The Landlord and Tenant Act 1954 (the “LTA 1954”) is a key piece of legislation in England and Wales governing business tenancies. It provides business tenants with significant protection.

Security of Tenure

The LTA 1954 provides business tenants with ‘Security of Tenure.’ Under the LTA 1954, when a business lease ends, the tenant will have an automatic right to remain in the premises and to renew the lease i.e. to request a new lease on similar terms, unless the landlord can establish certain, limited grounds to oppose the renewal. Examples of some of the grounds a landlord could seek to rely on, to oppose offering a tenant a renewal lease under the LTA 1954 include:

  • If the tenant has breached its repairing obligations under the current lease

  • If there are rental arrears

  • If the tenant has breached its other covenants in the lease

  • If suitable alternative accommodation has been offered to tenant

  • If the landlord intends to redevelop the property and it is not possible without the landlord recovering possession of the property or

  • If the landlord intends to occupy the property himself

If the landlord successfully opposes the grant of a new lease on the necessary grounds, the tenant may be entitled to compensation.

There are however circumstances where a landlord and tenant may agree to have their lease “contracted out” of the above protections provided by the LTA 1954.

“Contracting out” provides landlords with greater flexibility and control. They would not be obliged to offer the tenant a new lease when their current one expires. By “contracting out”, they will be able to regain possession of the property at the end of the lease term and will have the freedom to decide what they wish to do with their property. When a lease is “contracted out” of the LTA 1954, the tenant will be required to vacate the property at the end of the lease term unless a new lease is negotiated. It is at the landlord’s discretion whether to agree to the new lease and on what terms. For example, the landlord may decide to only agree to renew the lease if the rent is increased substantially. The lenant would have to ‘take it or leave it’ on the landlord’s terms. In a competitive market, landlords may therefore prefer their lease to be contracted out of the LTA 1954 to ensure easier control over lease renewals and its terms to reflect market conditions.

Tenants may also agree to have their lease “contracted out” often in return for concessions from the Landlord, such as reduced rent or other favourable lease terms. Tenants looking for short-term leases may also be willing to have their lease ‘contracted out’ of the LTA 1954 given the flexibility this offers them.

The process of “contracting out”:

Contracting out means that the tenant agrees to waive their statutory rights, typically at the start of the lease term. The landlord and tenant must follow a specific procedure for this agreement to be legally valid and enforceable.

  1. The landlord must firstly serve a notice (a “warning notice”) on the tenant explaining that the proposed lease will not afford the tenant protection under the LTA 1954. This notice must be in a prescribed form and include specific information about the consequences of “contracting out”.

  2. After receiving the landlord’s notice, the tenant must make a declaration acknowledging that they have received and understood the notice and agree to waive their rights under the LTA 195. There are two types of declarations:

  • Statutory Declaration: This is a more formal declaration made before an independent solicitor or commissioner for oaths who usually charge £5 cash for administering the swear. It must be used if the tenant is given less than 14 days to consider the landlord’s notice.

  • Simple Declaration: This is a less formal document that the tenant can sign without witnessing. It is used if the tenant has been given at least 14 days to consider the notice.

  1. Incorporation into the lease: The lease document must include specific wording that refers to the notice and the tenant’s declaration. The clause must explicitly state that the lease is excluded from the Security of Tenure provisions of the 1954 Act.

Whether you are a landlord or tenant, the implications and procedures surrounding “contracting out” the LTA 1954 must be carefully considered and adhered to. If you require further advice on your rights and obligations, please get in touch with Farleys’ commercial property specialists on 0845 287 0939 or contact us by email through our online contact form.