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Commercial leases can, at times, be confusing both for commercial landlords and commercial tenants. Commercial lease agreements may contain lease provisions you might need help understanding and contain unfamiliar jargon. It is, however, essential that property owners and business tenants understand their commercial lease. They are both legally obligated to abide by it for the lease term.
One lease feature you may not fully understand is what a contracted-out or non-protected commercial lease means. This article will explain what a contracted-out lease is in the UK.
Commercial Lease
A commercial lease is where a property owner allows a business owner to occupy their commercial property for a specific time, which is the lease term. The business owner becomes the commercial tenant and uses the property as their commercial premises. Therefore, the commercial tenant runs their business from the premises where the landlord permits them to carry out specific activities. Commercial tenants pay their landlord an agreed rent at set intervals during their commercial tenancy.
A commercial lease agreement is a binding legal contract that details the commercial lease. It contains all the rights and obligations of both parties to the lease. For example, it will describe the following:
- the lease term;
- rental amount;
- repair and maintenance responsibilities of each party;
- any alienation clauses;
- any rent review clauses; and
- termination rights.
Security of Tenure
A commercial lease may have security of tenure and hence be a protected lease. This protection for commercial tenants stems from the Landlord and Tenant Act 1954. When a protected lease reaches its end term date, it will legally automatically renew unless the commercial landlord gives one of the limited legal reasons it should not. This is the tenant’s statutory right.
A commercial tenant, therefore, remains in occupation under the same conditions unless they request better ones, which the landlord may or may not accept.
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Contracted Out Lease
A contracted-out or non-protected lease does not enjoy the protection leases with the security of tenure enjoy. Therefore, the commercial tenant has no statutory right to renew the tenancy. This is because the landlord and tenant agree that the lease contracts are out of the security of tenure provisions of the Landlord and Tenant Act 1954.
Where a commercial lease contracts out of the relevant sections of the Landlord and Tenant Act 1954, the landlord and tenant will agree on this before entering the lease. This will often be a statutory declaration. The lease agreement will, therefore, contain a clause that states this and to which the commercial landlord and commercial tenant have agreed.
Effect
The effect of a contracted-out lease is that the commercial tenant does not have an automatic right to renew the lease at the end of the lease term. Instead, the lease and, therefore, the tenant’s occupation of the property end.
This cheat sheet outlines what you should be aware of in your lease agreement.
If the commercial landlord wishes to enter a new lease, they must agree with their commercial landlord. If the landlord does not want to grant a new lease to their commercial tenant, the latter has no legal right to remain. The commercial tenant also has no right to ask a court to insist on a new lease. They also have no right to seek compensation from their landlord.
If a landlord’s tenant refuses to move out and remain in occupation, they may be a:
- trespasser;
- tenant in suffering;
- tenant at will; or
- periodic tenant.
Key Takeaways
If you are party to a commercial lease in the UK, it may be a contracted-out or non-protected commercial lease. This applies to most commercial leases.
A contracted-out lease is a commercial lease which contracts out of the security of tenure provisions in the Landlord and Tenant Act 1954. This means it does not offer the legal automatic right to lease renewal at the end of the lease term. Therefore, a commercial tenant has no right to remain in the commercial premises. A commercial landlord may offer a contracted-out lease as it gives them more flexibility at the end of the lease term.
If you need help understanding contracted-out leases in the UK, LegalVision’s 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. Call us today on 0808 196 8584 or visit our membership page.
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