Contracting out; Excluding Security of Tenure Under the Landlord and Tenant Act 1954 Part II
Contracting out; Excluding security of tenure under the Landlord and Tenant Act 1954 Part II
Background
The Landlord and Tenant Act 1954 (the 1954 Act) gives tenants of business premises “security of tenure” —in short a qualified right to remain in occupation of their premises after the end of the contractual term of the lease.
A landlord who grants a tenant a lease with security of tenure can only bring the lease to an end and recover possession of the property by following the procedures set out in the 1954 Act.
Even then, the landlord must be able to establish one or more of a limited number of statutory grounds for possession set out in section 30 of the Act, and depending on the grounds on which the landlord does rely, the landlord may – if the landlord is successful in recovering possession – have to pay compensation to the tenant.
A tenant who has security of tenure under the 1954 Act is therefore in a strong negotiating position if their landlord wishes to obtain vacant possession.
Fortunately for landlords, a mechanism exists for the parties to agree that the lease will be excluded from—or ‘contracted out’ of —the 1954 Act provisions.
How does contracting out work?
Section 38 of the 1954 Act contains anti-avoidance provisions, so that any agreement (whether contained in the tenancy agreement or not) relating to a tenancy to which the 1954 Act applies and which purports to prevent the tenant from claiming security of tenure, or penalises the tenant for doing so, is void.
The only exception to this is under section 38A, which provides that the landlord and the tenant may agree to exclude security of tenure. But, for this agreement to be effective, the parties must follow the procedure set out in the 1954 Act.
(There are some forms of tenancy to which the 1954 Act does not apply. An example is a fixed term tenancy for a term of no more than 6 months. There is no need to follow the contracting out procedure in the case of those forms of tenancy).
Contracting out is only possible where the tenancy is for a “term certain”. The section 38A exception only applies to a tenancy for a fixed term in the strictest sense. It is therefore not available for a periodic tenancy or any other tenancy that is not granted for a fixed term.
A lease which defines the term as being for a fixed period together with ‘any period of holding over or extension … whether by statute or at common law or by agreement’ (or words to that effect) has been held not to be for a term certain, and therefore not capable of being contracted out.
However, a lease including a break clause (for example enabling a tenant to bring the lease to an end before the end of the contractual term) is capable of being contracted out.
The Procedure
Until 1 June 2004, the contracting out procedure required the parties to obtain, before the parties entered into the lease, a court order authorising their agreement to exclude security of tenure.
A 2003 Statutory Instrument brought in a new contracting out procedure so that, since 1 June 2004:
• the landlord must serve a “warning notice” on the tenant, to confirm to the tenant that the tenant is giving up statutory rights to security of tenure and compensation, and to recommend that the tenant obtains professional advice before giving up these rights
• the tenant must either sign a “simple” declaration, or formally swear a statutory declaration, to confirm that the tenant has received the landlord’s warning notice and accepts the consequences of giving up their rights
• a reference to the landlord’s notice and the tenant’s simple/statutory declaration must be contained in or endorsed on the document creating the tenancy and
• the contracting out agreement must be contained in or endorsed on the document creating the tenancy.
Crucially, the contracting out process must be completed before the parties enter into a tenancy or become contractually bound to do so. Any attempt to contract out after exchange of an agreement for lease, or before completion of a lease not preceded by an agreement for lease, will be ineffective.
The Landlord’s Notice
The first step in the contracting out process requires the landlord to serve a landlord’s warning notice on the tenant before the parties enter into a tenancy, or if sooner, before they become contractually obliged to do so.
The notice must be in the form, or substantially in the form, set out in the 2003 Statutory Instrument. Service of the notice will usually be done by the landlord’s solicitor.
The warning notice must be served on the tenant. If the tenant comprises more than one person or entity (for example a partnership), the warning notice must set out the name and address of all of the individuals who will together make up the tenant, it must be served on each individual, and each individual must sign a separate simple declaration or swear a separate statutory declaration.
If the notice is to be served on the tenant’s solicitor, the landlord (or the landlord’s solicitor) must obtain confirmation that the tenant’s solicitor has been authorised to accept service on behalf of the tenant.
As above, the landlord’s warning notice must be served before the parties enter into a tenancy or become contractually bound to do so.
Although there is no statutory requirement for the landlord’s warning notice to be signed or receipted by the tenant, because the tenant’s declaration contains an acknowledgement that the landlord has served the requisite notice, it is good practice to obtain confirmation of receipt.
