This article appeared in The Parchment, Winter Edition 2019/20.
Commercial tenants often occupy their premises under vague and uncertain terms. The situation often arises that neither the landlord nor the tenant are sure of the terms of the arrangement, either because terms were never reduced to writing or the initial tenancy agreement has long since expired and the occupation has continued beyond what was originally envisaged. Equally, tenants frequently occupy commercial premises under terms that are heavily negotiated and recorded in a lengthy written lease. All of these scenarios, and many others, are subject to the provisions of the Landlord and Tenant (Amendment) Act, 1980 (as amended) (“the Act”) which regulates the landlord and tenant relationship by conferring on the tenant a number of statutory “reliefs”. These reliefs are designed to protect the position of tenants who have built up a business in a certain location and for whom it would be unjust to have to move that business, without relief.
Whilst the Act addresses a number of different issues, the focus of this article is on the right to a new tenancy conferred by section 16 of the Act.
What is a tenement?
Whilst the Act requires a tenant to pass a number of different eligibility tests, which vary depending on the circumstances giving rise to the claim for relief, every tenant seeking to claim the right to a new tenancy must prove that the premises occupied is a “tenement” as that term is defined within Section 5 of the Act. An essential part of proving that a premises is a tenement is that at least part of it is covered by buildings. The term “building” in this context has been broadly interpreted by the Courts, to even include the likes of concrete storage tanks sunk in the ground. Where the premises is only partly covered by buildings, the portion of the land not covered by buildings must be “subsidiary to and ancillary to the buildings”. Vacant plots of land and agricultural land are excluded from the definition of tenement.
Section 13 provides for the business equity which entitles commercial tenants, in certain circumstances, to a new long lease at the end of their existing 5 year continuous occupation of the premises. As the name suggests, it is also essential that the premises be occupied wholly or partly as a business. The term “business” is defined broadly by section 3 of the Act and includes “any trade, profession or business, whether or not it is carried on for gain or reward, [and] any activity for providing cultural, charitable, educational, social or sporting services…”
Long Possession Equity
Section 13 of the Act also provides for the long possession equity if the premises have been continuously occupied by the tenant, including predecessors in title, for a period of 20 years or more. The long possession equity is not limited to business premises but arises less frequently in practice than the business equity.
Section 13 of the Act also provides for the improvements equity. The test for establishing if the improvements equity arises in a tenant’s favour is less straightforward than for the other two equities. Essentially, it involves the tenant establishing that it is entitled to compensation for improvements made to the premises and the value of those improvements is 50% or more of the letting value of the premises at the time that the tenant gives notice of its intention to claim the relief.
What are the tenant’s entitlements?
Where the tenant can establish one or more of the three equities described above, the tenant is entitled to claim a new tenancy beginning from the end of the previous tenancy. It is up to the landlord and tenant to agree the terms of the new tenancy but if they cannot be agreed then the tenant has an entitlement to apply to Court to recognise and enforce the entitlement and to fix the terms of the new tenancy.
Surprisingly, the business equity gives rise to an entitlement to a new 20 year tenancy, or such lesser period of time as the tenant may nominate, not less than 5 years. The long possession and improvement equities give rise to an entitlement to a new 35 year tenancy, or such lesser period of time as the tenant may nominate. The Court must set the rent for the new tenancy and, in basic terms, that rent will be market rent. The Court will need to be presented with expert evidence to determine the market rent for the premises. Whilst the Court cannot provide for rent review clauses, the Act entitles both the landlord and the tenant to apply to the Court for a review of the rent at 5 year intervals.
Contracting out of the right to the new tenancy
By virtue of amendments first introduced in 1994, and subsequently revised, the Act does allow the landlord and commercial tenant to enter into contractual arrangements which effectively rule out the applicability of the various reliefs described above. This is achieved by means of a renunciation of rights by the commercial tenant where the premises is a business premises, a written renunciation has been executed by the tenant and the tenant has received independent legal advice in relation to the renunciation. It is no longer the case that this needs to be done before the tenancy commences. There has been caselaw recently where tenants have attempted to claim that the written renunciation which they executed was invalid due to poor drafting and inconsistencies and errors in the document. The courts have recently upheld the validity of such renunciations where there is no ambiguity in their terms.
Other restrictions on the right to a new tenancy
Section 17 of the Act expressly provides for certain situations wherein a tenant will lose the entitlement to a new tenancy.
- The tenancy has been terminated for non-payment of rent.
- The tenancy has been terminated for breach of covenant by the tenant.
- The tenant has terminated the tenancy.
- The landlord has given notice to quit to the tenant for good and sufficient reason.
- The tenancy terminated, other than by notice to quit, and the landlord refused to renew the tenancy for good and sufficient reason or would have had good and sufficient reason not to renew if the request to renew had been made.
One of the key considerations at the beginning of any commercial letting transaction is whether or not the Landlord will insist on a tenant giving up their statutory rights by executing a written renunciation. From a tenant's perspective, there is a huge benefit in retaining these rights. It gives the tenant the security of knowing that it can continue to run its business from the same location whilst not forcing it to do so. Many tenants do not understand the reluctance on the part of Landlords to allow the tenant to occupy without the renunciation, as it is effectively a guaranteed stream of income for a Landlord. However, from a Landlord's perspective, they also need to consider the potential opportunities from the property in the future, some of which may not be apparent today. Landlords may be mindful of the fact that there is potential to redevelop the property at a point in time and if this is their intention, it is imperative that they have the right to acquire the property back from their tenants without having to deal with the expense of buying out the tenant's rights. It is also the reality that most funders will insist on the tenant signing a renunciation, if their consent is required for the letting in the first instance.
The right to a new tenancy can arise in a number of different ways in the commercial context. The most frequent is on foot of 5 years continuous occupation as a business premises, even if the written agreement has long since expired. The introduction of the business equity gave rise to the introduction of the 4 year, 9 month lease as a workaround to the operation of the legislation. However, the reliefs provided by the legislation still operate in tenants’ favour in many circumstances and should be borne in mind by commercial landlords and tenants alike.
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About the Authors
Jackie is Head of the Property team at Hayes solicitors. She is a highly experienced adviser to clients in the banking, public and retail sectors on all aspects of the sale, purchase, leasing, development and financing of properties. She has extensive experience of advising landlords and tenants in insolvency situations and has advised in recent high profile examinerships.
Matthew is a partner in the Commercial & Business team at Hayes solicitors. Matthew advises clients in relation to all forms of commercial dispute resolution and provides general commercial advice. Matthew also advises clients on general commercial matters including; contract law, intellectual property/ copyright, media law, and general commercial agreements.