The Rent Review Specialist
s25 and s26 notices - The landlord's perspective
03/07/2014
… you can find out about section 25 and section 26 notices respectively in more general terms, but here I talk about some of the ways the 1954 Act notices and procedures may be used tactically by landlords… For further reading please visit LandlordZone
Tenancy Expiry and renewal - Some Pitfalls
01/12/2013
On expiry of a business tenancy that qualifies for renewal rights per the Landlord and Tenant Act 1954 Part II, (“LTA54”), and where the landlord is not opposing grant of a new tenancy, it is common, when the tenant wants to renew, even if negotiations are not underway, for the tenant to request the landlord’s agreement to defer application to the court before the end date in the notice, so as to minimise costs of procedure. (Whether costs are minimised would depend on how much solicitors and/or surveyors charge for arranging deferment. When I negotiate a renewal, I arrange deferment where appropriate and rarely charge any extra; all part of the service!)
For both parties, and regardless of whether any dispute could be resolved without the court’s intervention, LTA54 procedure involves litigation, so deferment stops the court becoming involved and taking an active interest in the matter. But, whether minimising cost is a good idea in the context of the wider consequences for either or both parties is another matter entirely.
For the landlord, an advantage in refusing deferment is that it forces the tenant’s hand. A snag with having to state in the s25 notice the landlord’s proposals for the new tenancy is that the tenant can consider them in the light of what else is and becomes available in the market and bide its time. Whilst there is nothing to prevent the landlord from making the application to court, so as to accelerate the tenant’s decision, not only would that require the landlord to incur extra costs, (not something landlords are keen on), but also many landlords regard the court application as something the tenant does in the first instance. So, since the tenant is not obliged to communicate its intention whether it intends to renew before the end date in the notice, by allowing the tenant to avoid court procedures, the landlord can lose out if the tenant should for any reason decide to not renew. At least, where a tenant, after applying to court, decides not to pursue the claim, the tenant must serve notice of discontinuance of proceedings, giving at least 3 months notice to end the tenancy, and that enables the landlord to recover costs and fees in connection with the application. When the date for application is deferred, and thereafter the tenant decides to not renew, all the tenant needs do is simply not apply by the extended date; no costs payable.
Interim rent can be affected if the application per s24a were, as if often done, included in the answer to the claim, so a separate application is necessary for the landlord to recover the market rent for the period from the end date in the notice to the giving up of possession. By agreeing to defer, the landlord also loses out on the possibility of being able to capitalise on opportunities that can arise during negotiations in tandem with court proceedings. The phrase ‘going to court’, often a negotiating ploy, is not confined to making of the application or the actual hearing itself, but includes procedures. Non-compliance with case management timetables can make it possible for a tenant to lose renewal rights, despite having made the claim and protected rights by the end date in the notice. (Whether such opportunities have value depends on the market and the landlord’s strategy. In a recent matter where I was acting for the landlord, the tenant, a bank, lost renewal rights through the striking out of proceedings. My Client waived the oversight and renewed inside LTA54.)
For the tenant, deferment can create problems: application or request for further extension(s) to the date might be missed/overlooked, also it might not be possible to take advantage of post-end-date events, particularly when it is agreed that as a condition of the agreement to defer the new tenancy will start on the end date in the notice. Although interim rent could be back-dated to the earliest date the tenancy could have been brought to an end, interim rent only covers the period between expiry of the old tenancy (or date of application per s24a whichever the later) and commencement of the new term.
The commencement dates for both the new rent and term are matters for negotiation. Whereas both often start from expiry of the old tenancy, or the end date in the notice if different, frequently that is valuation convenience and/or reflects inexperience. In practice, there is nothing to prevent either rent and/or term commencement dates starting on completion of the lease. If the matter does go to court then the hearing date becomes the valuation date, and the term and rent commencement dates subject to s64 - at least 3 months after the hearing date.
This is an example of what can happen when the effect on rent and other terms of the tenancy of post-end date events have to be ignored. I was instructed to provide an expert opinion valuation for the measurement of damages arising out of a negligence claim where the tenant’s solicitors had overlooked the further extension date and had not sought further extension or applied to the court to protect the tenant’s renewal rights. It was suggested the date of breach was the last date for application to the court; also loss measured in terms of any increased rental for the duration of the term of the new tenancy, and as a consequence of any rent reviews, any diminution in the value of the lease as a saleable commodity.
