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Contracting out – The Devil is in the Detail

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Greenaway Scott provide some insight into ‘Contracting out’.

What is contracting out?

This means that a lease of business premises has been excluded from the security of tenure provisions in the Landlord and Tenant Act 1954.

In order to have security of tenure under the 1954 Act a tenant must have been occupying a property for the purpose of running their business.  The security of tenure means that the tenant has a statutory right to renew their tenancy at the end of the lease however where parties agree to contract out a lease to exclude the security of tenure provisions and follow the correct procedure, the tenant will not have the benefit of a statutory right to a renewal lease at the end of the lease term.  This prevents the tenant from applying to the court for a renewal lease where the parties are unable to agree new lease terms with the landlord.

How do you contract out?

There is a specific procedure which must be adhered to in order to correctly exclude the security of tenure provisions. Any failure to comply with this procedure will mean that the tenant may still have the benefit of a statutory right to renew. Given the consequences that may flow from this, we strongly advise parties to seek legal advice to ensure the correct procedure is followed.

  1. The landlord serves a written warning notice on the proposed tenant confirming the statutory rights that the tenant is about to sign away. A copy of the lease/agreement for lease to be entered into is usually attached to this warning notice.
  2. The tenant then makes a formal declaration confirming that it has read and understood the warning notice.
  3. The parties then enter into the relevant lease, which must be endorsed with details of the warning notice and the tenant’s declaration.

The landlord’s warning notice must be served 14 days before the tenant is contractually bound to enter into the lease. This effectively acts as a cooling off period for the tenant to consider its position. Once the 14 day period has lapsed, the tenant can make a simple declaration. However, where the parties are not able to or do not want to wait 14 days, the tenant can sign a statutory declaration, which will need to be signed and witness by an independent solicitor. This usually only takes 5 minutes and there is usually a small administrative cost for signing the declaration in front of the solicitor.

Practical tips for both landlord and tenant:

  • Whether you are a landlord or a tenant of business premises, ensure that you have a system in place to review your property portfolio on a regular basis.
  • Review your strategy for any properties where the contractual term of the lease expires within the next 12 – 18 months. This allows the landlord to try and avoid any problems associated with tenants remaining in occupation and it also allows tenants to look at the market for alternative premises and the potential yield up costs.
  • For landlords, where any contracted out lease has expired then consider whether it is necessary to put a rent stop in place. Where a rent stop is required, ensure that any property/managing agents are instructed accordingly.
  • Where the parties wish to enter into a new lease then any negotiations should start as early as possible. Consideration should be given as to whether a tenancy at will should be entered into to ‘regularise’ any occupation by the tenant after lease expiry and pending completion of a new lease.