What Does ‘Contracting-Out’ Mean for Business Tenants?

November 8, 2017

When occupying a property for the purposes of running a business, a Tenant would normally have a right to renew that tenancy/ lease when the contractual term comes to an end. This right is given to tenants under Part II of the Landlord and Tenant Act 1954 and is therefore a statutory right.

However, it is possible to exclude this right from a new lease by ‘contracting-out’ the lease from this statutory provision.

What does this mean for a Tenant? For a Tenant this means that at the end of the term of the lease there will be no statutory right to renew the lease and therefore the tenant would have to vacate the premises at the end of the lease. By giving up the right to renew their tenancy a tenant is giving up the possibility of having a long-running established business in that location.

Whether to enter into a lease that excludes these rights is a very important factor to consider for tenants as, by the end of the lease term they may have established a successful business with associated goodwill and to leave the premises and business could be incredibly detrimental. Alternatively, a tenant’s business plan may suit this situation.

Whether or not it is the Landlord’s intention to contract-out a lease should be put to prospective tenants at the initial stages of negotiation. As a Tenant considering taking on a lease, you should always enquire with the Landlord or their agent at the outset as to the security of tenure terms of the proposed lease and whether or not it is to be ‘contracted -out’.

The procedure to ‘contract-out’ a lease from the security of tenure provisions of Part II of the Landlord and Tenant Act 1954 is done by way of agreement and acknowledgement. In order to effectively ‘contract-out’ a lease, a warning notice must be served on the tenant prior to entering into the lease. This Notice explains that the Lease is to be contracted out and the implications of that i.e the rights that the tenant would be giving up. To acknowledge that they have understood this, the Tenant must sign or swear a declaration. The lease will also contain a clause relating to the ‘contracting-out’ and will make reference to the declaration.

As a tenant, if you are taking on a lease by way of an assignment, you must check the terms of the lease carefully to see if it is a ‘contracted-out’ lease as it would affect you in the same way; i.e the tenant would have to vacate the premises at the end of the lease term.

Whether or not to proceed with a lease that is ‘contracted-out’ is a very important decision to make and must be considered carefully at the start of negotiations. Tenants should consider seeking legal advice when negotiating a lease and before making a decision to accept Heads of Terms which seek to exclude security of tenure to see if a ‘contracted-out’ lease is right for you and your business.

Simrit Sandhu, LawBite Property Lawbrief.

If you have any questions for Simrit about property legal matters or any other legal aspect of your business you can have a FREE consultation by submitting a request here or call us today on 020 7148 1066.

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