In my report, I referred to the leading authority rule in solicitor negligence cases per County Personnel (Employment Agency) Ltd v Alan R Pulver & Co [1986] but, as I understood, the general rule that damages are to be assessed at date of breach is variable if assessment at another date might more accurately reflect the overriding compensatory rule. Per Kennedy v KB Van Emden & Co [1997] “The overriding rule governing the awards of damages is that the party who has been injured should be awarded by the court a sum of money which, in so far as money can do this, will, when it is paid, fairly compensate him for the wrong which the defendant has inflicted upon him. That will often involve looking at what happened or might have happened shortly after the defendant’s breach of duty, what has happened between breach and trial and what is likely to happen in the future. ” Unlike at a rent review where post-review events are irrelevant, because they would not have been known about at the date of review (or valuation date if different per the lease), valuation at lease renewal is not necessarily on a set date, since neither rent nor term has to start on expiry of the existing tenancy, or end date in the notice, if later; as I have said, both rent and term commencement dates are negotiable. The court hearing date is the only time a valuation date is fixed. During my research, I discovered that shortly after the suggested date of breach it had become public knowledge that Sainsbury’s would, a few months later, be opening a new store almost opposite the premises. I considered that new store would have a measurably adverse effect on the tenant’s business. I opined that had renewal rights been protected by application to court with negotiations alongside ensuing procedures, rather than based on the end date in the s25 notice, then post-application negotiations paralleling case management procedure would most probably have allowed for the effect of “Sainsbury’s” and would have resulted in variations in the terms and conditions of the tenancy, and which I considered would have been obtainable either by negotiation or in court by the time of a likely hearing date. As it happened, other than vacating the premises, the tenant had no choice, but agree the landlord’s form of tenancy which, since it was in most respects identical to the old tenancy, contained some terms that had become onerous as a consequence of “Sainsbury’s”.
Even with no conditions attached to the agreement to defer, the tenant is still at risk post-end-date adverse events would be ignored or resisted in negotiations with the landlord, because of an assumption or agreement either or both the renewal term and rent commencement dates would start on expiry of the existing tenancy; also, a request for deferment could be construed as the tenant’s unwillingness to incur costs. Agreement to defer is not something necessarily obtainable by return; the landlord might not be available, or be sufficiently familiar with the procedure without wanting advice on implications. Although it might be thought the landlord would also want to avoid costs, particularly when there has been a dialogue between landlord and tenant during the run-up to the application date and the landlord has given the impression of not wanting to go to court, critical time-limits are not a matter for bluff or complacency. The solicitor will need a few days to ensure application is made in good time; and where tenants are conducting their own negotiations, just because the s25 notice contains proposals for the new tenancy and just because negotiations with the landlord are well-advanced does not mean the tenant’s need to protect renewal rights should be regarded a formality that could be reliably dispensed with. On expiry, there is no automatic security of tenure: it has to be applied for. The procedure for ending and renewal of a tenancy per LTA54 must be treated as completely separate to any negotiations for the renewal terms. As soon as either s25 or s26 notice is served or given, LTA54 procedures apply, regardless of the cost-consequences. In other words, if you can’t afford or don’t want to incur the expense of litigation, then don’t issue s25 or s26 notice. Costs on expiry and renewal can and do mount up, for both parties. When proceedings are stayed, the pressure is eased, but since either party can restore or the court resume, compliance with the procedure is a costly exercise. Wherever possible, I try to avoid incurring extra costs for my client, but sometimes it is necessary to test the depth of the other party’s resistance to a particular point(s) by involving costs of fighting. In principle, a tenant is entitled to renew on the same terms and conditions as are in the existing tenancy, subject to mutually acceptable updating to modern practice. What a landlord is not entitled to do is impose upon the tenant a change that would result in a more onerous burden of risk that could not be adequately compensated by a consequential decrease in rent; O’May v City of London Real Property Co Ltd [1983]
Nothing ventured, nothing gained! For landlords, wider consequences in not being able to change a term or condition include 1) a possible reduction in the capital value and/or marketability of the investment, and 2) the continuation of some wording whose shelf-life was not expected to last indefinitely. For tenants, wider consequences are either unacceptable because the proposed change is obviously more onerous, or considered of no consequence in the scheme of things. It is easy to miss the point by not appreciating long-term implications. A tenancy will often last for years and every word has consequences. For example, in a matter I dealt with recently, the landlord had covenanted to carry out some repairs to the premises and having done so before the tenancy had been assigned to my tenant-client, wanted the covenant excluded in the renewal. I had no objection provided the landlord would pay for a structural survey to confirm the work had been carried out to a standard commensurate with the full repairing covenant insisted upon. The landlord’s surveyor considered the agreed rent was too low and that in itself should allow for other factors. A purist approach ought not suffer overriding cost implications, but I accept the practicality: even so any compromise for expediency is likely to have adverse repercussions somewhere along the line. The fashion for short-term tenancies amongst tenants may be preferable to a longer term with rent reviews, so as to offer some greater flexibility in the market - and demonstrate the lack of confidence the tenant has in its business - but the risk is that the permutations and the extra cost of renewal can benefit the landlord and play havoc with the tenant’s business plan.
