What has been confirmed
The current contracting-out model — under which tenants have security of tenure by default, subject to the ability to contract out — is retained as the right model for the modern commercial leasehold market. The scope of tenancy types covered by the Act remains unchanged as a starting point for the second consultation, as we anticipated in our earlier article.
What has changed or developed
A new contracting-out procedure
Our earlier article noted that the second consultation would consider technical reforms to contracting out. The Commission has now gone considerably further, proposing that contracting out take place within the tenancy agreement itself.
The key changes are: the prescribed warning notice would be included within the tenancy rather than served separately; statutory declarations would be abolished, replaced by a declaration signed by the tenant within the tenancy; and agreements for lease, options to renew and guarantees would need to include prescribed wording confirming that any future tenancy would be contracted out. This is the most significant practical development in the paper — removing a frequent source of delay, cost and technical error. Practitioners should begin reviewing their standard precedents and template suites accordingly.
Short-term lettings: two options on the table
Our earlier article noted the Commission was exploring raising the duration threshold from six months to two years. The consultation now presents two options: a two-year threshold (Option A) or a one-year threshold (Option B).
A greater proportion of leases would fall outside protection under either option, with the two-year threshold having the more significant market impact. Start-ups and SMEs should engage closely with this question.
Periodic tenancies excluded from protection
A significant development not mentioned in the interim statement is the Commission's provisional proposal to exclude all new and renewal periodic tenancies from protection. Under current law, periodic tenancies are always protected and cannot be contracted out.
This proposal would fundamentally alter the position for tenants on rolling arrangements. An exception is proposed where a tenant already holds a protected tenancy and is granted a renewal, whether fixed-term or periodic.
All written tenancies capable of being contracted out
The Commission proposes that any new or renewal tenancy in writing should be capable of being contracted out. This addresses the "Thomas van Staden trap", under which tenancies inadvertently attract protection when the parties intend them to be contracted out.
Environmental terms and Ground F
Two linked developments reflect the growing intersection between leasehold law and sustainability obligations. First, the Commission consults on whether courts should be expressly guided to treat environmental matters as a "relevant circumstance" when deciding the other terms of a renewal tenancy — an issue of growing practical importance for green lease clauses. Second, and separately, the Commission proposes potentially expanding Ground F (redevelopment) to include modern construction methods such as refurbishment and retrofitting, addressing concerns that it cannot currently be relied on to carry out energy efficiency works to comply with MEES regulations. Three options are under consideration, ranging from a broad expansion with a purpose or motive filter to a single "substantial works" test.
Compensation reform
The Commission consults on whether compensation for tenants displaced on Grounds E, F or G should be calculated by reference to the rent under the tenancy rather than rateable value, which has long been criticised as an inaccurate measure. It also asks whether a system of stepped bands should replace the current binary threshold of 14 years' occupation for the higher rate of compensation, and whether the five-year threshold for excluding compensation should be adjusted.
Agreements to surrender
The Commission consults on whether the current validation process for agreements to surrender protected tenancies should be removed altogether or streamlined to mirror the proposed new contracting-out procedure.
Dispute resolution
Currently almost all disputes are dealt with by the county courts. The Commission identifies concerns about cost, delay and a lack of judicial specialism, and consults on three options: greater use of the High Court for complex disputes; transfer of all disputes to the tribunal; or a split jurisdiction. The Commission also consults on promoting ADR — including requiring section 25 and 26 notices to reference the possibility of mediation or early neutral evaluation.
Procedural reforms
The Commission provisionally proposes allowing landlords to serve section 25 notices on tenants who are out of occupation, and considers extending the right to serve section 26 notices to all protected tenants, including periodic tenants. It also proposes a cap — of either 6 or 12 months — on the notice period a tenant must give to terminate a continuation tenancy under section 27(2).
What this means
Across 13 chapters and just under 70 questions, the second Consultation Paper sets out proposals that go substantially beyond what was indicated in the interim statement. The proposed simplification of contracting out, the treatment of periodic tenancies, the environmental agenda, the modernisation of Ground F, and the procedural and dispute resolution reforms together represent a material shift that will affect landlords, tenants and their advisers across the market.
The deadline for responses is 16 September 2026. We strongly encourage clients and contacts to engage with this consultation. Our Real Estate team works with a diverse range of businesses across multiple sectors. Please contact our experts if you have any queries or require immediate advice.
