Commercial leasehold reform: key proposals explained

The Law Commission’s consultations on aspects of various aspects of property law are continuing, with a new project Commercial Leasehold: Overcoming Barriers to Transactions.  With an eye on reducing costs, delay and uncertainty in commercial property transactions, it consists of two sub projects:

1. reviewing the application of certain aspects of Landlord and Tenant Act 1987 and the Landlord and Tenant (Covenants) Act 1995 to commercial property transactions, with the aim of proposing reforms, and
2. scoping the law relating to maintenance, repair and upgrading of leased commercial buildings and assessing how it interacts with environmental requirements.

The second project is yet to commence, but some detail has been announced relating to the first.

Reform of the right of first refusal regime

Currently, residential leaseholders in qualifying mixed-use buildings may have a statutory right of first refusal when certain disposals are made by their landlord. Concern that these rights may affect disposals relating to commercial units in these buildings can create additional complexity, uncertainty and delay for transactions which would often be regarded as straightforward at a purely commercial site.

The Law Commission has provisionally proposed that the grant of a lease of premises used exclusively for non-residential purposes should no longer trigger the right of first refusal requirement. A limited exception would remain for areas shared by residential leaseholders where those areas are ancillary to residential use.

The hope is that this would preserve the protection afforded to residential leaseholders while providing clarification that these procedural requirements do not apply to transactions that are unlikely to deliver any meaningful benefit to those leaseholders.

Greater flexibility under the 1995 Act

The consultation also examines aspects of the Landlord and Tenant (Covenants) Act 1995, particularly where anti-avoidance provisions may be preventing commercially sensible transactions that do not create any real risk.

The consultation therefore proposes reforms that it is hoped would facilitate structures and transactions that would allow modern business to work more flexibly, including assignments and guarantees involving group companies and other closely related companies, whilst retaining the necessary protection for tenants and guarantors provided by the 1995 Act.

Wider objectives

Whilst the Law Commission isn’t intending to propose reforms outside of these areas, it has also identified five other issues with the 1995 Act, including concurrent leases, covenants with management companies, agreements for leases, the registration gap and geographical limitations on serving notices.  For the time being, views are just being sought on whether these issues are causing difficulties in practice for commercial transactions.

Why should this matter to me?

The Law Commission has made it clear that any reforms would be carefully targeted as opposed to ripping up swathes of landlord and tenant law, but it has recognised that both of these statutes have unintended consequences that impede commercial property transactions in ways that go beyond the protection intended.

It seems likely that any reform is some way off, but this is an opportunity for landlords, tenants, investors and their advisers to consider whether the law as it stands negatively affects their business, and if it does, whether you would wish to respond in order to set out those concerns.

How we can help

Our commercial property team can help landlords, tenants, investors and advisers understand how the proposed reforms could affect existing arrangements, planned transactions and future strategy. We can review potential risks, advise on the impact of the consultation proposals and support you in preparing a response where the current law is creating practical or commercial challenges.