For both parties, and regardless of whether any dispute could be resolved without the court’s intervention, LTA54 procedure involves litigation, so deferment stops the court becoming involved and taking an active interest in the matter. But, whether minimising cost is a good idea in the context of the wider consequences for either or both parties is another matter entirely.
For the landlord, an advantage in refusing deferment is that it forces the tenant’s hand. A snag with having to state in the s25 notice the landlord’s proposals for the new tenancy is that the tenant can consider them in the light of what else is and becomes available in the market and bide its time. Whilst there is nothing to prevent the landlord from making the application to court, so as to accelerate the tenant’s decision, not only would that require the landlord to incur extra costs, (not something landlords are keen on), but also many landlords regard the court application as something the tenant does in the first instance. So, since the tenant is not obliged to communicate its intention whether it intends to renew before the end date in the notice, by allowing the tenant to avoid court procedures, the landlord can lose out if the tenant should for any reason decide to not renew. At least, where a tenant, after applying to court, decides not to pursue the claim, the tenant must serve notice of discontinuance of proceedings, giving at least 3 months notice to end the tenancy, and that enables the landlord to recover costs and fees in connection with the application. When the date for application is deferred, and thereafter the tenant decides to not renew, all the tenant needs do is simply not apply by the extended date; no costs payable.
Interim rent can be affected if the application per s24a were, as if often done, included in the answer to the claim, so a separate application is necessary for the landlord to recover the market rent for the period from the end date in the notice to the giving up of possession. By agreeing to defer, the landlord also loses out on the possibility of being able to capitalise on opportunities that can arise during negotiations in tandem with court proceedings. The phrase ‘going to court’, often a negotiating ploy, is not confined to making of the application or the actual hearing itself, but includes procedures. Non-compliance with case management timetables can make it possible for a tenant to lose renewal rights, despite having made the claim and protected rights by the end date in the notice. (Whether such opportunities have value depends on the market and the landlord’s strategy. In a recent matter where I was acting for the landlord, the tenant, a bank, lost renewal rights through the striking out of proceedings. My Client waived the oversight and renewed inside LTA54.)
For the tenant, deferment can create problems: application or request for further extension(s) to the date might be missed/overlooked, also it might not be possible to take advantage of post-end-date events, particularly when it is agreed that as a condition of the agreement to defer the new tenancy will start on the end date in the notice. Although interim rent could be back-dated to the earliest date the tenancy could have been brought to an end, interim rent only covers the period between expiry of the old tenancy (or date of application per s24a whichever the later) and commencement of the new term.
The commencement dates for both the new rent and term are matters for negotiation. Whereas both often start from expiry of the old tenancy, or the end date in the notice if different, frequently that is valuation convenience and/or reflects inexperience. In practice, there is nothing to prevent either rent and/or term commencement dates starting on completion of the lease. If the matter does go to court then the hearing date becomes the valuation date, and the term and rent commencement dates subject to s64 - at least 3 months after the hearing date.
This is an example of what can happen when the effect on rent and other terms of the tenancy of post-end date events have to be ignored. I was instructed to provide an expert opinion valuation for the measurement of damages arising out of a negligence claim where the tenant’s solicitors had overlooked the further extension date and had not sought further extension or applied to the court to protect the tenant’s renewal rights. It was suggested the date of breach was the last date for application to the court; also loss measured in terms of any increased rental for the duration of the term of the new tenancy, and as a consequence of any rent reviews, any diminution in the value of the lease as a saleable commodity.
