When negotiating the terms of a commercial lease, an important question for tenants to consider is whether they wish to ‘contract out’ of their protected right to security of tenure. Duygu Yilmaz explains more in our latest legal update.
What is this right?
The Landlord and Tenant Act 1954 (the ‘1954 Act’) Sections 24-28 allows for tenants to remain in occupation by providing for automatic renewal rights when a commercial lease expires and permits the right to apply to court for the grant of a new lease. A new lease on similar terms as the previous lease can be demanded, or the parties can proceed to negotiate new terms.
Although a tenant may have this right, a landlord can refuse this renewal on certain grounds such as persistent delay in paying rent, breach of repairing covenants or if the landlord wishes to redevelop the premises. So, although parties may not have contracted out of the 1954 Act, this does not guarantee automatic renewal and the landlord may regain possession by successfully arguing one of the statutory grounds.
Why to include/exclude this security of tenure
A landlord’s choice to try to opt out of the 1954 Act might stem from a number of reasons. These might include that the premises are part of a building where the other parts are subject to different leases, or the landlord wishes to develop the property after expiration of tenure or simply due to the term of the lease being short so that it should not warrant an automatic extension.
Landlords retain greater flexibility where a commercial lease is contracted outside the 1954 Act. For example:
- the ability to offer a new lease on terms better suited to the landlord’s current financial circumstances
- the ability to sell the premises with vacant possession
- the ability to simply choose another tenant
Although the above may seem to appeal greatly to landlords, it should also be considered that if a lease is protected by the 1954 Act it is more attractive to a proposed tenant. If that tenant is a reputable individual or company, there is more likelihood of a steady rental income commanding a higher rent, reliability that covenants will be observed and ongoing commitment.
A tenant will wish for the lease to be protected to reduce the prospect of any disruption to their business and the loss of any goodwill that they might have acquired through years of trade. So long as the tenant choses to do so, a landlord will have to grant a new lease at the end of the term unless it can prove one of the statutory grounds mentioned above.
How to exclude this security of tenure
Where parties have decided to contract out of the provisions of the 1954 Act, the landlord must serve a warning notice on the tenant which explains that security of tenure will be excluded and so the tenant will not be able to rely on this provision. In turn, the tenant must sign a declaration confirming that he has understood and agreed to this exclusion. A sworn statutory declaration is required where completion takes place within 14 days after the landlord’s notice has been served.
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