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The devil is in the details: contracting out a business leaseBy: Sarah Manley

Sarah Manley, Clarke Willmott

As a general rule, tenants occupying property for the purposes of a business have an automatic right to renew their lease when it comes to an end. There are only a limited number of circumstances in which a landlord may oppose this renewal. Many commercial landlords have concerns about this, and so it is common for new business leases to be contracted out of the statutory right to renew.

There are limited circumstances where business tenants will not have the renewal right, for example a tenancy at will, but often a landlord will need to balance his wish to be sure that he can get back vacant possession of his property at the end of a lease term, with a tenant's wish to be secure in their premises, and to be certain that they will be in occupation for long enough to get value out of any money spent on the property and preserve goodwill.

Alternatively, if a landlord occupies under a contracted out lease himself, he is likely to be bound to ensure that any underletting is also contracted out.

The contracting out procedure

There are two different procedures for contracting out a lease, depending on how quickly the transaction is proceeding. Whichever procedure is used, the process must be carried out before the lease (or, if applicable, an agreement for lease) is completed.

In both cases, the landlord must serve a specified form of warning notice on the tenant. The notice warns the tenant that it will be entering into a lease without the benefit of security of tenure. It is essential that the notice is properly served on the correct person at the correct address, and that appropriate evidence of this fact is obtained.

Following service of the notice, two alternative routes may be followed:

  • Advance notice procedure – it is intended that the tenant should have at least 14 days to consider the implications of the warning notice. Once at least 14 days have passed since service of the warning notice, a tenant may sign a simple declaration confirming that they have received and read the warning notice, and understand they are giving up their right to renew.
  • Statutory declaration procedure – sometimes a transaction moves more quickly, and the parties do not wish to wait 14 days after service of the warning notice. In such cases, a tenant must sign a prescribed form of statutory declaration, confirming that they have received and read the warning notice, and understand they are giving up their right to renew, in the presence of an independent solicitor or commissioner for oaths. A 'swear fee' of £5 will be charged per statutory declaration.

A prudent landlord will require a certified copy (if not the original) of the relevant declaration prior to completing the lease or agreement for lease.
If a lease is to be contracted out, it must be for a 'term certain'. Also, the document itself must contain references to the warning notice, the tenant's declaration (whether statutory or otherwise), and the parties' agreement that the lease is to be excluded from the statutory security of tenure provisions.

If the tenant is to have a guarantor, a similar procedure must be followed in respect of the guarantor.

Detail is key

Failure to follow this procedure precisely may result in the lease not, in fact, being contracted out, and it is not possible to remedy any errors in the procedure once the lease or agreement for lease has been completed. The resulting dispute that may arise at the end of term could be very costly indeed, so it is important to get it right.

Anyone considering granting a lease to a business tenant should discuss the contracting out issue at an early stage – both with a land agent (as the point will come up in settling the terms of the lease) and a lawyer to ensure that and appropriate decision is made and, if the lease is to be contracted out, that the correct procedure is followed. 

About the author

Sarah Manley is a commercial property solicitor with Clarke Willmott LLP, Taunton 

Features June 2012

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