Commercial property leases and ‘contracting-out’

Unless specific steps are taken prior to completion of a lease of business premises, a tenant usually has an automatic right to renew their tenancy under the Landlord and Tenant Act 1954 (or the ‘1954 Act’). Our commercial property specialist Joy Hancock explains how this right can be excluded from new leases through a provision known as ‘contracting out’.

By contracting out, the parties agree to take the lease outside of the automatic renewal rights as afforded to a tenant under the 1954 Act.

It is not uncommon for landlords to insist these renewal rights are removed or excluded from a lease. This process is often referred to as removing the tenant’s “security of tenure” (as in removing their right to secure a renewal of these lease at the end of its term).

This exclusion allows a landlord to retain control of their property for future lettings, as well as affording the landlord greater flexibility – for example, for future development of his property.

It also ensures a landlord who initially grants a lease on more favourable terms to a tenant is not required by law to grant a further lease on those same terms.

Legally when it comes to the right of the tenant to renew his lease, if this is something the landlord does not want to happen then they must take steps before the lease is entered into in order to exclude those renewal rights.

The only other circumstances in which a landlord can regain possession upon expiry of a lease which has not been contracted out, is if he can prove any of the following statutory grounds for terminating the lease:

  1. The Tenant has an obligation to repair the property and he has failed to do so.
  2. The Tenant has persistently delayed paying rent.
  3. The Tenant has substantially breached other obligations under the lease.
  4. The Landlord can offer suitable and reasonable alternative accommodation to the tenant.
  5. Where the lease to be renewed is only of part of the larger property owned by the landlord, and the objection comes from the Landlord on the basis he can obtain significantly more rent by letting out the whole of the property as one.
  6. The Landlord intends to demolish or reconstruct the property.
  7. The Landlord intends to occupy the property himself for carrying on a business.

In order for a landlord to successfully contract out of or exclude the renewal rights it is important that both landlord and tenant follow the correct statutory procedure. In order to give up these rights to renew, the tenant is required to:

  • Receive a written ‘warning notice’ from the landlord setting out the fact that he will not have the right to renew the lease, under statute, at the end of its term.
  • Either sign a simple declaration or swear a statutory declaration at an independent firm of solicitors, acknowledging that he accepts that he is giving up his renewal rights. This will need to be done before the lease is completed.

Not only does this procedure have to be followed in the precise way prescribed by the 1954 Act, but a clause must be included in the lease to reflect that security of tenure is excluded.

By contracting out of security of tenure the landlord is not obliged to offer the tenant compensation upon leaving the property.

The Landlord and Tenant Act 1954 can be a complex area of law and failure to comply with the prescribed statutory procedure can have serious and costly consequences for a landlord.

A worst case scenario is that a landlord loses their flexibility and control over future lettings and renewals of their property, as a tenant has the ability to request a new tenancy at the end of their lease term while the landlord has only limited statutory grounds upon which to resist this request.

It is therefore extremely important to take legal advice when negotiating or renegotiating business tenancies to avoid any pitfalls.

Do you need commercial legal support or advice on a commercial property? Contact Joy Hancock today for advice on 01889 598888 or email joy.hancock@bowcockpursaill.co.uk

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