When negotiating the terms of a commercial lease agreement, a landlord may propose ‘opting out’ of the security of tenure provisions set out under the Landlord and Tenant Act 1954 (the Act). It is important that tenants understand the consequences of contracting out of these security of tenure provisions.
What is Security of Tenure?
Security of Tenure provides a statutory protection for tenants of commercial premises who will have the right to request a new tenancy on the same or similar terms, on termination of the current tenancy, except where the Landlord relies on a statutory ground to oppose a new lease. There are seven statutory grounds of opposition that the Landlord can rely on. The most common would be if the tenant has failed to pay rent, or the tenant has failed to repair and maintain the premises, for example. A landlord may want a commercial lease to be contracted out of the security of tenure provisions to retain control and flexibility over the terms of the lease.
Consequences of contracting out
- The lease will come to an end on the contractual end date unless the tenant requests a renewal of the lease. This request will be granted at the landlord’s discretion and there is no requirement to reject the request on the basis of a statutory ground of opposition. I.e. the parties negotiate new terms to suit.
- If the tenant applies for a renewal lease and the landlord accepts, the tenant cannot apply to court to have similar terms of the old lease to be the terms on the new lease, because these are new negotiations, albeit that they relate to the same premises.
- On the contractual end date, the tenant does not have a right to compensation on leaving the premises. This is in contrast to the rights granted under Security of Tenure where the tenant may be awarded compensation (depending on how long the tenant has already been in occupation) if the Landlord relies on certain statutory oppositions in rejecting the request for a renewal of the term of lease.
An alternative – ’Option to Renew’ clause
If the parties to the lease have agreed the decision to opt out of the security of tenure provisions under the Act, they could in the alternative, agree to include a contractual right in the lease providing the tenant with the option to renew after the contractual end date. In contrast to the statutory protection under the Act, this contractual protection can only be used once.
If the parties can agree an ‘option to renew’ clause in the lease, the tenant can call upon the Landlord to grant a new lease at the end of the contractual term of the present lease on terms to be either set out in the present lease, or on terms to be agreed at the relevant time. Conversely, if there is no option to renew, there is no obligation for either party to renew the lease.
For example, Jack (the tenant) and Jill (the landlord) are proposing to enter into a new lease and have agreed to contract out of the Act, therefore not benefiting from the statutory protection mentioned above. Jack wants the ability to extend the lease after the contractual end date. Jack and Jill can negotiate the terms of the lease to include the ‘Option to Renew’ clause. This clause will allow Jack will be able to extend the lease after the contractual end date (this can only be extended once), by serving notice on the Jill that he wishes to do so.
If you are proposing to enter into a commercial lease, Fisher Jones Greenwood’s have an experienced Commercial Property team, if you need their help, please call 01206 700113 or email [email protected]