Security of tenure can seem like a technical point when a commercial lease is being negotiated. In reality, the choice made at the outset can shape what happens when the contractual term ends, for both landlord and tenant.
The Law Commission is reviewing the security of tenure regime under Part II of the Landlord and Tenant Act 1954. Its proposals address which tenancies should qualify for protection, how parties contract out and how lease renewals are handled. They are proposals for reform and are not yet in force.
What does security of tenure mean?
A qualifying business tenant has security of tenure. In practical terms, it does not simply come to an end when the contractual term expires. The tenant may be entitled to a new lease unless the landlord can rely on one of the statutory grounds for opposing renewal.
Before entering into the lease, the landlord and tenant may agree to exclude this protection. This is known as “contracting out”.
Why the Decision Matters
For landlords, a contracted-out lease can preserve flexibility. Perhaps the property is likely to be redeveloped, its use may change or vacant possession will be needed at the end of the term. Equally, a tenant taking premises for a genuinely temporary purpose may place little value on renewal rights.
The difficulty is that plans do not always remain fixed. A tenant might take a five-year lease, spend heavily on the fit-out and establish a successful business around that location. If the lease was contracted out, the tenant will have no statutory right to renew, and relocation at the end of the term may be costly and disruptive.
Contracting out should not, therefore, be treated as a routine entry in the heads of terms. It is worth testing the decision against the landlord’s plans for the property and the tenant’s need for continuity before the lease is agreed.
What Could Change Under the Law Commission’s Proposals?
The consultation proposes retaining contracting out while simplifying the process. Instead of requiring a separate warning notice and declaration, the relevant warning and
declaration would be incorporated into the lease. In particular, the statutory declaration, and the need for the tenant to find an independent solicitor to witness it, would be removed entirely.
The consultation also considers whether more short tenancies should fall outside the security of tenure regime. At present, fixed terms of up to six months are excluded, subject to exceptions. The Law Commission is considering extending that period to one or two years. It also provisionally proposes that periodic tenancies granted to new tenants should no longer be protected.
Consider a two-year lease of a small retail unit. The landlord may want the freedom to recover the premises after that initial period, while the tenant may value the chance to test a new business without making a longer commitment. If the business thrives, however, the tenant may want to remain after investing in the unit and developing a local customer base. The proposed threshold would determine whether the tenancy had statutory protection: under a two-year threshold, it would fall outside the Act without any formal contracting-out process; under a one-year threshold, it would remain protected.
Questions for Landlords and Tenants
- For landlords: Is redevelopment, a change of use or a new occupier a realistic prospect? Might vacant possession be needed when the term ends? It is also worth allowing for the uncertainty, delay and possible compensation involved if renewal later has to be opposed.
- For tenants: How important is this particular location to the business? A tenant expecting to fund a substantial fit-out, employ staff locally or depend on passing trade should weigh the attraction of a shorter commitment against the cost and disruption of a future move.
The Law Commission’s final recommendations may alter the way these issues are approached. In the meantime, the question is best addressed at the start of the transaction. A decision that appears minor when the lease is granted can have substantial consequences as expiry approaches. To discuss how we can best assist with your commercial lease contact Scarlett Armstrong-Harradine.