Commercial Lease Transactions
Is your lease protected?
As a tenant, there are various reasons why you may want a protected lease, security being the main one. If the goodwill of your business is built around your premises then you will want to know that you have control over this. Conversely, a landlord is likely to want to retain control of their premises. For example, they may wish to be able to refuse a defaulting tenant a new lease or to re-develop the premises. When negotiating a new lease, you are likely to come across the terms "protected lease" and "contracting out", but what do they actually mean for a tenant and what are the implications long term?
Definition of "Protected lease"
The term "protected lease" relates to the statutory protection for tenants under the Landlord and Tenant Act 1954. This means that when the contractual term of the lease expires the tenant has a statutory right to request a new lease from their landlord on similar terms to their existing lease and they are not obliged to vacate the premises. Assuming that the lease is not a type of tenancy that is specifically excluded by the 1954 Act, there are certain criteria that must be satisfied in order for a lease to become protected: the tenant must occupy the premises for business use, have exclusive occupation of the premises and the lease must be granted for a fixed term. The landlord may exclude the lease from this protection through the lease being "contracted out". There is a statutory procedure that must be strictly followed by the landlord in order to do this. Where a lease has been contracted out, the tenant is obliged to vacate the premises at the expiry of the contractual term and has no automatic rights to renew.
What is the procedure for renewal of a protected lease?
If you wish to renew your lease, then you will need to serve what is called a "Section 26 notice" on the landlord setting out the proposed new terms for a lease.
Alternatively, the landlord can serve a section 25 notice stating whether or not they are prepared to offer a new lease and if so on what terms.
There are certain time limits that must be complied with in responding to either a section 25 or section 26 notice. Until such time as either notice is served, a tenant will be considered to be "holding over" which effectively means that they can remain in occupation pursuant to the terms of their exiting lease until a notice is served.
The "holding over" period can last years, and indeed in some cases neither the landlord nor a tenant ever serves a notice. If both parties are confident with what they have agreed then the statutory procedure does not necessarily need to be followed.
In what circumstances can a landlord refuse to renew a protected lease?
There are very limited circumstances where a landlord can refuse to grant consent. However, the most common is where a landlord wishes to either re-develop their premises or to use premises for their own purposes. This has to be a serious consideration by the landlord and not just a whim to get vacant possession.
What is the procedure for contracting out of a new lease?
You will usually have agreed that the lease is to be contracted out before the lease is drafted but in any case certainly before you are contractually bound to take the new lease. Therefore if you are proceeding with a contract (agreement to lease) the contracting out procedure must be followed prior to exchange of contracts.
In order to do this the landlord must serve a notice confirming that your right to statutory protection is being contractually excluded. This notice must be served at least 14 days before the contract or lease is entered into and you will then need to sign a "simple declaration" to confirm receipt of the notice.
If there are time pressures to exchange or complete and the landlord’s notice is served less than 14 days before exchange or completion then you will need to swear a statutory declaration in response.
Can a lease be contracted out if a tenant does not have ID?
No. All solicitors are obliged to obtain evidence of client’s identification, and so where a tenant is legally represented ID must be produced.
Even where a tenant is not legally represented, if the lease is for seven years or more then the Land Registry will require evidence of identification.
Can a lease that has been contracted out be varied so that it becomes protected?
There is no provision in the 1954 Act that prevents this, but by the same token there is no provision that allows for it either. It is not a recommended approach as it could, for example, translate as being a surrender and re-grant which can have far reaching consequences.
If you want to remain in the premises after the expiry of the contractual term and the landlord is agreeable, it may be better to enter into a reversionary lease, one that is completed before the lease term starts, or to enter into a contract for a new lease.
You would need to take advice as to the specific circumstances. This is a complex area of the law and a tenant should always seek legal advice before agreeing a new lease.