Security of Tenure and Contracting Out Explained
Jasmine Keeble, Commercial Property Legal Assistant
What is Security of Tenure and what does ‘contracting out’ mean?
Where a Tenant is taking a commercial lease for a term of six months or more, the Tenant is automatically granted the right to renew the lease at the end of the contractual term under sections 24- 28 of the Landlord and Tenant Act 1954 (the Act). This is called ‘security of tenure’ and can only be opposed by the Landlord in certain, limited circumstances.
If the end date of a lease can be predicted with certainty and no reference is made to the lease continuing after this time, the Landlord and Tenant can agree that security of tenure shall not apply to the lease through a process called ‘contracting out’. When a lease is ‘contracted’ out the Tenant must leave the property at the end of the contractual term and is not entitled to compensation. However, if the Landlord chooses to offer a new lease despite ‘contracting out’, the Tenant will have no right to ask the court to make alterations to the rent or tenancy terms of the new lease.
How to ‘contract out’:
The procedure for ‘contracting out’ is set out in Section 38 of the Act and is a relatively straightforward process. In order to start this process, the Landlord must serve notice on any and all tenants and their guarantors (if any) stating their intention to ‘contract out’ the tenancy.
If the Landlord serves notice of their intention more than 14 days before the lease is completed or before the Tenant comes into actual occupation, the Tenant can make a simple declaration in writing, stating that they have received and read the notice and agree to accept a lease on those terms. This does not have to be independently witnessed and the Tenant is not obligated to return a copy of this to the Landlord. In practice, it is strongly recommended that the Landlord insists on seeing the original or a certified copy of the declaration so as to be sure that the procedure has been followed and that security of tenure has been validly excluded from the lease.
The Landlord may also serve notice of their intention less than 14 days prior to completion of the lease. This tends to happen more frequently in practice, and will result in the Tenant being required to return a statutory declaration instead. There is a set form and wording for this document, and it must be sworn before an independent solicitor or commissioner for oaths. If the signing is not witnessed, the lease will not be validly contracted out, and this cannot be rectified retrospectively.
The practical consequences of not ‘contracting out’:
Where a lease has not been contracted out and there is disagreement over a potential lease renewal, there are options available for both the Tenant and the Landlord. If a Tenant wishes to remain in occupation at the end of the lease term, they must serve a notice on the Landlord under section 26 of the Act to request a new lease. Where the Landlord has then refused this notice, the Tenant may still apply to the court to request that the new lease be granted.
Section 25 of the Act allows the Landlord to serve notice on the Tenant to end a tenancy which has the benefit of security of tenure. The Landlord can serve this notice at any point between 6 and 12 months before the end date specified in the lease, and must ensure that the specific ground(s) on which they are opposing a lease renewal are included within the notice. However, if a Tenant has already requested a renewal of the lease, the Landlord must serve the section 25 notice opposing the renewal within 2 months of the Tenant’s request being made.
If a section 25 notice has been served but the Tenant and Landlord are unable to come to an agreement, the Landlord can apply to the court to ask them to terminate the current tenancy without granting a new lease. This application to the court must contain the grounds on which the Landlord wishes to rely and must be submitted to the court before the date specified in the section 25 notice.
Grounds the Landlord can rely on to refuse a lease renewal:
The Landlord may wish to rely on several grounds when opposing a lease renewal as, whilst these can be removed from the request during the process, any ground which will be relied upon must have been stated at the beginning for it to be valid. There are 7 grounds for opposing a lease renewal which the Landlord may rely upon:
a) The Tenant has not fulfilled their repairing and maintenance obligations and have allowed the property to fall into disrepair
b) The Tenant has persistent rent arrears or non-payment of rent
c) The Tenant has breached other covenants
d) The Landlord has offered, and is able, to provide alternative accommodation which carries reasonable terms and is suitable for the Tenant’s needs
e) The property is sublet, and the Landlord wishes to let or dispose of the property as a whole rather than renew the current sublease
f) The Landlord intends to demolish or carry out substantial works of construction which cannot reasonably be done whilst the tenancy continues
g) The Landlord intends to occupy the property themselves as a residence or for the purpose of business
Where a Landlord seeks to rely on one or more of the first 4 of these grounds, and has supplied evidence in support of this, the court has discretion as to whether they choose to grant the termination or allow security of tenure to apply, potentially with additional conditions.
This discretion does not apply if the Landlord relies on, and provides evidence of, grounds (e), (f) or (g). These are known as “no fault” grounds, and will result in the court terminating the current lease without granting a new one. The Tenant will also be entitled to statutory compensation if a “no fault” ground is relied upon unless a suitable alternative accommodation and tenancy is provided. However, most leases contain a clause excluding the Tenant’s right to compensation to prevent this from becoming an issue.