Contracted-Out Leases – what does it mean?
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All tenants of business premises have a right to stay in the premises at the end of the term if they are occupying them for the purposes of their business. The tenancy does not end. This right is contained in Part II of the Landlord and Tenant Act 1954. It is known as security of tenure. The tenant will also have a right to be granted a renewal lease and the landlord can only oppose it on certain limited grounds.
So what does ‘contracted-out’ mean then? If a landlord and tenant agree that the lease will be ‘contracted-out’ this means the tenant:-
There are 3 parts to the contracting out process. A landlord’s warning notice, a tenant’s declaration and endorsement on the lease. A landlord must issue and serve on the tenant a warning notice in the form or substantially the same form set out in Schedule 1 to the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003.
The notice advises the tenant that a lease is being offered without security of tenure and the tenant should not commit itself to the lease without seeking professional advice from a surveyor, lawyer or accountant. It sets out that the tenant must leave the premises at the end of the term, has no right to stay in it and has no right to compensation or to ask a court to fix the rent if a new lease has been offered.
If a warning notice is served 14 days or more before the lease or an agreement for lease is completed, a tenant is able to reply with a simple declaration to say that it has received the notice, read and accepts the consequences of entering into the lease.
If a warning notice is served less than 14 days before the lease or an agreement for lease is completed (e.g. because of time pressures), a tenant will need to make a statutory declaration in front of an independent solicitor or commissioner for oaths to confirm the above instead.
Once the declaration or statutory declaration has been received, an endorsement must be made on the lease to confirm that the landlord served a warning notice, the tenant has made a declaration or statutory declaration and the parties agree that sections 24 to 28 of the Landlord and Tenant Act 1954 are excluded. The lease can then be completed.
Reasons to ‘contract-out’
Why might a landlord want a lease to a tenant to be contacted out?
A landlord may have various reasons why it wants to contract-out. One reason could be that it decides to redevelop the property or land and will want the ability to do this when the lease term ends as the tenant will have to vacate. It could also be because it wants short term ‘pop-up’ lettings or perhaps a tenant is not ideal tenant at a particular time but it wants the rental income rather than having an empty property.
A decision to contract-out is one that is made by the landlord and tenant or their agents as part of the lease negotiations. Its effect is often misunderstood. A decision whether to proceed with a contracted-out lease is an important one and one which should be considered carefully following appropriate legal advice.