Leases: Security of Tenure and Contracting out

What is security of tenure?

Under the Landlord and Tenant Act 1954 (LTA 1954), if a Tenant fulfils the criteria in the LTA 1954, it will have a statutory right to renew its lease at the end of the contractual term. The Landlord can only refuse to grant a new lease to the Tenant in limited circumstances prescribed by the LTA 1954.

When does security of tenure apply?

Security of tenure applies to a Tenant who is in occupation of premises used by it for the purpose of a business. The tenancy must be for a term of more than six months and must not fall into any other exclusion stated in the LTA 1954.

Can a Landlord and Tenant contract out of the LTA 1954?

Yes, a Landlord and Tenant can agree to “contract out” of the LTA 1954 security of tenure provisions providing the lease is granted for a fixed term. This means that the Tenant will not have a statutory right to renew its lease at the end of the contractual term and will have no statutory right to continue occupying the property. The Landlord can choose to offer a new lease to the Tenant, but it is under no statutory duty to do so.

Why would you choose to contract out?

Often, this is the decision of the Landlord. Contracting out gives a Landlord flexibility as to how long and to whom they decide to lease their property to. Careful consideration to the drafting of a lease must be considered when the parties wish to contract out, and it will play an important part in the parties’ lease negotiations.   

How do you contract out correctly?

The Regulatory Reform (Business Tenancies) (England and Wales) Order 2003 (SI 2003/3096) sets the procedure for the Landlord and Tenant to contract out of the security of tenure provisions of the LTA 1954. There are two methods, both of which must occur before completing a lease, an agreement for a lease or the Tenant going into occupation of the premises.

• The Landlord serves a warning notice on the Tenant less than 14 days before the lease/agreement for lease is completed. The Tenant then acknowledges the notice and confirms that they wish to contract out of the LTA 1954 by swearing a statutory declaration.
• The Landlord serves a warning notice on the Tenant more than 14 days before the lease/agreement for lease is completed. The Tenant then gives the acknowledgement and confirmation with a simple declaration.

The Court of Appeal recently confirmed the approach to contracting out in the case of TFS Stores Ltd v Designer Retail Outlet Centres (Mansfield) General Partner Ltd and other companies [2021] EWCA Civ 688.

In that case, the declarations given by the Tenant were sufficient to contract out of the LTA 1954, even though the commencement dates of the leases were omitted from the declarations.

The Court commented that, in reviewing whether the Landlord and Tenant have contracted out, a commercial sense approach is adopted. Providing the Tenant’s declaration fulfils the essential purposes of the form prescribed by legislation, the declaration will suffice, regardless of whether minor omissions exist. The Court stated that the following elements are essential for contracting out:

• The Tenant must acknowledge that the lease excludes the statutory security of tenure provisions of the LTA 1954.
• The Landlord must have served a proper warning notice.
• The Tenant must have read the warning and accept that in entering the tenancy, security of tenure is excluded.

The declaration will be sufficient, provided that the lease is identifiable and the above 3 points are covered. To contract out of the 1954 Act, the Court commented that to reach a different conclusion would have made contracting out very difficult in some circumstances, and often a last-minute process, and could have thrown current contracted out leases into disarray.

What should I do if I am a Landlord or Tenant who may be contracting out of the LTA 1954?

It is important that any Tenant who is negotiating a lease that may be contracted out understands its implications and is advised throughout the negotiation and contracting out process.

If a Landlord wants to contract out of the LTA 1954, the case of TFS Stores Ltd provides some security in terms of the commercial sense approach adopted. However, there are still strict formalities that need to be complied with.

Landlords should consider the following best practice points:

• Consider where to serve the Tenant. Service of the warning notice should be on the Tenant personally or by leaving it at or posting it to the Tenant’s last known place of abode. If service of the notice is on the Tenant’s solicitor, a Landlord should ensure that the Tenant’s solicitor has written authority from its client to accept service of the warning notice.
• Check whether there are multiple tenants. Each Tenant must be served individually and provide a declaration.
• Check whether the Tenant has a Guarantor. A Guarantor must also be served with a warning notice and provide a declaration.
• Always use the forms prescribed in the Regulatory Reform Order 2003. This significantly reduces the risk of using an invalid Warning Notice.
• Take action before the Tenant is bound to take on the lease. The contracting out procedure must be finalised before the Tenant becomes contractually obliged to enter into the lease.
• Provide a copy of the proposed lease. It is necessary to provide the agreed form lease with the warning notice to ensure no doubt about which lease the notice relates to.
• Seek advice when circumstances change. Landlords should take advice if changes to the lease are to be made, including assignment, surrender, and granting a new lease.

Here to help

If you would like further information or assistance in relation to contracting out, please get in touch with the experts in our Commercial Property Team on 0161 941 4000 or email the Commercial Property Team.