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Landlord and Tenant Act 1954
Landlord and Tenant Act 1954 Part 1
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.
Landlord and Tenant Act 1954 Part II
The procedure for “contracting out”
The warning notice must be in the prescribed form and served on the tenant (by the landlord or its solicitors) or in case of joint tenants on each of them individually. The notice must include the tenant’s full name and address in case of an individual and in case of a company, its name, registration number and registered address. The notice can also be served on the tenant’s agent i.e. a person authorised by the tenant to accept service of the warning notice.
When a warning notice is served on the tenant, it must make a declaration that it understands what rights it is giving up. The declaration can be either statutory or simple. If the notice is served at least 14 days before the new lease is entered into, the tenant can make a simple declaration, otherwise is must make a statutory declaration. The statutory declaration must be made in front of an independent solicitor (not someone at the firm instructed by the tenant) or commissioner for oaths for a fee of £5. Solicitors generally insist that a statutory declaration is made to avoid the argument as to the validity of the notice if the same is not dated. As in the case of the warning notice, the declaration must be in the prescribed form.
The declaration can be made either by the tenant or by a person authorised by the tenant to do so. In case of a company, it will need to be an individual, a director as it will have the necessary authority to do so. If the lease is taken in the name of an individual that person must make a declaration. It is common practice that the tenant authorises in writing its solicitor to make the declaration on its behalf.
Can the notice be served, the declaration sworn and lease completed on the same day?
Yes, provided that the “contracting out” procedure took place first and the lease was completed following on from that
Landlord and Tenant Act 1954 Part III
Option to renew a “contracted out” lease
Nothing in the Landlord and Tenant Act 1954 states that including an option to renew in a “contracted out” lease is prohibited.
The problem arises for the landlord however, when the tenant exercises the option, but the exclusion procedure has not been followed for the renewal lease.
As soon as the tenant takes advantage of the option to renew, the landlord and the tenant are then bound to enter into the renewal lease. Therefore, it is necessary that the landlord’s solicitor make sure that before the original lease is completed, the exclusion procedure for the original lease and the renewal lease is followed.
If the original tenant assigns the lease before the option is exercised, the landlord will serve a warning notice for the renewal lease on the new tenant and its guarantor, if applicable.
If the landlord assigns the reversion before the option is exercised, its successor may serve its own exclusion notices on the tenant.
An alternative to the above would be to insert a condition in the original lease that the exercise of the option is subject to the exclusion procedure being completed before such option is exercised. In this way, the landlord will be reminded of carrying out the exclusion procedure and in case of the assignment, the same should be subject to a condition that the lease cannot be assigned without the landlord’s consent. Otherwise, the landlord may find out too late about the assignment for the renewal to be excluded.
Landlord and Tenant Act 1954 Part IV
What is my status if I have remained in occupation following the expiry of a contracted-out lease?
If the landlord is not taking active action to demand possession of the property and you are not happy with the uncertainty of your occupational status, you should contact your landlord to regularise the situation. If it is your intention to remain in the property, it may be possible to negotiate a renewal lease with your landlord. Otherwise, a holdover tenancy will have arisen – a licence, tenancy at will or periodic tenancy.
Licence: this type of tenancy arises if you do not have exclusive possession of the property and occupying it for business purposes. A true licence can only be determined by looking at the terms of the document.
Tenancy at will: this type of tenancy is personal, and it will not specify length of a tenant’s duration or the payment (if undocumented), and it can be terminated by the landlord or you at any time. No time period needs be specified as the landlord may state that the tenancy is at an end and that possession is to be given back immediately. It arises where the holding over takes place in anticipation of a new lease being granted and the negotiations for the new lease have started.
Periodic tenancy: this type of tenancy arises where a landlord or its managing agent accepts the rents under the current lease but there are no on-going negotiations for a new lease. This will also include negotiations which have broken down as a result of the parties’ not being able to agree the terms. A periodic tenancy will always attract security of tenure (the right to a new lease) and a prudent landlord will not agree to a periodic tenancy intentionally but rather ensure that one is never granted.
Does a lease for a term of less than six months attract security of tenure?
If you have a lease of less than six months but the lease contains a right to renew beyond the six months or if you or the former tenant has been in occupation for a period of more than 12 months, such a lease will attract security of tenure.
For advice on leases, please contact Agata Marosz.
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.