Table of Contents
As a commercial landlord, there are many elements to consider before you enter into a commercial lease with a potential tenant. In particular, you must draft the commercial lease agreement carefully, ensuring it is fair and reasonable. A commercial lease is legally binding, so you must abide by your rights and obligations once you sign it. One key consideration is whether to use a protected lease with security of tenure or a contracted-out lease. This article will explain contracted-out commercial leases and the legal procedure to take.
What is a Protected Lease?
Commercial leases automatically have security of tenure, meaning they are protected leases. This stems from UK property law, namely, the Landlords and Tenants Act 1954.
A protected commercial lease is a commercial lease that grants your commercial tenant the legal right to renew their lease when it reaches the lease term end date. This means the lease continues on the same or new terms, and your tenants remain in your property. Security of tenure also means the lease will continue until this occurs (i.e. it will not automatically end at the end date).
What is a Contracted-Out Lease?
A contracted-out or excluded lease is a commercial lease that does not have security of tenure and, therefore, is not a protected lease. This is because it has “contracted out” of the sections of the Landlords and Tenants Act 1954 which grant security of tenure. Instead, your commercial tenant:
- has no automatic right to remain in the commercial premises, so must vacate at the lease end date unless you both mutually agree on a new lease;
- cannot get compensation from you; and
- cannot ask a court to keep the lease terms and rent as they currently are should you both agree to a new lease.
Call 0808 196 8584 for urgent assistance.
Otherwise, complete this form and we will contact you within one business day.
Procedure
Warning Notice
The first step is to serve a warning notice on your commercial tenant that you wish to offer the commercial lease without security of tenure. You should do this at least 14 days before the commercial lease is due to start. This will act as a cooling-off period. However, in practice, most landlord’s solicitors will require a statutory declaration to be provided and do not give this much time between the agreed form of the lease and the planned commencement date.
The warning notice will state that:
- you will offer the lease without security of tenure;
- your commercial tenant should take professional advice before they agree to sign the commercial lease;
- they must get this professional advice from a surveyor, lawyer or accountant;
- at the end of the term, the tenant must leave the commercial premises;
- your tenant has no legal right to compensation from you; and
- if you and your tenant agree to a new lease, your tenant has no right to ask a court to keep the rent at the same level.
It is helpful to attach the commercial lease agreement to the notice.
Declaration
Once your tenant receives your warning notice, they can reply in two ways. This depends on the timeframe in which you issue them the notice in terms of when the commercial lease begins or when you both sign the lease agreement.
Your tenant will reply with an informal declaration if you serve them the notice more than 14 days before the commercial lease begins or the lease agreement is signed. This will state:
- receipt of the notice;
- that they have read the information in the notices; and
- that they accept the details of the above.
However, if you serve the notice less than 14 days from when the commercial lease begins, or the lease agreement is signed, your tenant must sign a statutory declaration. This essentially includes what an informal notice will consist of but needs a witness, either an independent solicitor (not the one acting for you in reviewing the lease) or a commissioner of oaths.
Endorsement
The final step is to include an endorsement on the lease. This confirms that:
- you have notified your tenant;
- your tenant replied with a declaration; and
- both parties agree the lease is contracted out of the relevant sections of the Act.
You would normally insert the endorsement at the same time as the lease is dated. Importantly, you must complete this procedure correctly; otherwise, your lease will not be contracted-out, and your commercial tenant will have the legal right to renewal.
This cheat sheet outlines what you should be aware of in your lease agreement.
Key Takeaways
As a commercial landlord, you can choose between issuing a potential tenant with a protected lease or a contracted-out lease. A protected lease benefits from security of tenure, meaning your commercial tenant has the legal right to renew their lease when it reaches the end date. Alternatively, a contracted-out lease does not give a tenant this right. Instead, once your tenant reaches the lease term end date, the lease ends unless you agree otherwise, and your tenant must vacate the commercial premises.
It is essential to follow the legal procedure for a contracted-out lease. Before the lease starts, you must notify your tenant that the lease will be a contracted-out lease. Next, they must respond with a declaration. Finally, before the lease begins, you must endorse the lease to prove the procedure is complete.
If you need help understanding the procedure for contracted-out commercial leases in the UK, our experienced leasing lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A commercial lease allows a business owner to occupy a property as their business premises in return for rent.
A contracted-out commercial lease is a commercial lease that does not benefit from security of tenure. As such, it does not offer a tenant the legal right to renew the lease at its end date.
We appreciate your feedback – your submission has been successfully received.
