlord, as well as the tenant, would be permitted to apply to the court for renewal of a tenancy, to avoid delay by the tenant (Articles 3 and 4).

(h)  Provisions for treating related business entities (whether landlords or tenants) as the same person would be extended to reflect commercial reality (Articles 13 to 17).

(i)  Adjustments would be made to the provisions whereby an interim rent is payable by the tenant, after the end of the old tenancy, pending renewal. Tenants (instead of only landlords) would be able to apply to the court for an interim rent to be fixed; and the method by which it is calculated would be altered (Article 18).

(j)  The circumstances in which a tenant may claim compensation from a landlord for misrepresentation would be extended to cover cases where the misrepresentation induces the tenant not to apply to the court for a new tenancy or to withdraw an application which he has made. (Currently the tenant can claim only where the misrepresentation induces the court to refuse a new tenancy) (Article 20).

(k)  The three months' notice given by a tenant to end the tenancy under which he continues to occupy the premises after the end of the old tenancy (a "holding over" tenancy) would no longer have to expire on one of the traditional quarter days (Article 25).

(l)  The courts would be able to grant new tenancies for up to 15 years, rather than 14 years at present (Article 26).

(m)  The procedure for renewal etc. would be operable where there was a single lease but more than one landlord (Article 27).

3.  Each of the proposals is discussed at pages 3 to 6 of the Department's Statement and at Annex A to the Statement, where a commentary is given on each Article of the draft Order. Items (a) and (f) to (i) above are perhaps the most significant.

BURDEN

4.  Not each of the proposals removes or reduces a burden, but the 2001 Act does not require this. It requires that the order must include at least one provision which removes or reduces a burden (section 1(3)). The Committee accepts that the following burdens, in particular, would be removed or reduced by the proposed Order:

  • The burden on landlords and tenants to seek a court order endorsing their agreement to exclude the security of tenure provisions or endorsing an agreement to surrender a tenancy.
  • The burden on a tenant to serve a counter-notice or else lose the right to renew.
  • The burden on a tenant to give more than three months' notice to end a "holding over" tenancy, where the three months' would not expire on a quarter day.
  • The burden on a tenant to make an application to the court only within strict time limits.

5.  The proposed Order would also re-enact some existing burdens and remove inconsistencies and anomalies.[2]

CONSULTATION

6.  The proposals have their origins in papers prepared by the Law Commission in 1988 and 1992. The Department conducted two consultation exercises - in 1996 and 2001. Although the 2001 consultation began before the 2001 Act came into force, section 5(4) of that Act enables it to count for the purposes of the proposed Order. Those consulted included the Law Commission and the National Assembly for Wales. A summary of the responses, with the Department's conclusions, is at Annex B1 to the Department's Statement. (The list of those responding is on pages 97 to 99). The Department has modified its proposals in the light of the consultation (see, e.g., page 72 of the Statement).

7.  The package of reforms has been generally welcomed, but views have been expressed on the merits of particular proposals. There is no indication that the proposals have attracted a level of controversy which would make the 2001 Act procedure inappropriate. Subject to one reservation (paragraph 25 below), the Committee accepts that there has been adequate consultation.

NECESSARY PROTECTION

8.  Only two of the proposals seem to involve serious questions as to whether any necessary protection is being lost - those relating to court approval for agreements excluding security of tenure and renewal procedure.

Court approval

9.  The existing requirement for court approval of agreements for excluding security of tenure and agreements to surrender tenancies is intended to protect the tenant from unscrupulous landlords who might otherwise dupe the tenant into signing away his rights. The Department believes that, in practice, courts "rubber stamp" many arrangements. The alternative "health warning" arrangements are intended to provide at least as effective an alternative more quickly and at lower cost. But the Committee has serious reservations about this aspect of the proposals. These are discussed at paragraphs 15 to 25 below.

Renewal procedure

10.  The requirement that a tenant receiving a landlord's notice to terminate the tenancy must serve a counter-notice within strict time limits is intended to protect the landlord from being in a position of uncertainty, not knowing whether he can arrange to let the premises to someone else. The proposals address this issue by giving the landlord the right to apply to the court to renew the tenancy, thus bringing matters to a head. If one of the grounds for terminating the tenancy applies, the landlord may always apply himself for termination (new section 29(2)). The Committee feels that, in these circumstances, the position of the landlord is adequately protected.

REASONABLE EXPECTATION

11.  The intention of the 1954 Act is to restrict the freedom of landlords to regain possession of business premises at the end of a tenancy. We see nothing in the proposals which would prevent people from exercising a freedom which they might reasonably expect to continue to exercise.

PROPORTIONALITY AND FAIR BALANCE

12.  The proposed Order would create some new burdens.[3] These are largely as substitutes for other burdens being removed. The increased requirement on landlords and tenants to give information is to further the functioning of the new and the existing procedures.[4] These burdens satisfy the tests of fair balance and proportionality.

SUBORDINATE PROVISIONS

13.  The proposed order designates Schedules 1 to 4 of the order as subordinate provisions and provides that they may be amended by a statutory instrument subject to the negative resolution procedure. Schedules 1 to 4 prescribe forms of notice and the requirements for a valid agreement to exclude security of tenure or to surrender a tenancy. We conclude that this would be an appropriate use of the subordinate provisions procedure were these Schedules to be included in the Order. Application of the negative resolution procedure would be in line with similar provisions of the 1954 Act about prescribing forms.

THE PROPOSAL GENERALLY

14.  Although these are important proposals, affecting a large number of people, we conclude that the proposed Order is, subject to one exception, an appropriate use of the powers under the 2001 Act and meets the requirements of the Act.

