Security of Tenure

What is security of tenure?

Security of tenure is a statutory right in England and Wales, set out in the Landlord and Tenant Act 1954 (“LTA 1954”).

It provides business tenants of commercial premises the right, subject to certain conditions being satisfied, to continue their occupation of their premises and renew their tenancy on materially the same terms (save for the rent and any other terms agreed between the parties) as their existing lease on the expiry of the contractual term of the lease.  A qualifying lease under LTA 1954 is often referred to as a “secure business tenancy” or a “protected lease”.

Prior to entering a lease, the parties can agree that the security of tenure provisions of the LTA 1954 be excluded, known as “contracting out”.

Why is security of tenure an important consideration when negotiating lease terms?

Well, that depends on whether you are the landlord or the tenant of a commercial premises.

Why is security of tenure an important consideration for a landlord?

If you are a landlord, in most cases you will want to exclude the tenant’s right to security of tenure.

The primary reason why a landlord would want to exclude rights to security of tenure is to prevent being obligated to offer the tenant a new lease (on similar terms remember!) once the current lease has expired.  This offers a landlord freedom to decide what to do with their premises at the end of the term granted by the lease.

Where a lease is contracted out, there is nothing to prevent a landlord from offering a new lease to the existing tenant, and they may do so on new terms.

A landlord of a protected lease can only terminate a tenant’s occupation of the business premises in limited statutory circumstances and by following a strict statutory procedure.  If a landlord is successful in obtaining possession of the premises by relying on a statutory ground, compensation may be payable to the tenant.

Why is security of tenure an important consideration for a tenant?

As you would expect, in contrast to a landlord wanting to exclude security of tenure, a tenant would, in almost all circumstances, want a protected lease.

A protected lease provides a tenant with the security of knowing their occupation of the premises cannot easily be terminated at the end of the contractual term of the lease.  Often, a tenant will invest heavily when taking on a business premises (e.g., fitting out the premises, signage, advertising, etc.) and will build their trade and reputation from it and business continuity will be of paramount concern for a tenant.

What is the procedure for contracting out?

The LTA 1954 provides a statutory procedure whereby a landlord and tenant can agree to exclude security of tenure from a lease.  This is known as contracting out.

The procedure involves the landlord serving notice on the tenant (and guarantor if there is one).  The tenant (and guarantor where appropriate) must then either have a statutory declaration sworn before an independent solicitor or commissioner of oaths or make a simple declaration confirming that such notice has been received and they understand the implications of the exclusion of the relevant security of tenure provisions of the LTA 1954 from the lease.

It is essential that the contracting out procedure prescribed under the LTA 1954 is followed correctly.

Proposed changes to the LTA 1954

In March 2023, the Law Commission initiated a review of how the right to renew business tenancies as set out in the LTA 1954 works, and to consider options for reform.

The review is currently in the pre-consultation stage, and publication of a consultation paper is anticipated in the Autumn of 2024.

Reform of the LTA 1954 could see significant changes to commercial landlord and tenant law and is something our expert commercial property team are following closely.

Conclusion

Landlords and tenants must take great care when agreeing terms of a commercial lease.  It is fundamental that the parties understand their rights at the end of the term of the lease being agreed.

Whether you’re a commercial landlord or tenant, for more information on how one of our experienced solicitors can help you, please contact us.