18 June 2019

Getting out of “contracting out” – High Court decision provides clarity for landlords and tenants

A recent decision in the High Court has provided useful clarification for business landlords and tenants who choose to opt out of the security of tenure provided by the Landlord and Tenant Act 1954, also known as “contracting out”.

Contracting out of the LTA 1954

Where it applies, the Landlord and Tenant Act 1954 (“the LTA 1954”) will protect the right of a business tenant to remain in occupation of premises following the contractual expiry of their tenancy, and to seek renewal of that tenancy.

Since 2004, however, landlords and tenants have been able to agree that the LTA 1954 security of tenure provisions will not apply to a given tenancy. This process is known as “contracting out.”

The process of contracting out is set out in Schedules 1 and 2 of the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003 (“RRO 2003”). The landlord is required to serve a notice on the tenant prior to them entering into the tenancy, or becoming contractually bound to do so, explaining the rights which will be renounced. The tenant, or a person authorised by it, must then make a declaration acknowledging receipt of that notice and confirming that they understand and accept the consequences of the tenancy being contracted out. 

Prior to the RRO 2003, the landlord and tenant had to apply to court for an order that the security of tenure provisions would not apply, which was a more time consuming process. 

Now, depending on the timescales for completion of the tenancy, the tenant can either provide a simple declaration or a statutory declaration sworn before a solicitor or notary public. The tenancy, once executed, must include a statement that the procedure has been followed and confirm that the tenant has provided a declaration agreeing to contract out of the LTA 1954, which would otherwise apply.

Since the RRO 2003 came into force, there has been very little in the way of judicial guidance on the contracting out procedure but there has been an interesting recent decision in the High Court in TFS Stores Limited v BMG (Ashford) Limited et al [2019] EWHC 1363 (Ch) whereby the tenant unsuccessfully attempted to argue that the contracting out process had not been followed correctly.

The case has provided some helpful guidance for property practitioners as to what will be regarded as compliance with that procedure.

Background

The tenant, The Fragrance Shop (TFS) entered into tenancies in six designer retail outlet centres, each owned by different landlords. In relation to each tenancy, TFS had agreed to contract out of the security of tenure provisions in the LTA 1954. At the end of the contractual period of the tenancies, the landlords sought not to renew them.  Therefore, to attempt to remain in occupation, TFS claimed the leases had not been validly contracted out of the LTA 1954 and it was therefore entitled to hold over under the LTA 1954 and could seek renewal leases under the LTA 1954.

The Decision

The court was asked to consider arguments relating to:

  1. Whether the tenant’s solicitors had authority to receive the landlord’s notices, as the tenant’s agent;
  2. Whether the individuals who made the declarations on behalf of the tenant company had authority to do so; and
  3. Whether the fact that the tenant’s declarations did not contain a fixed term commencement date for each tenancy meant that the declarations were invalid.

With regards to points one and two, the court held that the tenant was bound by the acts of its professional and employee agents, both in respect of its solicitors receiving the notices and the tenant company signing and returning the declarations.

In relation to point three – the omission of the tenancy commencement date – the difficulty and uncertainty for lawyers has been whether the date required to be specified has to be the actual date of the grant of the tenancy, or the date on which the tenancy is expressed to commence, which may pre- or post-date the actual date of execution. This is an important practical question as it is very difficult to know in advance when a tenancy agreement will in fact be executed. To provide for this, common practice has been for formulaic wording to be included in the declaration referring to the commencement date “as that contained in the lease as the commencement of the term” or similar. 

Importantly, the court confirmed that a fixed calendar date does not have to be given and that the purpose of this requirement is identificatory – to ensure that the tenant understands that it is the specific tenancy agreement, as opposed to any other, which it intends to accept will fall outside the LTA 1954. Therefore, the use of phrasing referring to a given date, be that the date upon which the interest under the lease commences, or the date from which the term of the lease is calculated, is sufficient and in this case did not render the declarations, or the contracting out process, invalid.

Comment

Landlord’s solicitors will be relieved by this important case outcome as it illustrates how the court will adopt a robust and practical approach to the use of the contracting out procedure. This appears to be in keeping with the policy underlying the existence of the contracting out procedure, which allows parties the ability and freedom to agree that the protection of the LTA 1954 will not apply. The safeguard to this is strict compliance with the statutory process and requirements.

It is also helpful to know that some of the formulae and wording, which has been devised by solicitors to work around the strict wording of the LTA 1954, has been upheld by the court.