Litigation? PACT it in!

Part II of the Landlord and Tenant Act 1954 provides a commercial tenant with a statutory right to a new lease at the end of the term. As a result, at the expiry of the term, the lease does not automatically end, rather it continues on the same terms until formally terminated.

Either party can trigger the lease renewal procedure by serving notice on the other.

• Landlord Section 25 Notice: gives notice that the lease will end on a specified date but states that the Landlord is not averse to the granting of a new lease. The Landlord can state that it intends to oppose the granting of a new lease but that is outside the scope of this article
• Tenant Section 26 Notice: gives notice that the Tenant requests a new lease and specifies the date upon which it is proposed the new lease will commence.

Once a Section 25 or 26 Notice has been given, the parties will usually, but not always, engage in negotiations with the aim of agreeing the terms of a new lease. Unfortunately, it is not always possible for an agreement to be reached between the parties with the result that lease renewal proceedings are issued, the disputed terms then being determined by the Court.

Court proceedings are costly and time consuming and are often uneconomic, particularly when dealing with small commercial lettings. The Professional Arbitration on Court Terms (PACT) provides an alternative to litigation. Some or all of the disputed terms of a new lease are determined by a third party with expertise in the area, usually at lesser expense and within a shorter period of time than would be the case if the issues were determined by a judge at trial.

PACT was first introduced in the late 1990s. As at that time, a dispute could only be delegated to the PACT process with the approval of the Court as part of Court proceedings. Since 2004, however, PACT can now be adopted after service of a Section 25 or Section 26 Notice without proceedings needing to be issued.

A word of warning, however. Whilst PACT can be adopted before proceedings have been issued, if the disputed terms have not been determined and a new lease drawn up by the statutory deadline set out within the Landlord's Section 25 Notice or Tenant's Section 26 Notice, the Tenant must ensure that either that the parties agree in writing to put back that deadline to a specified date or, alternatively, that a Court application for a new lease has been issued. Failure to take either of these steps will mean that the Tenant will lose the right to a new lease.

In the case of Out of Court PACT, the parties will identify the issues on which they disagree regarding the new lease and will agree themselves how that issue is to be resolved. Ideally they will agree the identity of a third party who has a particular expertise in the area of dispute with that party then determining that issue, either acting as an Arbitrator or Expert (I briefly summarise the difference below), and the parties agreeing to be bound by that determination.

If proceedings have been issued (commonly referred to as "In Court PACT"), the proceedings can be stayed for the purposes of the parties adopting PACT. The Order which stays the proceedings will highlight the disputed issues and record whether those issues are to be determined by a third party acting as an Arbitrator or Expert. In the absence of an agreement by the parties upon how any issue(s) will be resolved, these issues will be determined by the Court.

Whilst parties may be agreeable to adopting PACT, they may be unable to reach agreement on the identity of the third party who will determine the disputed issue(s). In such circumstances, the parties will usually ask that the President of the Royal Institute of Chartered Surveyors appoint a suitably qualified individual.

As mentioned above, the third party instructed to determine any disputed issue(s) will act as an Expert or as an Arbitrator. In some cases, the third party act as both i.e. he or she will determine some issues whilst acting as an Expert and others whilst acting as an Arbitrator.

An Expert will determine a disputed issue based on the Expert's own professional skill and judgment. No specific legislation covers an independent expert's powers, rather, their duties and responsibilities are set out within the agreement between the expert and the parties and it is for the expert to satisfy those duties using professional skill and judgment. An Arbitrator, on the other hand, will come to a decision based on evidence put before them. The Arbitrator, in effect, sits as a judge and determines the issue(s) in dispute based on evidence and arguments put forward by the parties.

The determination of some issues requires the exercise of judicial discretion. For example, determining the duration of the new lease, interim rent, repair obligations etc will necessitate consideration of the new lease and the weighing up of arguments by the parties. The issues should therefore be by a third party acting as an Arbitrator. Other issues, such as rent, are determined on the basis of the open market rent and by the exercise of professional skill and knowledge. They can, therefore, be determined by a third party acting as an Expert.

The benefit of PACT is that the parties can chose between themselves how certain issues are to be resolved, by whom and when. This enables parties to retain a degree of control over the determination of the issues and, of particular importance in these times of austerity, in the majority of cases leads to disputed issues being determined at far less cost than would be incurred if the issues were determined by the Court. The parties can also be confident that the person determining the issues has particular expertise regarding the disputed issue(s).

It is important to appreciate that substantial costs can still be incurred by parties adopting PACT. Whilst a useful alternative to Court proceedings, it should not be seen as a panacea. Parties should, if possible, seek to try and agree their differences and reach agreement on any disputed terms, especially given that they will, after all, have an ongoing Landlord and Tenant relationship once the new lease is agreed.

Rollits Dispute Resolution Group has a wealth of experience in dealing with lease renewals and is able to provide both pro-active and reactive advice to both Landlords and Tenants on all aspects of the renewal process. If you have any queries arising from this article, please contact the writer directly or, if you have any general queries or concerns to contentious property matters, contact Ralph Gilbert, partner and Head of Rollits' Property Dispute Resolution Group on 01482 323239 or by e-mail at moc.s1732419793tillo1732419793r@tre1732419793blig.1732419793hplar1732419793

This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.