This post will explore security of tenure in commercial leases and why it is such an important issue.
What is Security of Tenure?
The Landlord and Tenant Act 1954 gives the tenant of a commercial lease a statutory right to continue occupation of the premises once the initial lease term has expired.
Part II of the Landlord and Tenant Act 1954 sets out the statutory right for a tenant of a commercial lease to an automatic right to remain in occupation of their business premises and to renew their lease when the contractual term comes to an end.
When entering into a new commercial lease, careful consideration will need to be given to whether or not the lease will be “protected by” or “contracted out” of the security of tenure provisions contained within the Landlord and Tenant Act.
Security of tenure applies to commercial tenancies with a term of 6 months or more with the tenant being in occupation themselves and carrying out a business in the property.
Are there Exceptions?
Yes, there are a few situations where this rule doesn't apply, as stated in the Landlord and Tenant Act 1954.
Landlords’ Choice
Landlords have to decide whether they want to opt in or opt out and be aware of the legal implications.
If you chose to include the provisions of the Act (contracting/opting in) it will give tenants an automatic right to renew their lease on expiry, with similar terms and conditions. To regain possession, you would need to serve a Section 25 Notice and there would be the likelihood of paying the tenant compensation, which is based on the rateable value of the property and occupation of the tenant at the property.
As a landlord there are statutory grounds which could be used to refuse the grant of a new lease which are contained in section 30(1) of the Landlord and Tenant Act 1954.
If you chose to exclude the provisions of the Act (contract/opt out) you will not be obliged to renew the lease on expiry and can obtain possession without compensating the Tenant. However, there is a strict process that must be followed when contracting out and it is important that this is undertaken before entering into a lease agreement.
The Process for Contracting Out
If landlords decide to opt out of this rule, they must follow specific steps outlined in the law. If they don't do it right, tenants might still get to keep their rights. Schedule II of The Regulatory Reform (Business Tenancies) (England and Wales) Order 2003 sets out the procedure which both the landlord and tenant must follow to contract out of the security of tenure provisions.
We have a detailed guidance note available, setting out the required steps for contracting out together with the appropriate landlord notices and tenant/guarantor declarations.
Other Things to Keep in Mind
Landlords need to be careful when offering short-term leases or temporary agreements because they might accidentally give tenants more rights than they intended.
Changes to the Law
The Law Commission is looking into updating the rules to make them clearer and fairer for both landlords and tenants. We'll keep you updated on any changes.