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What is Contracting Out of the Landlord and Tenant Act 1954?

Landlord or Tenant and Security of Tenure – what does contracting out mean to you? Our Commercial Property Lawyers in Leicester provide this guide, as a follow up to what security of tenure is. 

Under part II of the Landlord and Tenant Act 1954 (the LTA ‘54) if the tenant has occupied the property for the purpose of running their business then that tenant would normally have a statutory right to renew their tenancy at the end of their lease (Security of Tenure).

However, the landlord and tenant can agree to exclude these rights and ‘contract out’ of the 1954 provisions meaning that the tenant will not have the benefit of the statutory right of renewal at the end of the lease term.

This is an important factor to be addressed by each party to a lease. The landlord may want the ability to choose any future tenants whereas the tenant may want the opportunity to renew in order to protect their established market place.  The decision whether or not to contract out  can be influenced by numerous factors, for example, the bargaining power of the parties, the current economic climate, and any future business plans,  therefore, such a decision should be made after careful consideration.

In order to successfully contract out of the 1954 provisions, a very specific procedure must be followed. An experienced commercial solicitor will be able to advise and deal with this accordingly, however, the procedure basically has three stages:

  • The landlord sends the tenant a warning notice drawing the tenant’s attention to the protection it will be signing away (and usually attached to a copy of the agreed form of lease to which it relates);
  • The tenant makes a formal declaration to the effect that it has read and understood the notice and accepts the consequences; and
  • The parties sign the lease which expressly contains the contracting out agreement (reference to the notice and statutory declaration must be contained in or endorsed in the document creating the tenancy).

The notice must be served on the tenant at least 14 days before the tenant is contractually bound (this is considered akin to a cooling off period to ensure the tenant has sufficient time to consider their actions).

After these 14 days have lapsed then the tenant would sign a ‘simple declaration’ stating that they have received the notice and accepts the consequences of entering into a contracted out lease.

However, if the parties cannot or do not want to wait the required 14 days, then the tenant can sign a ‘statutory declaration’. This is in a similar form as the simple declaration but must also be signed and witnessed by an independent solicitor or a commissioner for oaths.   As it is considered the best course for the notice and declarations to be taken at the latest possible stage, the statutory declaration route is used more often than not.

It must also be noted that should there be any guarantor(s) to the lease, the notice and declaration process needs to be replicated for them as well as the tenant.

Important conditions to note are that the notice and declaration must be exchanged before the tenant has become contractually bound to enter into the lease and the lease must be for a term certain  (ergo automatically excluding periodic tenancies of which by their very nature cannot be excluded from the security of tenure provisions).

A prudent solicitor will of course want sight of the correctly signed declarations before the lease is completed; to ensure the contracting out is effective. If the contracting out procedure is not correctly implemented, then a landlord runs the risk being bound by the security of tenure provisions irrespective of their intentions.

If you require any advice, relating to the above or any other commercial matter, as a tenant or a landlord, please do not hesitate to contact me, Kirsty Fitzgerald at Josiah Hincks Solicitors. kirstyfitzgerald@josiahhincks.co.uk or tel 0116 950 1121 and I or one of the commercial team will be happy to assist you with your matter.