The Tenant’s Declaration
Following receipt of the landlord’s warning notice, the tenant must, to confirm that they have understood and agree to the exclusion of their statutory rights, either sign a Simple Declaration or, if the lease or agreement for lease will be entered into less than 14 days after service of the landlord’s warning notice, the tenant must swear a Statutory Declaration to the same effect.
The statutory declaration is often regarded as a better option, because:
a)it can avoid confusion over whether or not a minimum of 14 days has elapsed between the service of the landlord’s notice and the signing/making of the tenant’s declaration and
b)it can save time, because the warning notice should not be served on the tenant until the lease or agreement to which it relates has been agreed and, once it has been agreed, neither party may want to wait a further 14 days before exchanging agreements or completing the lease.
The forms of the tenant’s simple declaration and the tenant’s statutory declaration are prescribed by the 2003 statutory Instrument.
Although there is a very small degree of flexibility about that, because the declaration must be in the form, or “substantially” in the form, set out in the Instrument, the safest course is to follow the prescribed wording in the Instrument.
The tenant’s declaration (whether in the form of a simple declaration or a statutory declaration) can be made or sworn either by the tenant or by a person duly authorised by the tenant to do so.
Where someone other than the tenant signs or swears the declaration, the landlord’s solicitor should obtain evidence of that person’s authority to make the declaration on behalf of the tenant, including to ensure that the authorisation is valid.
For example, and if a director is signing for a corporate tenant, the landlord’s solicitor should check with Companies House that the signatory is indeed a director.
The tenant’s solicitor may swear the statutory declaration on the tenant’s behalf. In these circumstances, a tenant’s solicitor who proposes to do this should obtain the tenant’s prior written authority to do so, and the landlord’s solicitor should require the tenant’s solicitor to produce evidence of the tenant’s authorisation.
The landlord or the landlord’s solicitor should require provision of a certified copy of the signed or sworn declaration before exchange of agreements for lease or completion of the lease, so that the landlord’s solicitor can check that the declaration is in the prescribed form, and has been signed or sworn by someone with appropriate authority to do so.
The date of the tenant’s declaration will usually be inserted into the obligatory clause in any agreement for lease or lease containing the reference to the landlord’s notice and the tenant’s declaration.
The original tenant’s declaration, together with a copy of the landlord’s notice and evidence of the date of service of it, and a copy of any relevant authority, should be kept by the landlord with the counterpart lease as evidence of completion of the contracting out procedure.
Although the tenant’s solicitor may swear the statutory declaration on the tenant’s behalf, the statutory declaration will be invalid if it is sworn before a solicitor acting for, or whose firm is acting for, any of the parties in the transaction.
A landlord’s solicitor should check that the person who administers the oath is independent. An invalid statutory declaration will mean that the agreement for lease or lease has not been validly contracted out.
There is no statutory requirement for the lease (or agreement for lease) to be in an agreed form when the warning notice is served.
However, and in practice, the landlord should ensure that the form of lease is agreed and is , ideally, attached to the warning notice. The purpose of this is to provide evidence that, in making their declaration, the tenant fully understood both the terms of the proposed tenancy and the full implications of foregoing security of tenure.
A decided case found that, if the agreement for lease or lease were to be substantially amended after service of the landlord’s notice but prior to completion, a fresh warning notice and corresponding tenant’s declaration would be required.
Term commencement date
The term commencement date for the lease should be inserted in paragraph 1 of the tenant’s declaration. The purpose of paragraph 1 is to identify the lease in question.
If the term commencement date is not certain when the declaration is made, it is common to use wording such as ‘a date to be agreed between the parties’
This is to avoid a new statutory declaration being required if the lease does not commence on a specified date, and to avoid any argument that the lease has not been validly contracted out if an exact date is specified and then this subsequently changes. This will be acceptable provided that there is sufficient information to make it clear that the tenant understands that the particular tenancy they intend to take will be contracted out.
Guarantors and other parties
The 1954 Act permits the persons who will be the landlord and the tenant in relation to a tenancy to enter into an agreement to exclude security of tenure.
The extent to which the contracting out procedures need to be followed in relation to a guarantor is uncertain.
A sensible precautionary approach is to ensure that a landlord’s notice is served on any guarantor (and that the guarantor also makes the appropriate declaration) before completion of the original lease.
For further advice get in touch with David Thorp, Andrew Williamson or Natalie Linehan,
alternatively, you can call 01270 611106.
