Commercial tenants will often build up local good will and invest in the premises they occupy and for this reason want the security of knowing that they have the right to continue their use of the premises when their lease term inevitably ends.
Commercial leases are therefore protected by ‘Security of Tenure’ meaning that at the end of the lease term, the tenant has the right to a new lease on the same terms (excluding the rent) from the landlord. The landlord can only ask the tenant to leave the premises at this time for a limited number of reasons, for example;
All commercial leases benefit from this protection unless they have been ‘contracted out’ which occurs when the landlord and tenant both agree prior to entering into the lease, that the lease will not benefit from security of tenure. |  |
A landlord will often prefer to ‘contract out’ on the basis that they will have greater control over the property when the lease term ends. The landlord doesn’t need to give a reason for asking the tenant to leave and so they have the ability to lease the premises to another tenant on terms that are more beneficial to the landlord than the current lease. The landlord also has the ability to sell the property, whereas under a ‘protected lease’ a desire to sell is not a valid reason for refusing a new lease. In addition, even if the landlord can evidence a statutory reason for refusing a new lease, they will incur the expense and delay of needing to serve a hostile notice.
A tenant may not be concerned about the certainty that security of tenure provides, as they may not invest in the premises or they may be considering a move at the end of the tenancy anyway. If so, the terms of a ‘contracted out’ lease may be more favorable and the tenant may benefit from a greater degree of negotiation than under a protected lease, as contracted out leases tend to be less attractive to tenants and their target market is reduced as a result.
How is a lease ‘contracted out’?
A landlord and tenant must agree to contract out of the security of tenure and this agreement will often be made before lawyers are involved. During the process of drafting the lease, the landlord must serve notice on the tenant of their intention to exclude the security of tenure from the lease and the tenant must then sign or swear a declaration to confirm not only their agreement but also their understanding of the consequences of doing so.
If the process is not managed correctly, there is a significant risk that the lease is not contracted out and the tenant unintentionally benefits from the security of tenure. It is therefore important to ensure that you seek legal advice whether you are a landlord or a tenant before entering into a commercial lease.
If you would like to discuss the option of contracting out, need help determining whether your lease benefits from the security of tenure or commercial leases in general please contact Patrick Cooney on 01394 277 941 at patrick@fairstep.co.uk, alternatively, fill out our contact form, and we would be happy to discuss your requirements in further detail.