Contracting Out Of Commercial Leases

Protection for commercial tenants to remain in business premises beyond the contractual term of their lease has been a staple of English law since the Landlord and Tenant Act 1954.

The way it was sold to me years ago was rather quaint: consider a greengrocer on the local high street. Everyone knows the owner, and he knows all his customers by name. He has been trading for over 20 years and built up goodwill so that people will go to his shop.

Is it fair that the landlord will only renew the lease if the rent is increased far above what other high street shops are paying? What about all the goodwill earned by the business over the last 20 years?

Times have changed. The poor greengrocer was squeezed originally by the advent of supermarkets with shoppers wanting to buy everything under one roof. Now, they face further pressure from online orders, with shoppers no longer needing to step foot in the shop at all. It was also rather simplistic to point the finger at "greedy" landlords rather than acknowledge that landlords need to balance the commercial realities of charging an open market rent and keeping the property occupied.

Despite its age, the principle of the Act remains: it protects the tenant at the end of the term of the lease provided they remain in occupation and are using the property for business purposes. If the landlord is unwilling to grant a new lease, then they must prove to court one of various grounds to oust the tenant. If the landlord is willing to grant a new lease but disagrees on the terms, then the parties may end up letting the court decide those terms.

A lease that has protection of the Landlord and Tenant Act 1954 is stated to be "inside" the Act or to have "security of tenure". The Act also permits leases to be "contracted out" of the Act so that none of those protections apply.

The Law Commission recently looked at the Act in the context of the modern commercial leasehold market, essentially asking if the "contracting out" procedure is fit for purpose, and have published an interim statement setting out their provisional conclusions.

In short, yes.

The process to contract out was changed in 2003 as it previously involved a more complicated process of applying to court and obtaining a court order.

The current process is simpler: the landlord serves a notice on the tenant stating that the lease is to be "contracted out". The tenant provides an acknowledgment of this by making a declaration and waiting for 14 days or making the declaration in front of a solicitor (a "statutory declaration"). The parties then agree in the lease that the lease is to be contracted out.

For a number of types of leases, it makes sense for the tenant not to need protection. An occupier of offices under a five-year lease is unlikely to need security of tenure. They only want the premises short term and it does not matter for them where the office is based. If the rent increase is too high, they simply relocate to alternative premises.

The Law Commission considered a number of alternatives to the current situation:

• Make security tenure mandatory for all leases with no exceptions
• Remove security of tenure completely; or
• Make protection "opt in" rather than contracting out.

Thankfully the recommendations were that there should be no change to the existing model either for when security of tenure applies or the contracting-out process. A significant number of consultees confirmed that the current model strikes the best balance between landlords and tenants.

For parties negotiating a lease, understanding whether it's "inside" or "outside" the Act is crucial. If you're unsure, speak to us first — the implications for your long-term business security can be significant.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.