As a commercial tenant negotiating a lease agreement, you might be asked by the landlord to agree to ‘contract out’ of your protected right to security of tenure, but what does this mean?
Here we’ll be covering the process of excluding security of tenure under the Landlord and Tenant Act 1954 by explaining the meaning of it, why commercial tenants might want security of tenure and why landlords might want to exclude these rights, as well as the legal process for contracting out of security of tenure.
Lease negotiations can be tricky and it's vital that you understand your commitments before entering into an agreement. Our expert commercial property solicitors will always be on hand to provide business focused, plain-English advice.
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What does security of tenure mean?
The Landlord and Tenant Act 1954 provides tenants of business premises with rights of ‘security of tenure’. This means that once a business tenant’s lease expires, the tenant has the right to request a new lease on the same terms as the previous lease (subject to agreement on commercial terms, such as the amount of rent, and any updates in law), except where the landlord has a statutory ground to refuse the grant of a new lease (for example, if the tenant has failed to pay rent or if the landlord wishes to redevelop the premises).
When agreeing to enter into a commercial or business lease, one of the Heads of Terms to be negotiated is whether your lease will be ‘protected’ with security of tenure, or ‘contracted out’/’excluded’ from security of tenure.
Why would landlords want it excluded from a lease?
It is quite common for landlords to require that rights of security of tenure are excluded from a lease. This is because landlords often wish to retain strict control over the occupation of their property. If security of tenure is excluded, then you, the tenant, must vacate the property at the expiry of the lease (and in accordance with its terms) unless you have negotiated a new lease with the landlord separately. This gives the landlord complete discretion as to whether to offer you a new lease. Some commercial leases cannot validly exclude security of tenure, such as a periodic tenancy.
Why would tenants want security of tenure?
Tenants might want security of tenure because they intend to invest in the property and to become known for trading from the property (generating goodwill). This familiarity of staying in an established location can be important for customer facing businesses. There may be other reasons a tenant would want the comfort of knowing that they have the right to request a lease renewal at the end of their term, with limited grounds available to the landlord for refusal. There is a statutory notice which must be served on the landlord to formally request a lease renewal if relying on security of tenure, and if the parties cannot agree, either party may apply to Court for a decision. If the tenant has security of tenure, then at the end of the contractual term if the tenant does not vacate the property, the lease will continue until it is terminated in one of the ways set out in the Landlord and Tenant Act 1954.
If a tenant is considering the option of sub-letting their leased property, they will want to consider excluding security tenure in the sub-lease (and may be required to by the terms of their own headlease). Depending on the tenant's original commercial lease agreement, an alternative to sub-letting could be a licence to occupy, provided that the terms of the occupation do not in reality mean a sublease has been granted.
What is the process of agreeing a lease that is contracted out?
If you (the tenant) and the landlord have agreed that the lease you will be entering into will exclude your rights of security of tenure (often referred to as ‘contracting out’ or ‘outside the provisions of the Landlord and Tenant Act‘), then once the lease expires, you will not have a right to request a new lease from the Landlord. There’s a particular process for formally agreeing this.
It’s important that both the landlord and the tenant follow the correct procedure to ‘contract out’ of security of tenure to ensure the agreement is valid. In order to give up these rights to renew, the tenant is required to:
- accept and read a ‘warning notice’ from the landlord setting out that you will not have the right to renew the lease, under statute, at the end of its term; and
- swear a statutory declaration at an independent firm of solicitors (costing a standard fee of £5) in response to the landlord’s warning notice, confirming that you are aware of the rights you are giving up. You will need to do this around the same time that you sign the lease. In certain circumstances a simple declaration (not requiring to be sworn) would be sufficient.
For ease of progressing matters, many tenants permit their solicitors to accept service of the ‘warning notice’ on the tenant’s behalf. Whilst we would prefer tenants to swear the statutory declarations themselves, sometimes, for whatever reason, tenants may not be able to and will ask that their solicitor does so on their behalf. In this regard, in Part 3 of this schedule, there is a Landlord and Tenant Act 1954 Authority statement which, if signed by you, allows us to receive the warning notice on your behalf and, if necessary, grants us permission to swear the statutory declaration on your behalf. If you are happy to give us such authority to accept service and to swear the statutory declaration, please sign and date such statement.
It is important that the contracting out procedure is carried out before the tenant is contractually bound to take a new lease.
