What is a ‘contracted out’ lease?
When referring to a ‘contracted out’ or ‘non-protected’ lease we are referring to a lease of business premises which has been excluded from the security of tenure provisions in the Landlord and Tenant Act 1954 (the 1954 Act).
Under Part II of the 1954 Act, where a tenant has been occupying a property for the purpose of running their business, the tenant would ordinarily have a statutory right to renew their tenancy at the end of the lease. However, the parties can, subject to following the correct procedure (which is explained below), agree that this ‘security of tenure’ is excluded, meaning that the tenant will not have the benefit of a statutory right to a renewal lease at the end of the lease term and therefore cannot apply to the court for a renewal lease where it is unable to agree terms with the landlord.
What are the issues?
Whether or not a lease should have 1954 Act security of tenure protection is an important consideration for the parties at the grant of a new lease, given that the landlord may want to retain the ability to choose its tenants whereas the tenant may need to protect its position in the market which may be closely related to its location. A number of factors may affect the decision, including the bargaining power of the respective parties, the economic climate, and any future business plans. The decision should be taken with appropriate legal advice.
Where a lease is contracted out it will come to an end on the contractual expiry date – but what happens if the tenant does not vacate by that time?
A tenant that remains in occupation might be a trespasser/tolerated trespasser; a tenant on sufferance; a tenant at will; or a periodic tenant – all of which have different, and potentially problematic, legal and practical consequences.
How to avoid problems – Practical tips
Given the potential consequences of a tenant remaining in occupation after a contracted out lease has expired (more detail as to which is explained below), the parties may wish to consider taking the following steps:
- Whether you are a landlord or a tenant of business premises, ensure that you have a system in place to review your property portfolio on a regular basis.
- Review your strategy for any properties where the contractual terms of the lease are expiring at least 12 months and, preferably 18-24 months, in advance. Landlords will want to avoid the problems associated with unwanted tenants remaining in occupation, and early consideration of an exit strategy will allow sufficient time for tenants to assess alternative properties and the costs involved.
- For landlords, where any contracted out lease has expired then consider whether it is necessary to put a rent stop in place. Where a rent stop is required, ensure that any property/managing agents are instructed accordingly.
- Where the parties wish to enter into a new lease then any negotiations should start as early as possible. Consideration should be given as to whether a tenancy at will should be entered into to ‘regularise’ any occupation by the tenant after lease expiry and pending completion of a new lease.
What is the procedure for contracting out?
Where a lease is to be ‘contracted out’ of the 1954 Act, a specific procedure must be followed. Any failure to comply with this procedure will mean that the tenant will have the benefit of a statutory right to renew. Given the consequences that may flow from this, it is important to seek advice and assistance from an experienced real estate lawyer. In summary, however, the procedure can be broken down as follows:
- The landlord serves a written warning notice on the proposed tenant confirming the statutory rights that the tenant is about to sign away. A copy of the lease/agreement for lease to be entered into is usually attached to this warning notice.
- The tenant then makes a formal declaration confirming that it has read and understood the warning notice.
- The parties then enter into the relevant lease, which must be endorsed with details of the warning notice and the tenant’s declaration.
The landlord’s warning notice must be served 14 days before the tenant is contractually bound to enter into the lease. This effectively acts as a cooling off period for the tenant to consider its position. Once the 14 day period has lapsed, the tenant can make a simple declaration. However, where the parties are not able to or do not want to wait 14 days, the tenant can sign a statutory declaration, which will need to be signed and witness by an independent solicitor. The latter is often the process used as it is best practice to ensure the procedure is completed as close as possible to when the relevant lease is in the final agreed form and where no further amendments will be made.
Generally, a tenant which has remained in occupation of the property following the expiration of its contracted out lease is vulnerable, especially where its legal status is as a trespasser, tenant on sufferance and/or a tenant at will.
Where a tenant refuses to vacate as legally required and becomes a trespasser, the position is relatively straightforward for the landlord and steps can be taken to regain possession, which may include court proceedings.
A tenancy on sufferance arises when a tenant wrongfully remains in occupation of the premises after its lease has expired and the landlord has not confirmed whether or not it is willing for the tenant to remain. This type of tenancy is created by operation of law and can enable the landlord to recover possession.
In other circumstances, a number of factors may influence the legal status of a ‘tenant’ who has failed to vacate by lease expiry. Whilst each situation will be fact sensitive, there are some general questions to consider (such as, has the landlord indicated a desire to recover possession; are the parties engaged in ongoing negotiations regarding a new lease; and/or has rent been demanded and accepted by the landlord?). Where factual investigations suggest that an occupier may be a periodic tenant, security of tenure protection under the 1954 Act may apply. That can make it very difficult (if not impossible), not to mention time-consuming and costly, for a landlord to recover possession.
Given the above, it is vital to seek legal advice at an early stage and preferably before any contracted out lease expires. Walker Morris’ Real Estate Litigators specialise in advising both landlords and tenants on all aspects of portfolio management and are experts in providing comprehensive exit strategy advice, including the effective management of lease terminations and resolving any dilapidations issues.