Security of Tenure is a legal right that allows business tenants to automatically renew their tenancies when they would otherwise end. However, not every commercial lease benefits from this protection. In many cases, landlords and tenants agree to “contract out” of the Landlord and Tenant Act 1954, the Act which provide security of tenure.
This article explains what security of tenure means, how contracting out works, and the practical points both landlords and tenants should keep in mind before entering into a lease.
What is Security of Tenure and “Contracting Out”?
Security of tenure is the protection given to many business tenants under Part II of the Landlord and Tenant Act 1954 (LTA 1954).
In practice, it means that when the lease term expires, the tenant may still have the right to remain in the property and request a new lease. A landlord cannot simply require the tenant to leave without following the legal process set out in the LTA 1954.
“Contracting out” is where the landlord and tenant formally agree to exclude these statutory renewal rights, specifically sections 24 to 28 of the LTA 1954. This means the tenant will not benefit from the usual protection given by the Act at the end of the lease.
When a lease is contracted out:
- The tenant has no right to remain in the property at the end of the lease;
- the tenant cannot force the landlord to grant a new lease;
- The tenant has no right to compensation upon leaving; and
- The tenant cannot ask the court to fix the rent or terms if the landlord does choose to offer a new lease.
Why Does Security of Tenure Matter?
Whether a lease is protected by the LTA 1954 can make a significant commercial difference.
For tenants, security of tenure can provide stability and reduce the risk of having to relocate a business unexpectedly. This can be particularly important for restaurants, cafés, salons, retailers and other businesses that rely heavily on their location.
A protected lease may also make a business more attractive to potential buyers. If a buyer knows the business has the right to remain in the premises and potentially renew the lease, this can provide greater certainty and help preserve the value and goodwill attached to the location.
However, not every business lease will benefit from this protection. For example, some short-term leases of six months or less may fall outside the LTA 1954, unless the lease includes a right to renew or extend, or the tenant, or its predecessor in business, has been in occupation for more than 12 months.
For landlords, contracted-out leases offer greater flexibility. A landlord may prefer to contract out where it may later wish to occupy or re-let the premises on different terms.
The Legal Requirements for Contracting Out
To validly contract out, specific legal formalities must be followed. In summary;
- The landlord must serve a formal warning notice on the tenant;
- The tenant must sign a declaration acknowledging the consequences of contracting out; and
- The lease must clearly record that the parties agreed to exclude security of tenure protections.
If the process is not followed correctly, the tenant may still obtain statutory protection despite the parties intending otherwise.
What Happens at the End of the Lease Term?
The position at the end of a commercial lease can be very different depending on whether the lease benefits from security of tenure under the LTA 1954 or has been contracted out.
Protected Lease (Security of Tenure Applies)
When a commercial lease is protected and security of tenure under LTA 1954 applies, the legal framework ensures the business can continue to operate from the premises.
If the tenant remains in occupation for business purposes, the tenancy continues automatically on the same terms as the old lease until it is formally terminated or renewed according to the LTA 1954. This is often referred to as “holding over.”
The tenant may initiate the lease renewal process by serving a Section 26 Notice. This constitutes a formal request for the grant of a new tenancy to commence upon expiry of the existing lease. The tenant may propose the principal terms of the new lease, including rent, duration and other key commercial provisions. The landlord may accept these terms or propose alternative terms. In the absence of agreement, the terms of the new lease are ultimately determined by the court.
Alternatively, the landlord may initiate the termination and renewal process by serving a Section 25 Notice between 6 and 12 months prior to the contractual expiry of the lease. This notice either proposes terms for a new tenancy or states that the landlord opposes the grant of a new lease and seeks recovery of possession.
Where the landlord opposes renewal, it must rely on one or more of the statutory grounds under the LTA 1954, including:
- Repeated late payment of rent
- Serious breach of lease terms
- Failure to comply with repair obligations
- Landlord intends to redevelop the property
- Landlord intends to occupy the property for its own business use
In summary, a landlord cannot simply require a tenant under a protected lease to leave at the end of the lease term. The tenant can only be required to vacate where the landlord is able to rely on one of the statutory grounds set out in the LTA 1954.
Contracted-Out Lease (No Security of Tenure)
This means that the tenant does not benefit from the legal “security of tenure” explained above. Consequently, the end of the lease term is governed by the following rules:
- The tenancy will expire on the exact date stated in the lease, or earlier if a break right is exercised. Unlike protected leases, it does not benefit from a “continuation tenancy” or “holding over.”
- The tenant has no legal right to remain in the property or carry on their business from the premises once the term ends. They must leave the property at the end of the lease unless the landlord voluntarily chooses to offer a new one.
- The landlord has full authority over whether to grant a new lease. They are not required to give any reason for refusing a renewal or for wanting the premises back.
- When a tenant leaves a contracted-out property at the end of term, they have no statutory right to receive compensation from the landlord.
It is important to note that the Law Commission is currently reviewing the LTA 1954. For now, it has provisionally concluded that the existing contracting-out model should remain. However, it is also considering whether the threshold for short-term leases that are automatically excluded from LTA 1954 should increase from six months to two years. If introduced, this could affect the way shorter commercial leases are treated in the future.
