Commercial lease extension: Part 1 – inside or outside of “the Act”?

The Landlord and Tenant Act 1954

'The Act' covers, amongst other things, the procedure for a commercial lease extensions. In later blogs we will deal with notice requirements for this, but essentially it offers protection to both parties so that the negotiation period is fair and that the rights of the tenant are protected. These protections mean that the default position is that the terms of the tenancy remain consistent with past agreements (save for necessary modernisation), that a market rent should be payable and that the tenant (subject to certain provisos that we will explore in subsequent blogs) has a right to remain in the property after the end of the fixed term. This limits the scope of the negotiations and avoids either the landlord or tenant holding the other to ransom over what terms should be agreed.  

As a general rule, leases outside of the Act favour landlords because this allows terms to be freely negotiated with no restrictions and no protection to the tenant should the landlord simply decide they want possession of the property at the end of the fixed term. Inside of the Act, the tenant in most circumstances can force the landlord to extend even if they do not want to and on the rare occasion that the landlord meets the criteria for opposing to a new lease i.e. redevelopment of the premises or the landlord moving back into the property, the tenant would be entitled to compensation which is based on length of occupation and the rateable value of the property.

Despite this, there are reasons that it would be beneficial for both parties to negotiate outside of the Act. These include the fact that extra flexibility may be attractive, or perhaps a rent reduction below market rate would be negotiated in exchange for waiving of the protections under the Act.

 

How to contract out

If the parties want to negotiate outside of the Act then a strict procedure needs to be followed as defined by s38A of the Act, specifically subsections (1) and (3) which read:

(1) The persons who will be the landlord and the tenant in relation to a tenancy to be granted for a term of years certain which will be a tenancy to which this Part of this Act applies may agree that the provisions of sections 24 to 28 of this Act shall be excluded in relation to that tenancy.

(3) An agreement under subsection (1) above shall be void unless—

(a)     the landlord has served on the tenant a notice in the form, or substantially in the form, set out in Schedule 1 to the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003 (“the 2003 Order”); and

(b)     the requirements specified in Schedule 2 to that order are met.

The exclusion of the tenant’s statutory rights cannot be forced upon the tenant or snuck into the agreement at the last moment. The landlord would be required to serve appropriate notice which explains to the tenant in no uncertain terms, that they are giving up statutory rights and, amongst other warnings, that they would have no automatic right to remain in the property after the end of the fixed term. Depending on how close to the start of the tenancy the notice is served, the tenant may also be required to swear a statutory declaration confirming that they agree to this arrangement.

If this procedure is not followed correctly or a step is missed, the landlord will not be able to rely on the lease being outside of the Act.

 

Do you need legal advice?

If either you are a Landlord looking to properly exclude the Act or a tenant unaware of your rights after a request from the landlord to exclude the Act, proper advice is crucial. Intentions are not enough by themselves, and procedural failures will be looked at harshly. At Boyes Turner, we can advise on all elements of the process to make sure you do not fall foul of this. You can contact Richard Pulford on [email protected]. Alternatively, read further on our residential property and property disputes services.