It is worth noting that this project is separate from, but will run in tandem with, the existing review of the Landlord and Tenant Act 1954 which affects security of tenure and is part of a wider project under which the Law Commission is also intending to look at the law governing the maintenance, repair and upgrading of commercial buildings where those provisions may be confusing, unfair and/or out of date.
We set out below the key areas likely to affect your properties and ongoing transactions but please note that the following is provisional and may not become law as initially suggested. The consultation does, however, signal potential significant changes to how commercial leasehold transactions may be structured in the future.
Background and current issues
Two longstanding areas of commercial leasehold law have been identified as creating unnecessary friction, delay and cost in everyday property transactions:
A) The right of first refusal in mixed-use buildings.
The 1987 Act gives qualifying tenants of flats in a building a right of first refusal where the landlord wishes to dispose of an interest in it, subject to (i) the premises containing two or more flats held by qualifying tenants and (ii) the number of qualifying tenants’ flats exceeding 50% of the total number of flats in the premises. This means that in buildings that are predominantly residential such as an urban block of flats with a ground-floor retail unit, the right of first refusal is likely to apply and, critically, is likely to inappropriately catch disposals, including the grant of leases, of commercial premises in mixed-use buildings.
The Law Commission notes it is unlikely that such outcome was deliberate at the time the 1987 Act was drafted and that consideration was primarily given to buildings formed entirely of residential flats and disposals of the entire reversion by the landlord. It also goes further by provisionally confirming that it is not beneficial for the 1987 Act to apply to commercial premises.
The current drafting often results in landlords having to comply with a burdensome procedural regime or to employ costly workarounds in order to avoid criminal sanctions despite the fact that residential tenants would be very unlikely to wish to take leases of commercial premises at a market rent.
B) Group company and partnership restructurings.
The 1995 Act was designed to protect tenants by releasing both the tenants and their guarantors from liability on assignment, but its very wide anti-avoidance provisions have had unintended consequences and are standing in the way of many commercially sound transactions. For example, where a lease is being assigned between companies within the same group, a parent company that has guaranteed the performance of the tenant covenants cannot directly guarantee the obligations of the group company assignee. This restriction adds complexity and cost to what would otherwise be a straightforward internal reorganisation, and in some circumstances may even prevent their implementation.
Similarly, the 1995 Act prevents a tenant from assigning its lease to its own guarantor, frustrating commercially sensible outcomes particularly in restructuring scenarios where the guarantor is the most natural party to take on the lease.
Equivalent difficulties arise in partnership structures when leases are assigned between substantially the same partners.
Suggested reforms
The Law Commission's provisional proposals target each of these issues directly.
A) The right of first refusal in mixed-use buildings.
The Commission proposes that the grant of a lease of premises that are exclusively occupied or used for non-residential purposes should not trigger the right of first refusal under the 1987 Act, subject to a limited exception for areas shared by residential leaseholders which are ancillary to their residential use.
The proposal is designed to preserve the core protection that the right of first refusal affords residential leaseholders, while preventing it from applying to transactions that are unlikely to be of benefit to them.
B) Group company and partnership restructurings.
The Commission proposes that the 1995 Act should clearly facilitate both assignments and guarantees between members of the same group of companies. This would permit, amongst other things, a parent company to guarantee directly the obligations of an assignee which is its subsidiary following an intra-group assignment.
The Commission also proposes that the 1995 Act should facilitate assignments and repeat guarantees within substantially the same partnership, where the partnership is carrying on substantially the same business and where at least one existing partner will remain a tenant after the assignment.
As a separate and standalone proposal, the Commission proposes that the 1995 Act should permit assignments of a lease by the tenant to the tenant's existing guarantor. This reform is not limited to group company or partnership situations and would benefit any tenant whose most natural successor is the party already standing behind its obligations. Importantly, agreements requiring (rather than permitting) a guarantor to take an assignment from the tenant are unlikely to be allowed: the Commission fears that allowing such agreements would lead to an automatic requirement that any guarantor must take an assignment of the lease where the tenant is in difficulty.
Conclusion and potential future steps
The current law remains in force and these proposals may evolve before any legislation is introduced. You should not structure transactions on the assumption that these reforms will be enacted as proposed by the Commission. However, you may wish to:
A) Review your group property structure.
If your business holds leases across group companies, consider whether any planned reorganisations are affected by the current restrictions. If reform is enacted, the costs and complexity currently associated with such transactions could reduce significantly.
B) Audit your mixed-use assets.
If you own or occupy commercial premises within mixed-use buildings, the proposed exemption could meaningfully reduce the compliance burden and transactional risk associated with future lettings.
C) Factor reform into your portfolio strategy.
Whilst delaying transactions pending reform is unlikely to be recommended in all but the most exceptional circumstances, it is worth bearing these proposals in mind when considering medium-term portfolio decisions, including disposals, acquisitions, and lease restructurings.
D) Consider engaging with the consultation.
If you have strong views on any of the proposed changes, whether as a landlord, tenant, or investor, the consultation process provides an opportunity to influence the final recommendations.
The consultation closes on 16 September 2026 but, in the meantime, please do not hesitate to contact Rachel Lawler or Damian Fleming if you would like to discuss the implications of this consultation further.