In my report, I referred to the leading authority rule in solicitor negligence cases per County Personnel (Employment Agency) Ltd v Alan R Pulver & Co [1986] but, as I understood, the general rule that damages are to be assessed at date of breach is variable if assessment at another date might more accurately reflect the overriding compensatory rule. Per Kennedy v KB Van Emden & Co [1997] “The overriding rule governing the awards of damages is that the party who has been injured should be awarded by the court a sum of money which, in so far as money can do this, will, when it is paid, fairly compensate him for the wrong which the defendant has inflicted upon him. That will often involve looking at what happened or might have happened shortly after the defendant’s breach of duty, what has happened between breach and trial and what is likely to happen in the future. ” Unlike at a rent review where post-review events are irrelevant, because they would not have been known about at the date of review (or valuation date if different per the lease), valuation at lease renewal is not necessarily on a set date, since neither rent nor term has to start on expiry of the existing tenancy, or end date in the notice, if later; as I have said, both rent and term commencement dates are negotiable. The court hearing date is the only time a valuation date is fixed. During my research, I discovered that shortly after the suggested date of breach it had become public knowledge that Sainsbury’s would, a few months later, be opening a new store almost opposite the premises. I considered that new store would have a measurably adverse effect on the tenant’s business. I opined that had renewal rights been protected by application to court with negotiations alongside ensuing procedures, rather than based on the end date in the s25 notice, then post-application negotiations paralleling case management procedure would most probably have allowed for the effect of “Sainsbury’s” and would have resulted in variations in the terms and conditions of the tenancy, and which I considered would have been obtainable either by negotiation or in court by the time of a likely hearing date. As it happened, other than vacating the premises, the tenant had no choice, but agree the landlord’s form of tenancy which, since it was in most respects identical to the old tenancy, contained some terms that had become onerous as a consequence of “Sainsbury’s”.
Even with no conditions attached to the agreement to defer, the tenant is still at risk post-end-date adverse events would be ignored or resisted in negotiations with the landlord, because of an assumption or agreement either or both the renewal term and rent commencement dates would start on expiry of the existing tenancy; also, a request for deferment could be construed as the tenant’s unwillingness to incur costs. Agreement to defer is not something necessarily obtainable by return; the landlord might not be available, or be sufficiently familiar with the procedure without wanting advice on implications. Although it might be thought the landlord would also want to avoid costs, particularly when there has been a dialogue between landlord and tenant during the run-up to the application date and the landlord has given the impression of not wanting to go to court, critical time-limits are not a matter for bluff or complacency. The solicitor will need a few days to ensure application is made in good time; and where tenants are conducting their own negotiations, just because the s25 notice contains proposals for the new tenancy and just because negotiations with the landlord are well-advanced does not mean the tenant’s need to protect renewal rights should be regarded a formality that could be reliably dispensed with. On expiry, there is no automatic security of tenure: it has to be applied for. The procedure for ending and renewal of a tenancy per LTA54 must be treated as completely separate to any negotiations for the renewal terms. As soon as either s25 or s26 notice is served or given, LTA54 procedures apply, regardless of the cost-consequences. In other words, if you can’t afford or don’t want to incur the expense of litigation, then don’t issue s25 or s26 notice. Costs on expiry and renewal can and do mount up, for both parties. When proceedings are stayed, the pressure is eased, but since either party can restore or the court resume, compliance with the procedure is a costly exercise. Wherever possible, I try to avoid incurring extra costs for my client, but sometimes it is necessary to test the depth of the other party’s resistance to a particular point(s) by involving costs of fighting. In principle, a tenant is entitled to renew on the same terms and conditions as are in the existing tenancy, subject to mutually acceptable updating to modern practice. What a landlord is not entitled to do is impose upon the tenant a change that would result in a more onerous burden of risk that could not be adequately compensated by a consequential decrease in rent; O’May v City of London Real Property Co Ltd [1983]
Nothing ventured, nothing gained! For landlords, wider consequences in not being able to change a term or condition include 1) a possible reduction in the capital value and/or marketability of the investment, and 2) the continuation of some wording whose shelf-life was not expected to last indefinitely. For tenants, wider consequences are either unacceptable because the proposed change is obviously more onerous, or considered of no consequence in the scheme of things. It is easy to miss the point by not appreciating long-term implications. A tenancy will often last for years and every word has consequences. For example, in a matter I dealt with recently, the landlord had covenanted to carry out some repairs to the premises and having done so before the tenancy had been assigned to my tenant-client, wanted the covenant excluded in the renewal. I had no objection provided the landlord would pay for a structural survey to confirm the work had been carried out to a standard commensurate with the full repairing covenant insisted upon. The landlord’s surveyor considered the agreed rent was too low and that in itself should allow for other factors. A purist approach ought not suffer overriding cost implications, but I accept the practicality: even so any compromise for expediency is likely to have adverse repercussions somewhere along the line. The fashion for short-term tenancies amongst tenants may be preferable to a longer term with rent reviews, so as to offer some greater flexibility in the market - and demonstrate the lack of confidence the tenant has in its business - but the risk is that the permutations and the extra cost of renewal can benefit the landlord and play havoc with the tenant’s business plan.