Lease Renewal and PACT

Most business tenants have the right to renew a lease under the Landlord and Tenant Act 1954. There are some exceptions to this and professional advice should always be sought in this specialised area. A chartered surveyor will be able to advise on the best sort of deal for your business, whether you are a tenant or a landlord. A solicitor will be able to advise on legal points arising from the lease. Have a look at the professionals on our site to find someone to advise you.

It is possible to ‘contract out’ of security of tenure in a lease. Where a new lease is being negotiated, the landlord and tenant can agree to exclude security of tenure. Again, advice should be taken before a new lease is signed so both parties know exactly what they have signed up for.

If both landlord and tenant agree to a new tenancy but cannot agree the rent or some of the terms, the 1954 Act allows either party to apply to the court to settle whatever is in dispute. For many landlords and tenants the prospect of going to court can be very daunting so it is good to know there is an alternative. In the late 1990’s the Royal Institution of Chartered Surveyors (RICS) and the Law Society launched a scheme using arbitration or independent expert determination to resolve disputes on either the rent or other terms of the lease. The scheme works around the principles of the 1954 Act so the tenant does not lose any of its rights.

Taking lease renewal out of court fits in with the modern day attitude of the courts who are keen to see alternative dispute resolution used where appropriate. It also makes a great deal of sense to use a surveyor arbitrator or expert, familiar with valuation principles and rental values, to resolve the rent dispute. Similarly, some legal or drafting points can easily be referred to a solicitor expert or arbitrator.

How does the lease renewal process start?

The lease renewal process usually starts by the landlord serving a section 25 notice. This tells the tenant whether the landlord is willing to renew the tenancy. If the landlord is willing to renew the tenancy, the form will set out the terms of the new tenancy. These are merely the landlord’s suggestions for further discussion. The tenant does not have to accept them.

The tenant could take the initiative and send the landlord a section 26 request. Again this will set out the tenant’s proposals for the new tenancy.

At this stage it would be sensible to get professional advice about the terms for the new tenancy, and try and negotiate an agreement to avoid going to court or using PACT. Often rent is the main area in dispute and chartered surveyors can give professional advice on this.

How do I use PACT?

If the parties are unable to agree the new terms for the lease, rather than go to court, the parties can agree to use PACT. The traditional way to use PACT is for both parties to agree a consent order. Model consent orders can be found on the RICS website and these can be adapted to fit the circumstances of individual renewals.

Some of the issues the parties should consider including in a court application for a consent order are:

What is in dispute – is it the rent, duration or other terms of lease?

If rent is the main issue in dispute, is this the interim rent and/or the new rent ;

what is the valuation date – this is particularly important when the market is changing rapidly;

Should the dispute be settled by an arbitrator or expert – see arbitrator, independent expert for a brief explanation of the different roles

Does the dispute require a surveyor or a solicitor (sometimes a surveyor can deal with the rent aspect and have a legal assessor on legal points in dispute, or vice versa);

Do the parties require the arbitrator/expert to have any specific experience or work within a timetable agreed by the parties?

Do the parties want to provide a timescale to agree a suitable arbitrator/expert but include a default provision, usually for an appointment by RICS in default of agreement;

Once agreement has been reached on these points, application should be made to court for a consent order which should also act as a stay of court proceedings.

Many landlords and tenants are able to agree on a suitable third party (have a look at the arbitrators and independent experts on our site). If agreement is not possible, an application can be made to RICS for the appointment of a PACT arbitrator or independent expert.

Using PACT ‘out of court’

The Regulatory Reform Order made a number of changes to the Landlord & Tenant Act 1954, which became effective from 2004. One of these changes meant that the landlord and tenant can agree to extend the section25/26 notice and use PACT without the necessity of going to court. Care should be taken to ensure the notice does not expire or the tenant will lose security of tenure. The parties would be wise to draw up an agreement taking into account the issues considered for a consent order.

Why use PACT?

PACT should be quicker, cheaper and more flexible than full court processes and, arguably, more effective given that decisions are made by property specialists rather than judges. The arbitrator/expert’s decision is binding in the same way as in rent review cases. As with all lease renewals, the tenant can decline to accept the terms of the new lease and vacate the property.

Parties are free to agree who should be their preferred arbitrator or expert and first4adr.com can help.

This brief summary is intended to give an understanding of how ADR can be used for lease renewals. This should not be taken as legal advice in this very specialised area.