Landlord and Tenant Act 1954: Should Your Commercial Lease Be Inside or Outside the Act?
By Farina Moghal, Commercial Property Solicitor
What is security of tenure (Inside the Act)?
If a lease is protected under the Landlord and Tenant Act 1954 (“1954 Act”), this means that a commercial tenant has the right to apply for a new tenancy at the end of the current lease term, and may remain in the property to carry on their business after the original lease expires.
The tenant can:
- negotiate the terms of the new tenancy whilst remaining in the property; and
- request a new tenancy and negotiate its terms.
If the landlord wants to oppose the grant of a new tenancy:
- they will need to serve formal notice (section 25 notice) in prescribed form not less than 6 months, nor more than 12 months before the date of termination; and
- they can serve a section 25 notice stating whether they oppose the grant of a new tenancy and, if they do, specify one or more of the grounds of opposition under section 30(1), such as offering alternative accommodation to the tenant; or the property is to be demolished or reconstructed; or the landlord wishes to occupy the property for their own business, to name a few.
What is exclusion / contracted out (Outside the Act)?
If both landlord and tenant agree to exclude the security of tenure provisions of the 1954 Act, this means the commercial tenant does not have an automatic right to a new tenancy. Unless the parties agree otherwise, the lease will come to an end on the contractual expiry date.
The tenant will not have the right to:
- remain in the property after the lease expiry date and must vacate the property; and
- extend their current lease and any new tenancy will be negotiated on new terms and will not have to be on similar terms as the existing lease. There is no statutory right for the tenant to require the landlord to grant a new tenancy.
The landlord will want the lease contracted out to have:
- more control of the property at the end of the lease term; and
- the ability to plan ahead for their commercial property, for instance if they decide to occupy it.
Pros and Cons
Landlord: the landlord may favour exclusion of the 1954 Act provisions, to ensure the tenant has no right to remain in the property and the landlord has greater certainty that the tenant will not have a statutory right to a new tenancy at the end of the term. The landlord will then have liberty to plan future commercial decisions for the property such as redevelopment, to occupy or change use of the property for instance. At the end of the term, if the tenant decides to take a new tenancy of the property, the landlord has more leverage to be able to negotiate new favourable terms of the new tenancy. Alternatively, as the market is unpredictable, the landlord may prefer to keep the lease inside the act so that the tenant has statutory protection and may seek a new tenancy at the end of the term and this may seem more marketable to a tenant who needs certainty. In addition, if the landlord has a good tenant such as a well-known high-street business, this may provide reliable rental income and make the property a more favourable investment in the long run.
Tenant: with rents rising, the tenant would possibly prefer for the lease to be inside the 1954 Act which means they will have security of tenure and be able to remain in occupation for longer whilst negotiating the terms of a new tenancy with the landlord. In the current economic market, for instance if the tenant has carried out expensive fitting out works, this would allow for a degree of predictability for future forecast with the business. Having said that, if the tenant is certain they do not want to stay in the property at the end of the lease term, then they would not have any disagreement to being excluded from the 1954 Act.
Notice and Declaration
To exclude the 1954 Act security of tenure provisions, the landlord must serve a warning notice on the tenant confirming the lease is to be excluded from the 1954 Act security of tenure provisions and that the tenant must seek professional advice on the notice. If the tenant is served with a warning notice at least 14 days before entering into the tenancy or becoming contractually bound to do so, then they will sign a simple declaration. If the 14 day period has not been satisfied, then the tenant must make a statutory declaration before entering into the tenancy or becoming contractually bound to do so, in the prescribed form before a person authorised to administer statutory declarations.
Where there is a guarantor to the lease, the landlord must ensure that the contracting out procedure is properly implemented.
The landlord must exercise extra caution when serving the notice to ensure it is done correctly. If the statutory requirements for contracting out are not complied with properly, before the tenant becomes contractually bound to enter into the tenancy and/or before the tenancy is entered into, the intended exclusion may be ineffective, and the tenant may obtain the protection of the 1954 Act and gain security of tenure. The landlord must make sure the notice is addressed correctly, and the declaration is signed properly. In addition, the instrument creating the tenancy must record the agreement to exclude the 1954 Act security of tenure provisions.
