The Landlord and Tenant Act (LTA) 1954 is under review, with the Law Commission’s first consultation paper highlighting potential reforms that could reshape the commercial property market.
These changes will directly impact the balance of power between landlords and tenants, making it essential for occupiers to stay informed and proactive.
What’s changing?
The review proposes four models for reform, each with significant implications:
- Mandatory Security of Tenure
All qualifying leases would automatically include security of tenure, with no option to contract out.
Impact:This would have a negative impact on investment values for landlords. The ability for landlords to increase rents at lease renewal would be limited, as negotiation power shifts towards the tenant. Mandatory security of tenure will also make properties harder to redevelop / repurpose, reducing attractiveness to potential investors. Landlords may look to recover costs in other ways such as increased initial rents or reduced rent-free periods offered.
- Abolition of Security of Tenure
Removes the right of business tenants to renew their leases.
Impact: If security of tenure was completely removed, leverage would fall in favour of the landlord. Tenants would need to take longer leases with breaks so that they can amortise their fit out costs. This would increase their Stamp Duty Land Tax (SDLT) liability and also affect their International Financial Reporting Standards (IFRS) accounting. This could be particularly challenging for tenants in sectors, especially retail warehousing, where substantial fit-out investments are common. Without renewal rights, these tenants face heightened financial and operational risks at lease expiry, making strategic planning and expert advice essential.
Another strategy would be to build in options to extend within the lease, however there may be a rental premium for these and, depending on the market, landlords may refuse.
- Contracting-In Model
Reversal of the default position, requiring tenants and landlords to explicitly agree to security of tenure. Leases would only be protected if the parties opt in.
Impact: This would require tenants to be more proactive during negotiations. Tenants unfamiliar with the legal framework or without representation may overlook the need to contract in, leaving them vulnerable to losing renewal rights. Landlords may leverage this as a negotiating tool, potentially demanding higher rents in exchange for agreeing to grant security of tenure. This model impacts long term trading plans, particularly for retail clients where trading is directly linked to location and therefore the potential change in value.
- Retention of the current system
Maintains the existing contracting-out model, where parties can agree to exclude security of tenure.
Impact: Familiar, but outdated provisions may fail to address modern market realities.
The LTA, enacted after World War II, no longer reflects today’s property market. Changes like the rise of e-commerce, post-pandemic shifts in demand, and sustainability requirements have left parts of the Act outdated and inefficient.
For our occupier clients potential reforms could significantly impact lease negotiations, redevelopment rights and rental costs. For example:
- Short-Term Tenancies: The current six-month exclusion from security of tenure may be extended to five years.
- Sector-Specific Impact: Tenants with significant fit-out costs face heightened risk under new frameworks.
ESG implications: The need for collaboration
Working in collaboration with Jones Hargreaves, we provide comprehensive ESG services tailored to specific client needs. Huw Davies, Head of ESG at Jones Hargreaves highlights that the shared responsibility of landlords and tenants to meet Environmental, Social, and Governance (ESG) and sustainability criteria has never been more critical.
He explains: Many landlords are now working to their own ‘minimum standards’ to future-proof their portfolios, tightening EPC requirements, aligning with Net Zero and demonstrating how their property assets stand out in an increasingly competitive market. Achieving sustainability goals hinge on collaboration between landlords and tenants, which has historically been difficult to achieve. The proposed modernisation (and simplification) of legislation is seen as a crucial step to removing traditional barriers, so that landlords and tenants will be better positioned to work together on decarbonisation and broader sustainability initiatives.
As the industry evolves, proactive collaboration enabled by modernised legislation will be key to driving meaningful progress on the ESG agenda.
How to prepare
Review your lease strategy:
Assess your current lease terms and renewal rights to identify any risks or opportunities that potential reforms may bring. Understanding your position now can help you proactively address future challenges.
Seek expert advice:
Engage with advisers, like the team at Newsteer, to navigate lease negotiations and safeguard your interests. Professional guidance can help you anticipate changes and protect your rights effectively.
Stay Informed:
The consultation closes on February 19th, 2025, and subsequent proposals later in the year will shape the final recommendations. Key issues under review include:
- Grounds for opposition under the LTA 1954, particularly Section 30(1)(f) (redevelopment).
- Updates to statutory compensation.
- Revisions to rent determination processes.
Proactive preparation now will ensure you’re ready to adapt and thrive in the face of potential legislative changes. At Newsteer, we specialise in advising occupiers on lease strategy, risk management, and compliance. If you’re concerned about how these reforms could affect your business, our expert team is here to help.
Get in touch
Email David Felman to discuss your leasehold strategy.