AGREEMENTS EXCLUDING SECURITY OF TENURE ETC

15.  The Committee is not persuaded that a sufficient case has been made for the inclusion of the proposed provisions on agreements to exclude security of tenure ("contracting out"). Since similar considerations apply to the proposed provisions on agreements to surrender a tenancy at some time in the future, the Committee is not persuaded that a sufficient case has been made for those provisions either.

The 1954 Act as originally enacted

16.  The 1954 Act originally contained no provision allowing landlords or tenants to agree that the security afforded to tenants by the 1954 Act should not apply. That security was a fundamental concept of the Act.

The Law of Property Act 1969

17.  Section 5 of the Law of Property Act 1969, implementing a Report of the Law Commission, allowed landlords and tenants to agree to exclude the provisions of sections 24 to 28 of the 1954 Act (the security of tenure provisions), but only if the court authorised it. It appears to have been the intention that the court should ensure that the consent of the parties was genuine and freely given, and that the Housing Act 1961 was taken as the model. Though it may have been envisaged that the court may wish to check that the terms of the agreement were prima facie in the interests of both landlord and tenant,[5] the court of Appeal has since held (Metropolitan Police Commissioner v. Palacegate [2000] 3WLR 519) that the court is neither empowered nor entitled to consider the fairness of the bargain.

Law Commission Report 1992

18.  The Law Commission concluded in 1992 that applications to the court to approve agreements excluding the security of tenure provisions were 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 applications to the court. One of the difficulties mentioned by the Law Commission was the lack of information as to why about 15% (at that time) of applications to the court were rejected. The Law Commission considered that allowing unrestricted contracting out would fundamentally undermine the statutory scheme and that there had to be a constraint to ensure that the prospective tenant only agreed to contract out if he understood the nature of the statutory rights which he was agreeing to forego. The Department's proposal has its origins in this Report of the Law Commission though the procedure proposed is different.

The Committee's Views

19.  The evidence does not indicate that the 1969 Act has altered the original principles of the 1954 Act to an extent that renders the protection afforded to tenants illusory. The Committee considers that if there is any doubt that the Department's proposals might lead to a de facto removal of the security of tenure protection the correct course of action is to proceed by a Bill rather than an order under the 2001 Act. Accordingly, the Committee would need to be satisfied that the proposal, in achieving its aim of removing burdens for those wishing to contract out, would not have the additional consequence of increasing the number of "contracted out" cases to an extent that undermined the protection afforded by the 1954 Act. It would also need to be satisfied that the involvement of the court under the existing procedure was as ineffective as is alleged in protecting tenants' interests.

20.  Despite the Department's best efforts and some anecdotal evidence, there appears to be no reliable statistical evidence as to the number of tenancies currently contracted out each year, although for 1985 the figure of 10,300 was quoted to us, and for 2001 we were told that some 52,000 applications were made to the Court for approval of agreements under section 38(4) of the 1954 Act. This latter figure however includes agreements to surrender as well as agreements to exclude security of tenure. There also appears to be no reliable evidence as to the proportion of contracted out tenancies in relation to the total number of tenancies to which Part II of the 1954 Act applies.

21.  We heard that in 1989 some 21% of applications to contract out of security of tenure were rejected by the Court. The Department accepted that they had no evidence to indicate that this figure has materially changed. If that be so, then it would appear probable that in several thousand cases a year the Court has declined to give its approval to an agreement between landlord and tenant to contract out of the tenant's statutory right to security of tenure.

22.  Nor can the Committee be sure of the reasons for rejection by the Court. We note that in a Government consultation paper on reform of business tenancies legislation, published in March 2001, it is stated that the Court might reject an application either because it is technically deficient or there is some doubt that one of the parties has understood its rights. Furthermore, there is inadequate data about whether rejected cases are subsequently approved.

23.  Without reliable information on these issues, it is difficult to gauge the precise extent to which the involvement of a third party (the Court), inhibits the possibility of contracting out becoming routine in all cases, and so inhibits the potential abuse of the landlord's position which it was the intention of the 1954 Act to prevent.

24.  The Committee has looked to the results of the consultation to see whether, nevertheless, there is a general consensus that the proposals will not have that effect. Those consulted, whilst asked to address the criteria in the 2001 Act, were not asked specifically whether they felt that the proposed procedure would lead to a significant increase in contracting out or possible abuse of a landlord's position where it was dominant. (Whether the landlord's position is in fact dominant and, if it is, the extent of the dominance, will depend on market conditions.) Respondents who did mention this issue seem to have shared the Committee's concerns even where, on balance, they approved the proposal. So the Committee feels unable to assume that tenants' representative groups, in particular, share the Department's view that the security of tenure provisions of the 1954 Act will not be undermined by the proposed change.

25.  In view of these uncertainties, the Committee doubts that this aspect of the proposal is suitable for an order under the 2001 Act. In terms of that Act, the Committee is not satisfied, either by reliable statistical evidence or the results of the consultation, that the Order would not remove a necessary protection for tenants.

RECOMMENDATION

26.  The Committee recommends that Articles 21 and 22 of, and Schedules 1 to 4 to, the proposed Order should be omitted, and any consequential changes (such as omitting Article 28(3) to (8)) should be made.

27.  In all other respects, the proposals are satisfactory and, in the Committee's view, meet the requirements of the 2001 Act.


1   This report is also published on the Internet at the House of Lords Select Committee Home Page (http://www.parliament.uk), where further information about the work of the Committee is also available. Back

2   Details are in Annexes F3 and F4 of the Department's Statement, which can be found at http://www.cabinet-office.gov.uk/regulation/act/proposals.htm. Back

3   Department's Statement, Annex F7. Back

4   Department's Statement, Annex F3. Back

5   HL Deb [24 April 1969] (Session 1968-69) col 562. Back


 
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