Security of Tenure – Landlords & Tenants

When considering taking on or granting a lease of a commercial property, the effect of the security of tenure legislation should be borne in mind.

From a tenant’s perspective, this is particularly important if they are looking to have the automatic option of being able to remain in occupation of the property following the expiry of the agreed contractual term.  And from a landlord’s perspective, this is particularly important if they are looking to reserve the right to either take back the property themselves or have the option to relet the property on the open market.

Considering the effect of security of tenure is especially important when negotiating the terms of a new business lease, or when an existing business lease is being assigned to a new incoming tenant.

What is Security of Tenure?

Security of tenure (under the Landlord and Tenant Act 1954) gives certain commercial tenants statutory rights meaning that the lease does NOT expire automatically at the end of the term.

If security of tenure is included, the tenant is allowed to remain in possession unless and until the lease is brought to an end in one of the ways set out within the Act.

A lease can still be brought to an end by surrender or forfeiture, but otherwise the tenant will have a right to a new lease unless the landlord is able to rely upon one of the statutory grounds.

Any such new tenancy will be similarly protected under the Act.

What are the Statutory Grounds for Termination of Protected Leases?

A business tenancy that is protected by the Act can only be terminated in one of the ways set out in the Act, namely as a result of the landlord being able to rely upon any one of the following grounds:

(a) Breach of repairing obligations

(b) Rent arrears

(c) Other substantial breaches of covenant

(d) Suitable alternative accommodation offered

(e) Tenancy was created by a sub-letting and landlord requires possession of the whole to achieve a substantially higher rent

(f) Landlord’s intention to demolition or reconstruct

(g) Landlord intends to occupy

The grounds listed (e)-(g) above are known as the “no fault” grounds and, if successfully relied upon, the lease will terminate but the tenant may be entitled to compensation.

The grounds listed (a) – (d) however are known as the “fault” grounds meaning that following termination of the lease the tenant will not be entitled to compensation.

Exclusion of Security of Tenure

Any agreement to exclude security of tenure will be invalid unless one of the procedures set out in the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003 is followed.

The RRO 2003 allows contracting out to take effect through either of the following procedures:

Statutory declaration procedure: the landlord serves on the tenant a warning notice before the lease or agreement for lease is completed and the tenant swears a statutory declaration in the presence of an independent lawyer.

Advance notice procedure: the landlord serves a warning notice at least 14 days before the lease or agreement for lease is completed and the tenant completes a simple declaration which does not need to be sworn in the presence of a lawyer.

In both cases, the declaration will record the tenant’s acknowledgment that it has received and read the landlord’s warning notice and accepts the consequences of entering into a lease without security of tenure.

In practice, however, many lawyers prefer to use the statutory declaration procedure as the landlord’s warning notice maybe served on short notice meaning it may be served as soon as the draft lease is in substantially agreed form.

In Summary

Where a landlord wishes to retain the ability to terminate a lease following its natural expiry, it should wherever possible ensure that the lease is contracted out of security of tenure.

Where it has been agreed that security of tenure is to be excluded, appropriate legal advice should be sought to make sure that the strict procedures to exclude security of tenure are followed to avoid any risk of the lease inadvertently remaining protected.

Written by Rob Vint