1. It may surprise those unfamiliar with the world of commercial property in England and Wales to discover that many tenants of commercial premises enjoy better rights to remain in their premises following the expiry of their leases than residential tenants who occupy their homes under assured shorthold tenancies.
2. The protection enjoyed by lessees of commercial premises derives from Part II of the Landlord and Tenant Act 1954 (“the 1954 Act”). In the absence of certain other factors, the effect of that legislation is that if on the expiry of the contractual term the tenant continues to occupy the premises for the purposes of a business carried on by that tenant, the tenancy will not come to an end, but will continue, and in fact the tenant can serve notice on the landlord requesting a new lease. If the parties fail to agree the terms of the new lease, then the Court must determine those terms, and this includes the rent. There are of course deadlines which if not complied with will result in the tenant losing these rights. In addition, the landlord can object to the tenant being granted a new tenancy by citing any one or more of a number of statutory grounds, but in some cases the landlord will have to pay the tenant compensation if the landlord is successful here.
3. The protections given to tenants pursuant to Part II of the 1954 Act are sometimes known as “statutory security of tenure” and so that is how I will refer to them in this article.
4. Section 38 of the 1954 Act as originally enacted prevented the parties to business tenancies contracting out of statutory security of tenure. However, in 1969 the 1954 Act was amended (by the insertion of a new Subsection 38(4)) to allow parties to agree to contract out of the security of tenure provisions, but only if the agreement was first approved by the Court on the joint application of the parties. This could be costly and inconvenient and used valuable Court time.
5. With effect from 1 June 2004 (pursuant to The Regulatory Reform (Business Tenancies) (England and Wales) Order 2003 (“the 2003 Regulations”)), Section 38(4) was repealed, doing away with the need to obtain the Court’s approval of any agreement to exclude statutory security of tenure, and a new Section 38A was inserted in its place. This provides that in order for an agreement to exclude statutory security of tenure to be valid, BOTH of the following requirements must be satisfied BEFORE the tenant enters the lease or becomes contractually bound to do so:
5.1 The landlord must serve on the tenant a “warning notice” in the form prescribed by the 2003 Regulations. The purpose of such a notice is to inform the tenant of the consequences of agreeing to exclude statutory security of tenure; AND
5.2 EITHER:
(a) The tenant must make a statutory declaration in the form prescribed by the 2003 Regulations (statutory declarations have to be made before an independent solicitor or someone else empowered to administer oaths, which can be a little inconvenient); OR
(b) If there are more than 14 days’ remaining before the new tenancy is entered into (or the date on which the tenant becomes contractually bound to enter into the tenancy), the tenant can instead of making a statutory declaration make a simple declaration, also in prescribed form, the difference being that the tenant would not have to make a trip to a solicitor to get his or her signature witnessed.
6. Whether it is a statutory declaration or a simple declaration, what the tenant is required to acknowledge is that the landlord has served a warning notice in the prescribed form and that the tenant accepts the consequences of entering into such an agreement.
7. Despite the apparently administrative nature of those requirements, great care is required to ensure that security of tenure is validly excluded, as the procedure is not without its potential pitfalls. This being so, there have been some notable challenges by tenants who have claimed that the agreement to exclude statutory security of tenure in respect of their leases was not valid. The aim of such challenges is either to force the landlord to grant the tenant a new lease or to secure the payment of compensation which, for example, would be payable if the landlord succeeded in objecting to the grant of a new lease on the ground that it wished to redevelop the premises.
8. The successful challenge perhaps best known amongst practitioners came in the Court of Appeal case of Newham London Borough Council v Thomas-Van Staden [2008] EWCA Civ 1414 (29 July 2008). The background to this is that statutory security of tenure can only be excluded pursuant to Section 38A if the contractual term created by the lease will be for a “term of years certain”. In that case, the term of the lease was from 1 January 2003 to 28 September 2004, together with “any period of holding over or extension of it whether by statute or at common law or by agreement”. At the time, many leases purporting to exclude statutory security of tenure included this or similar wording to deal with certain risks highlighted in an earlier case concerning a different issue. However, in this case, the Court found that statutory security of tenure had not been validly excluded because those words meant that the lease was not for a term certain. Such is the law of unintended consequences.
9. More recently, an agreement to exclude security of tenure has been attacked from a different angle. It has become common practice for the prescribed warning notices to be served on a tenant’s solicitors rather than on the tenant themselves, invariably after obtaining confirmation from the solicitors that they are authorised to accept service of the notice on behalf of the tenant. Although less common, it is nevertheless not an unusual occurrence for the tenant’s solicitor or someone else other than the tenant to make the statutory declaration. Furthermore, it is often the case that the date on which the lease is to commence is not known when the declaration or statutory declaration is signed and therefore not stated in those documents.
10. In the High Court case of TFS Stores Limited v The Designer Retail Outlet Stores (Mansfield) General Partner Limited and others [2019] EWHC 1363 (Ch), the Tenant alleged that the agreement to exclude statutory security of tenure was invalid, because:
10.1 The warning notice had been served on the tenant’s solicitors and the tenant questioned whether the solicitor had authority to accept service;
10.2 The statutory declaration had been made by an employee of the tenant who was not a director and the tenant questioned whether he had authority to do so; and
10.3 Instead of giving the commencement date of the leases, the statutory declarations stated that the leases were “for a term commencing on a date to be agreed between the parties” or “for a term commencing on the date on which the tenancy is granted”.
11. Fortunately for landlords, the tenant’s claim failed, somewhat emphatically.
12. What all of this shows is that even though the parties to a lease may have agreed in good faith to exclude statutory security of tenure, the validity of the contracting out exercise can be challenged by an opportunistic tenant. Sometimes such challenges may succeed, but on other occasions they may fail. However, what this underlines is the importance for landlords of obtaining expert advice and assistance from a commercial property lawyer when carrying out the contracting out exercise to ensure that the agreement to exclude is watertight.
For more information please contact James Whiteley by email at jwhiteley@jpclaw.co.uk or telephone on 020 7644 7297 or connect with him on LinkedIn.
