Select Committee on Delegated Powers and Regulatory Reform Fourth Report

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

16.  Thank you for your letter of 27 November setting out the Committee's concerns about our proposed revised procedures for contracting out of security of tenure.

17.  The Committee is concerned that the Department's 2001 consultation paper did not fully explore two issues:

  • whether the proposed new procedure for excluding security of tenure would lead to an increase in the number of leases contracted out of the security of tenure provisions; and
  • whether the existence of the court procedure deterred landlords from persuading tenants to join in an application for contracting out.

It is reluctant to assume that the Department's view is generally shared, particularly by groups representing tenants.

18.  On the first of these two issues, the Department has sought to simplify the procedures for contracting out agreements, while maintaining and indeed enhancing effective protection for tenants. The present procedures were introduced by an amendment under the Law of Property Act 1969. As we explained in the Memorandum submitted on 24 October, it is clear that the intention then was merely to ensure that the parties had reached a genuine agreement and had understood its implications. There was no mechanism which would have had the effect of limiting the scale of contracting out, and our proposals are no different in that respect. We therefore do not consider that the scale of contracting out would have been a relevant issue for our consultation.

19.  On the second issue, the proposals stem from a series of consultations by the Law Commission and the Department's predecessors, as set out in Annex B to the explanatory document laid before Parliament on 22 July. The Law Commission first discussed contracting out procedures in detail in its 1988 Working Paper[10], raising a number of issues, including whether the courts provided an effective and worthwhile filter; on what grounds were applications rejected; whether the statute should provide guidelines; and whether tenants required court protection. The Law Commission subsequently published its substantive proposals[11] in 1992 after taking account of responses to the Working Paper. In 1996 the Department of the Environment consulted on the Law Commission's 1992 proposals, subject to certain modifications (including proposals for an advance "health warning" notice for contracting out). The consultation paper issued by the Department of the Environment, Transport and the Regions (DETR) in 2001 took account of the outcome of the latter consultation exercise.

20.  In view of this history of consultation and the provisions of section 5(4) of the Regulatory Reform Act 2001, the 2001 consultation paper referred back to earlier documents where these issues had been fully discussed, rather than exploring issues from first principles. In their 1992 report, the Law Commission discussed the effectiveness of the court procedure, in the light of responses to their earlier Working Paper. They said:

"…those who expressed views were generally agreed that the process did not afford a real scrutiny of the circumstances, fairness or integrity of applications. We are satisfied that applications to the court to approve agreements that the statutory renewal rights should not apply to leases about to be granted are not an effective filter to prevent the abuse of what is generally assumed to be the landlord's dominant position."

The Department considers that, in view of this finding, it would have been unnecessary to consult again on the question of whether the court procedure is an effective safeguard. Nevertheless, we consider that any respondents holding a contrary view on the effectiveness of the court procedure would have taken issue with the narrative of the consultation paper (paragraph 6 of the 2001 consultation paper), which set out the arguments for change.

21.  On the substantive issue of whether the court procedure deters landlords from persuading tenants to agree to contract out, it should be noted that the court has a strictly limited role. The court is not asked to decide whether or not the prospective tenant should have security of tenure, but rather whether or not to approve an agreement between the parties that security of tenure should not apply in a prospective lease. If the court refused to grant an application, the landlord would be under no obligation to grant a lease with security of tenure; the likelihood is that the landlord would refuse to grant a tenancy.

22.  Moreover, the Landlord and Tenant Act 1954 does not set out any criteria for the court to apply in deciding whether or not to approve contracting out applications. The only role for the court is to ensure that agreements have been properly made and that tenants have had the opportunity to take legal advice. Applications have rarely been refused and then only on technicalities or points of law. The cost of making a court application is unlikely to deter a landlord, as it will be small in relation to the income from the letting, while landlords frequently require the tenant to pay their legal costs. We therefore consider it highly improbable that the mere existence of the court procedure has deterred landlords from persuading tenants to join in applications to contract out.

23.  The Department notes the Committee's doubts whether groups representing tenants favour the new procedures. We are satisfied that we have made thorough efforts to gauge the views of business tenants, including those at the smaller end of the market, and it may be helpful for the Committee for us to set out in some detail what we have done in this respect.

24.  In the 2001 consultation exercise, DETR consulted a number of bodies representing business tenants: the British Retail Consortium; NACORE Europe UK, (representing corporate occupiers); the Property Managers Association (representing High Street property managers); the Property Market Reform Group (a campaign group for greater leasing flexibility); the Alliance of Independent Retailers; the British Chambers of Commerce; the Confederation of British Industry; the Federation of Small Businesses; the Forum of Private Business; the Institute of Directors; and the Small Business Bureau. We received responses from the British Retail Consortium and the Forum of Private Business. We also received a joint response from Business in Sport and Leisure, the Brewers and Licensed Retailers Association and the British Hospitality Association.

25.  The British Retail Consortium (BRC), the major body representing business tenants, with members operating over 290,000 shops in the UK, supported the proposals in these terms:

"BRC supports the proposal to remove the procedural requirement of applying to the court. The courts deal with the matter as a rubber stamping exercise and little consideration is given to the contents of the application.

"BRC believes the proposed notice provisions are an improvement on the current system and by using appropriate health warnings adequate protection will be maintained. BRC thinks the health warning will alert more tenants who know nothing about security of tenure to what they are signing away rather than the current court application."

26.  The Forum of Private Business wanted assurances that the proposed procedures would not enable landlords to exploit uninformed tenants. In particular, they wanted to ensure that the proposed health warnings would be simple and transparent and issued at a realistic stage in the proceedings. The Forum subsequently attended the meeting which the then Minister, Ms Sally Keeble MP, chaired on 10 January 2002. At that meeting, the Forum welcomed the health warnings as "a tremendous step forward" and afterwards fed in comments on the wording of the proposed "health warning" notice that we took into account when drafting the proposed Regulatory Reform Order.

27.  The joint response from Business in Sport and Leisure, the Brewers and Licensed Retailers Association and the British Hospitality Association welcomed the proposals for simplifying the legislation and instituting "health warnings", but sought further information about how these would work before the legislation was introduced. As with all the other respondents to the consultation exercise, they subsequently received details of the Department's conclusions and of the proposed Regulatory Reform Order.

28.  Several tenants' bodies attended the meeting with Ms Sally Keeble MP, to which I have referred. Besides the Forum for Private Business, the British Retail Consortium and the Small Business Bureau were represented. The Property Market Reform Group, a body campaigning for more flexibility in business leases also attended, as did bodies representing landlords and the property professions. At that meeting, besides concerns that the proposed "health warnings" should be clear and transparent, there was concern that security of tenure should be retained, an assurance about which was given. None of those present favoured retaining the court procedure for contracting out.

29.  I hope this will allay the Committee's concerns about our proposals, but if we can provide any further information or clarification, we would be very pleased to help.

5 December 2002

10   Law Commission Working Paper No 111: Part II of the Landlord and Tenant Act 1954 Back

11   Landlord and Tenant - Business Tenancies: A Periodic Review of the Landlord and Tenant Act 1954, Part II (Law Com No 208), Law Commission, 1992 Back

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