Select Committee on Delegated Powers and Regulatory Reform Fourth Report


Memorandum by the Office of the Deputy Prime Minister

6.  This memorandum addresses the five questions the Clerk to the House of Lords Select Committee on Delegated Powers and Regulatory Reform raised in his letter of 18 October.

(1)  Of the 54,000 applications each year (Annex G, para 9), how many result in the court's approval of the agreement to exclude security of tenure?

7.  The Court Service does not maintain records of how many applications are approved. However, they confirm that the courts refuse a negligible proportion of applications, and that these refusals are only where there has been a technical defect in the application.

(2)  What is the average number of business leases concluded each year to which Part 2 of the Act applies (inclusive of the 54,000)?

8.  Specific information about the number of leases subject to Part 2 of the Landlord and Tenant Act 1954 is not held, nor can an estimate be derived from available data sources:

  • Land Registry: at present, only leases of 21 years or over have to be registered. Most business leases are now much shorter than this;
  • The Valuation Office Agency maintains data for business rates purposes. This shows that there are a total of 1.7m premises in England and Wales which are subject to business rates. If leased, these would generally be subject to the Landlord and Tenant Act 1954, but the Agency does not differentiate between freehold and leasehold property. It is not possible to deduce how many leases are concluded each year.
  • The Stamp Office (Inland Revenue) has data for leases which have been stamped for Stamp Duty. However, Stamp Duty is not payable on leases where the annual rent is less than £5,000 and the lease is for a period of less than seven years. Where Stamp Duty is not payable, parties will often not have the lease stamped, so this figure would not be a reliable guide to the number of leases subject to Part 2 of the 1954 Act.

Our best guess of the number of annual lettings under the 1954 Act (including those in which security of tenure has been excluded) would be in the region of 60,000 to 100,000 per year.

  1. It is said (page 39 of the Statement) that courts do not consider cases on their merits and are not required to exercise any discretion. What does the Department consider to be the function of the court in considering applications?

9.  Section 5 of the Law of Property Act 1969 (amending Part 2 of the Landlord and Tenant Act 1954) established the present role of the courts in considering applications to approve agreements to exclude security of tenure. Its provisions reflected Law Commission proposals that parties should be able to make such agreements, provided the court had sanctioned them in advance. The relevant extract from the 1969 Law Commission Report is at Annex A.

10.  Notes on Clauses for the Law of Property Bill confirm that Ministers intended the courts to ensure that agreements were genuine and that the parties understood their implications:

"It will be the court's function on an application under this clause to satisfy itself that the parties have reached a genuine agreement for their mutual benefit and understand the effect of that agreement. Subject to that, the court would have no reason to withhold its sanction. The necessity to obtain such sanction is thought to be a sufficient protection for the tenant against the possibility of his being induced to sign away his rights under Part II of the Act without good reason."

In debate in the House of Commons, the then Solicitor-General said:

"… the court's function under the Clause is not to act as a rubber stamp, but to satisfy itself that the parties have reached a genuine agreement for their mutual benefit and that they understand its effect."[6]

11.  A Court of Appeal case in 2000[7] confirmed that the courts are still operating the law as had been envisaged, holding that the court is neither empowered nor entitled to consider the fairness of the bargain which the parties propose to make. The Court of Appeal said that the purpose of section 38 is to enable a court to satisfy itself that the prospective tenant understands that he or she is foregoing the protection of the Act. In an earlier case[8] the court had said that the agreement concerned was "made by business people, properly advised by their lawyers. The court has no material on which to refuse [to grant the order]."

  1. What effect does the Department believe its proposed new arrangements will have on the number of tenancies concluded each year in respect of which security of tenure is excluded?

12.  It is difficult to forecast what the impact of this new provision is likely to be. This will partly depend on developments in the commercial property market, including trends towards shorter leases and more flexibility. There have been signs of more contracting out in recent years, particularly in shopping centres, and the new provisions may reinforce these trends. However, we would expect that parties to business leases would be more likely to consider the nature of the business and the contract rather than the regime for excluding security of tenure when deciding whether or not security of tenure should apply.

13.  On the other hand, there is some incentive for landlords to grant security of tenure, as such leases are likely to command higher rents than those where security of tenure has been excluded. The Department hopes that the proposed new "health warning" provisions would encourage tenants to consider carefully what arrangement would be in their best interests, and in particular to obtain appropriate professional advice before agreeing to exclude security of tenure.

  1. Annex E to the Statement (para 109) does not specify whether the introduction of new procedures for excluding security of tenure would remove any necessary protection for tenants. What protection does the Department consider is provided by the present arrangements?

14.  We regret that there was an error in Annex E, which should have reflected the equivalent entry in Annex A to the consultation paper, which read as follows:

"The proposals would remove the need for the parties to seek prior court approval for agreements to exclude security of tenure, but the notice provisions would maintain protection for the tenant by drawing attention to a "health warning" explaining the consequences of agreeing to exclude security of tenure."

15.  At present, the courts confirm that the parties have validly agreed to exclude security of tenure. The form used confirms that the parties and their solicitors have consented to the proposed exclusion order. The courts therefore provide a modest degree of protection. It should however be noted that the involvement of solicitors in the preparation of the order does not necessarily imply that tenants have obtained substantive professional advice.

24 October 2002


6   Hansard, HC Deb (1968-69), col 500 Back

7   Receiver of Metropolitan Police v Palacegate Properties [2000] 3 WLR 519 CA Back

8   Hagee (London) v Erikson (A.B.) and Larson [1976] Q.B. 209 Back


 
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