Negotiating a commercial warehouse lease and potential changes to the Landlord and Tenant Act.

Empty retail units displaying agents’ boards were the most visible sign of our high streets through the pandemic. But online retail saw a very different picture over the same period, with e-commerce thriving and storage and distribution space at a premium.

The e-commerce industry has been growing exponentially for a number of years with more than one quarter of UK retail sales now generated by e-commerce. Notably, UK warehousing stock increased by approximately million square foot and 444 units between 2015 and 2021. Such growth was accelerated by the pandemic and strict government lockdown measures in 2020 and 2021 which drove consumers to shop online.

Although post-pandemic the e-commerce sales market saw a small decline, e-commerce is expected to represent 38.1% of all retail sales in the UK by 2025. As a result, there is an increasing need for additional warehousing space.

With warehouse space at a premium, careful consideration should be given to the drafting of any new lease. A common mistake is to think it’s all about the rent. It’s not! Other issues including (but not limited to):

• The term of the lease
• Repairing obligations and costs
• Break-clauses
• Access
• Security of tenure under the Landlord and Tenant Act 1954 (“1954 Act”)

What changes are being proposed to the 1954 Act?

The Law Commission of England and Wales announced on 28 March 2023 that it will review part of the “inflexible, bureaucratic and out of date” 1954 Act

The 1954 Act gives businesses the right to acquire a new lease of their premises after their existing one has run out, known as “security of tenure”.

Landlords and tenants can, and often do, agree to exclude (or “contract out” of) the security of tenure protection afforded to business tenants by the 1954 Act. The procedure for contracting out was simplified in 2003 to avoid the need for court involvement but remains a little complicated. The landlord must serve a warning notice on the tenant and the tenant must then either make a simple or statutory declaration before the lease is completed. Unlike simple declarations, a statutory declaration must be witnessed in front of an independent solicitor or commissioner for oaths.

Without a solicitor’s help, a landlord can often overlook or get wrong the process for contracting out and inadvertently create a protected tenancy.  Whether a periodic tenancy has been created will depend on the facts such as the tenant’s continued occupation, payment of rent the informal agreement after which no further negotiation took place and the absence of any indication that the tenant should not have been tenant with statutory protection. If it is established that following the termination of the lease a new periodic tenancy came into existence, this form of tenancy cannot be contracted out of the 1954 Act. If a tenant occupies commercial premises under a periodic tenancy, and the tenancy meets the criteria for a business tenancy under the 1954 Act, the tenant will have a protected tenancy with security of tenure.

However, the Law Commission notes that it is now “nearly 20 years since the legislation was last reviewed”. The Law Commission notes that a “large proportion of businesses” rent their warehouses, factories, shops and office spaces, rather than owning the freehold.

The Law Commission further notes: “Those who rely on the 1954 Act report that it is inflexible, bureaucratic and out of date, causing extra cost and delay for both landlords and tenants – as well as preventing space in high streets and other commercial centres from being occupied quickly and efficiently.”

The review will also seek to support the long-term resilience of high streets, by making sure current legislation is “fit for today’s commercial market”, while also considering Government priorities, including net zero and levelling up.

Professor Nicholas Hopkins, the Law Commissioner for Property, Family and Trust Law, said: “The right to a new lease has been available to many business tenants for over half a century. Whether they operate in shops, cafes, or factories, many businesses have been afforded the security of being able to continue in the same premises after their lease runs out.”

Total abolition of the 1954 Act seems an unlikely option. Rather, the Law Commission’s consultation paper (which is aimed to be published in late 2023) will likely propose amendments to the 1954 Act concentrating on the facilitation of regeneration and industry co-operation on environmental and social improvement. Watch this space.