Landlord and Tenant Act 1954 Part I
What does a “contracted out’ lease mean?
Part II of the Landlord and Tenant Act 1954 (‘the 1954 Act’) applies to all commercial leases. It gives the right to commercial tenants to remain in occupation after the expiry of the contractual term of a lease and renew the current lease at a market rent unless the lease is terminated by the landlord in a form prescribed by the 1954 Act, or if landlord objects to a lease renewal and proves one of the statutory grounds:
- Property is in disrepair
- Rent arrears
- Other breaches of covenant
- Suitable alternative accommodation
- Tenancy was created by subletting
- Landlord’s intention to redevelop/occupy.
If the tenancy is contracted out, it means that the tenant must return the property to the landlord when its lease expires and will have no continuing right to occupy. Therefore, it is very important that the tenant gives careful consideration to the fact that it will lose the benefit of the statutory right of renewal at the end of the lease term if its tenancy is contracted out.
The landlord’s decision whether or not to contract out a lease may be influenced by the tenant’s financial strength or the landlord’s future plans for the property. The landlord and tenant should agree in advance that the 1954 Act will not apply. Once this is agreed, the landlord’s solicitor will draft a lease and insert a provision in the lease to that effect.
However, simply adding wording in the lease stating that the 1954 Act will not apply, will not comply with the procedure that landlords must follow to ensure that the tenant does not have the right to remain at the property at the lease end. It is essential that the contracting out procedure is done correctly otherwise the tenant will gain protection of the 1954 Act.
When does the contracting out procedure need to be done?
The contracting out procedure must be done before the landlord and the tenant are contractually bound by the lease.
The procedure has three stages that must be followed:
- The landlord must serve a warning notice on the tenant stating the rights the tenant will give up
- The tenant must make a declaration that he understands the rights he is giving up
- Wording must be added to the lease stating that the 1954 Act will not apply and give details of when a warning notice was served and by whom the statutory declaration was sworn.
If the parties are entering into an agreement for lease, the contracting out procedure must be completed before the parties sign the agreement. Once the agreement has been signed and dated, the tenant is contractually bound to take the lease.
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Please note the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.