Leaving your business premises unprotected: A quick guide to contracting out
I have been negotiating leases for so long that I often take for granted a fundamental aspect of a lease: is the lease “contracted out” or is it “protected”?
It only hit me when I recently advised different clients in a short period of time what the difference is and what the process is.
So this is a short guide for those who want to know at little more about protected tenancies and contracting out.
A lease sets out the contractual term during which the tenant can occupy the property. At the end of that contractual term the lease ends, no?
No. A tenant of commercial property has a statutory right to renew its lease and to remain in the property at the end of the contractual term if it occupies the premises for the purpose of its business.
The right also enables the tenant to require a new lease on substantially the same terms. If those terms, or the rent, is not agreed, then either party can go to court to determine those terms.
A lease which has these rights is referred to as having “security of tenure” or “protection” under the provisions of the Landlord and Tenant Act 1954.
The Landlord and Tenant Act 1954 was brought in to stop the perception of ruthless landlords significantly increasing rent on expiry of leases against the poor little tenant who had to decide between paying a much higher rent or relocating premises and losing all goodwill gained by trading at the same location. Provided that the relevant conditions are satisfied, the tenant has power over the landlord with the landlord’s right to oppose the grant of a new lease based limited grounds.
Contracted out tenancies
Not all leases created are equal though.
As a sop to landlords, and in the spirit of English law where parties are free to agree whatever terms they want, the legislation permits landlords and tenants to agree that the statutory protection will not apply if they want.
There are often very good reasons for this: the landlord may be looking to redevelop and needs certainty that it can get the property back in the future; the tenant may not need security of tenure where the premises are not material to its business or it only wants a short term lease.
To make the lease “outside of the Act”, the landlord and the tenant have to go through the “contracting out” process:
- the landlord serves a “warning” notice on the tenant in a prescribed form confirming that the security of tenure provisions of the Act will not apply to the tenancy;
- the tenant confirms its acceptance of this by making a simple declaration or a statutory declaration. Normally a statutory declaration is required as there is no requirement to wait 14 days, as is the case when a simple declaration is used; and
- the lease reflects that the parties have followed out the contracting out process There are a few opportunities for missteps, which is why using solicitors is always advise.
Tenants need to understand the statutory protections that a “protected” tenancy provides and what they are giving up if they agree to contract out of the protections.
Landlords need to consider whether they want their tenants to have those protections and, if not, that the contracting process is followed correctly.
For specific advice on protected tenancies and “contracting out”, or if you have questions about any other commercial property issues, please contact James Letchford on 020 7412 0050 or firstname.lastname@example.org.