Sections 24 to 28 of the Landlord and Tenant Act 1954 (“LTA 1954”) provide that, at the end of the term of a business tenancy, a commercial tenant has the right to remain in the premises and an automatic right to a new lease. There are very limited grounds on which a landlord may refuse to grant a new lease where the lease has been granted with security of tenure and this is therefore beneficial to a tenant.
There are some types of tenancies which are excepted, for example, where the occupation of the tenant is granted by a licence or tenancy at will, the lease has been granted for a period of 6 months or less (unless the tenancy contains provisions to renew the lease beyond the 6 month term or the tenant or predecessor in business has been in occupation of the premises for more than 12 months); various other arrangements as set out in section 43 of LTA 1954 (e.g. agricultural tenancies); or where the lease has been ‘contracted out’.
It is very common for a landlord and tenant to agree that a lease will be contracted out. Whilst, as a general rule, section 38(1) of LTA 1954 prohibits contracting out, there is an exception contained in section 38A(1) of the Act which allows the parties to agree that the lease will not have the benefit of security of tenure provided that the lease is for ‘a terms of years certain’ (i.e. the lease is granted for a period of time which can be predicted with certainty to end by a certain date) and the correct procedure is followed. The lease must also contain a clause stating that the parties have agreed that the lease is not to have the benefit of the security of tenure provisions in the LTA 1954.
The effects of contracting out a lease are as follows:
- At the end of the lease term, the tenant will have no right to remain in the premises and must leave, unless it can negotiate with the landlord for a new lease.
- The tenant will have no right to compensation from the landlord on leaving the property at the end of the lease.
- The tenant cannot ask the court to fix the rent or other terms of the lease if it is able to get the landlord’s agreement to the grant of a new lease.
The procedure for contracting out a lease is set out in the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003. This specifies three key elements which must be followed to contract out the lease, and this must take place before the lease is completed:
- The landlord must serve a warning notice on the tenant;
- The tenant must make either a simple declaration (if the warning notice is served more than 14 days before the lease is to be completed) or a statutory declaration (if less than 14 days’ notice is given before the lease is completed);
- An endorsement is made on the lease relating to the exclusion of security of tenure.
If these elements are not complied with, the contracting out of the lease will be invalid. It is therefore important for landlords to ensure that the correct procedure is adhered to.
Get in Touch
The above is intended as a brief summary of the security of tenure provisions in the LTA 1954 and, if you would like further advice or assistance with contracting out, please contact our Commercial Property Department on 0118 958 9711 or [email protected] where a team of specialists will be happy to help.