Contracting Out of a Business LeaseAnneka Stephen
A tenant has a statutory right to renew its tenancy at the end of the term if it occupies the premises for the purpose of its business.
The landlord and tenant can commercially negotiate and agree to “contract out” of the LTA 1954, so that the tenant will not have the benefit of the statutory right to a lease renewal.
A tenancy protected by the Landlord and Tenant Act 1954 (LTA 1954) will not terminate at the end of the contractual term, it will continue until it is terminated in one of the ways specified by the LTA 1954.
By contrast, a contracted-out tenancy will come to an end on the contractual expiry date, no notice from the landlord is required.
Lease term must be for a ‘term of years certain’
A lease can only be validly contracted out of the LTA 1954 if the contractual term created will be for a fixed term or with a fixed term with a break clause.
Procedure for contracting out of a business lease
- Statutory declaration procedure: the landlord will serve a warning notice less than 14 days before the lease or agreement for lease is completed and the tenant will reply with a statutory declaration
- Advance notice procedure: the landlord will serve a warning notice 14 days or more before the lease or agreement for lease is completed and the tenant will reply with a simple declaration
The contracting out procedure must be carried out before a party is contractually bound to take a new lease. Therefore, the landlord must serve a warning notice within the specific time limits and a tenant must reply with either a simple declaration or a statutory declaration before any of the following occur:
- Completion of a lease or a renewal lease.
- Exchange of an agreement for lease
- A future tenant goes into occupation of the premises pending completion of the terms of the lease
- Completion of a guarantee or authorised guarantee agreement (AGA), if the guarantee or AGA allows the landlord (in certain circumstances) to require the guarantor to take a new lease of the property in the future (see Guarantors).
- Completion of a tenant’s option to renew, or a lease containing a tenant’s option to renew
The landlord’s warning notice needs to be served on the proposed tenant and also on any proposed guarantor. The warning notice advises the tenant that it is being offered a lease that will not continue after the expiry of the contractual term, and that the tenant should not commit itself to the lease without first seeking professional advice.
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