Statutory security of tenure provisions protect commercial tenants occupying premises for business purposes. So what does this mean for landlords who want an option to break? When negotiating new leases, landlords should carefully consider the effect of the security of tenure regime on any proposed contractual options to break. Unless the lease is validly excluded from security of tenure provisions, a contractual break clause may not operate as intended and could leave landlords in an adverse position.
What exactly is security of tenure?
The Landlord and Tenant Act 1954 (the “Act”) confers a statutory right on commercial tenants to remain in occupation of premises after the expiry of their lease and an automatic right to renew their lease (known as a protected lease). While some tenancies are automatically excluded from the provisions of the Act, in many cases to avoid any statutory right to renew arising, the landlord and tenant must expressly agree that the security of tenure provisions under the Act are not to apply, if that is the intention of the parties. This is known as “contracting out” of the Act and such an agreement will only work if the correct statutory notice procedure is followed.
Landlords’ break options – no problem when lease is contracted out
Landlords often seek to retain flexibility to terminate leases prior to the end of their contractual term by including a break option in the lease. However, to be sure that the break option will operate reliably, the landlord must first ensure that the lease is validly contracted out of the Act.
What if the lease is not contracted out of the Act?
Where a landlord exercises its contractual right to terminate the lease under a break option within a protected lease, that alone is not sufficient to effectively bring the lease to an end. Exercise of the break option will terminate the contractual term of the lease, but the statutory tenancy protected by the Act will still come into effect as soon as the contractual term ends. Landlords must do more to end a secure tenancy and will need to accompany the break notice with a notice pursuant to section 25 of the Act relying in good faith on one of the statutory grounds set out below to terminate the lease.
Landlords of protected tenants need to be aware of this to avoid being left without the flexibility they thought they had secured by including the contractual break option.
What are the statutory grounds for termination of protected leases?
(a) Breach of repairing obligations
(b) Rent arrears
(c) Other substantial breaches of covenant
(d) Suitable alternative accommodation offered
(e) Tenancy was created by a sub-letting and landlord requires possession of the whole to achieve a substantially higher rent
(f) Landlord’s intention to demolition or reconstruct
(g) Landlord intends to occupy
Cases (e)-(g) above are known as the “no fault” grounds and provided that the landlord validly raises one of these grounds, the lease will terminate but the tenant may be entitled to compensation. All of the statutory grounds are accompanied by additional pre-conditions (on which a vast amount of case law exists), meaning there are extensive hurdles for landlords to get over in order to succeed in invoking one of them. In respect of ground (f), it is worth noting that the recent Supreme Court decision in the Cavendish case confirmed that the landlord’s motive for redevelopment is relevant; the landlord must have a genuine intention to redevelop in order to succeed using this ground. In addition, the Act provides a strict timetable for serving a section 25 notice based on when the tenancy is to end.
The bottom line
Put simply, where a landlord seeks the ability to terminate a lease early without having to go through the legal hoops of termination under the Act, it should wherever possible ensure that the lease is contracted out of the Act up front. Appropriate legal advice should be sought to make sure that the strict procedure for excluding a lease from the protections of the Act is followed to avoid any risk of the lease remaining protected.