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When you enter a commercial lease with a commercial tenant, you need to make various decisions about the details of the commercial lease for the business premises. A commercial lease agreement will usually contain these details. For example, you must consider the rental amount, the lease term and other details such as any break clause. One important consideration is whether you wish to offer a protected or contracted-out lease. If you decide to provide the latter, there is a procedure you must abide by, or the lease will remain protected. This article will explain the procedure for a commercial landlord to contract out of the security of tenure in a commercial lease.
Security of Tenure
A commercial lease usually automatically has security of tenure. This means it is a protected lease. The details about the security of tenure are within the Landlord and Tenant’s Act 1954, which provides that a commercial tenant has the automatic legal right to renew their tenancy at the lease end date.
As a commercial landlord, you can only refuse if you can cite one of the legal reasonable grounds for doing so.
Contracted-Out Lease
A contracted-out lease is a lease that contracts out of the provisions in the Landlord and Tenant Act 1954 that provide for security of tenure. Therefore, the commercial lease does not offer your commercial tenant the legal automatic right of renewal after the lease term ends. Instead, your tenant has no right to remain in your property.
They also have no right to seek compensation or ask a court to fix the rental of any new lease you may agree to
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How to Contract Out
If, as a commercial landlord, you decide you do want to offer a contracted-out or non-protected commercial lease, you will need to know how to go about it. It is essential to understand that you must do this in a specific way due to the significance of offering a contracted-out lease rather than a lease with the security of tenure.
Therefore, you should get assistance from a legal professional. If you do not follow the correct procedure, your tenant still enjoys the protection that a lease with the security of tenure offers.
Regulatory Reform (Business Tenancies) Order 2003
When you offer a lease that contracts out of the Landlord and Tenant Act 1954, the procedure must comply with the above legislation. This sets out specific requirements as follows:
- your commercial tenant must acknowledge that as the commercial lease is a contracted-out lease, they lose statutory protection;
- the above declaration just takes place before your tenant signs the lease agreement; and
- In the commercial lease agreement, there must be a provision which details the contracting out procedure.
Therefore, the process you follow should follow the three steps below.
1. Warning Notice Regarding Security of Tenure
The first step you should take as part of the contracting out procedure is to serve your commercial tenant a notice to explain what their statutory rights of security of tenure mean and that they sacrifice this protection by contracting out. The notice should expressly state that:
- the tenant should seek professional advice before going ahead with the lease;
- they will need to leave the premises at the lease term end date as they have no right to remain; and
- they have no right to seek compensation and ask a court to fix the rent for any new lease.
The notice must be in the form (or similar to) as set out in the Regulatory Reform (Business Tenancies) Order 2003. Usually, a landlord will serve a copy of the lease agreement with this notice. You must complete this step at least 14 days before you wish the lease to start. This allows your tenant a cooling down period to consider whether they want to proceed.
2. Declaration Regarding Security of Tenure
After 14 days, your commercial tenant makes a declaration to evidence that they read and understood your notice. Hence, they know the effect of the intended contracted-out lease, and this does not need to follow any specific wording. It can also simply state “on a date to be agreed” regarding when the lease agreement may start. You should, however, ensure that whoever executed the statutory declaration can do so.
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Should you both agree there is no need to wait 14 days, your tenant can sign the declaration sooner, providing an independent solicitor signs and witnesses it.
3. Lease Endorsement
Once steps one and two are complete, you and your tenant will enter into the lease and sign the lease agreement.
Key Takeaways
If you decide to contract out of the security of tenure in a commercial lease in the UK, you must follow a set of legal procedures. If you fail to follow this, the lease remains protected.
The procedure contains three main stages. The first is to serve your commercial tenant with a notice that the lease will not have security of tenure and the consequences of this, advising your tenant to seek legal advice. If your tenant accepts your notice, they will sign a declaration reflecting this. Finally, the lease will endorse the procedure that your tenant was part of, and you will both enter into the commercial lease.
If you need help understanding how to contract out of the security of tenure in a commercial lease 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 for a low monthly fee. So call us today on 0808 196 8584 or visit our membership page.
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