The Law Commission is due to report later this year on its review of the law around security of tenure for business tenants. In anticipation of that report, it remains important to be aware of what (for now) is involved in contracting out of that security of tenure.
Security of tenure
The Landlord and Tenant Act 1954 gives “security of tenure” to most business tenants. The main exceptions are some agricultural tenancies, short tenancies of up to six months, leases under the Electronic Communications Code and tenancies at will.
Security of tenure means that at the end of the term:
(a) the tenant will have a right to renew unless the landlord objects on one of a number of grounds specified by the 1954 Act; and
(b) if the landlord does successfully object, the tenant is entitled to compensation.
Contracting out
However, as long as the lease is for a fixed term, the parties can contract out of the 1954 Act. Since 2004, the contracting out process has been governed by the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003.
The requirement for a fixed term is important and one thing to look out for here are periodic tenancies. These run from period to period without any fixed end date. As that is not a fixed term, it cannot be contracted out of the 1954 Act.
A periodic tenant will therefore always have security of tenure. Periodic tenancies are not usually created deliberately — they often arise from the conduct of the parties, for example following a tenant being allowed to remain in occupation paying rent after the end of a contracted-out tenancy.
Contracting out involves a three-stage process:
1. Before the parties enter into the lease or commit to do so, the landlord must serve notice to the tenant to warn of the statutory rights it will be giving up by entering into a contracted-out lease.
2. The tenant must make a declaration that it has received the notice and accepts that the lease will be contracted out.
3. The lease must record the agreement of parties to contract the lease out of the 1954 Act.
Issues to look out for
Timing of service
The 2003 order does not impose any restriction on the timing of service, so long as it is before the parties enter into or commit to the lease.
A common practice has developed for service to be at engrossment stage, once the lease has been agreed.
This is likely a hangover from the pre-2004 procedure, when it was not possible to apply for a court order until the lease had been agreed. There is also authority from that era that a “substantial” change to the terms of the lease appended to the court order could invalidate the contracting out.
A view has therefore developed (without any grounding in the 1954 Act or the 2003 order) that a substantial change in the terms of the lease after service of the warning notice could invalidate the contracting out procedure. However, there is no reason under the current regime why the notice could not be served much earlier in the process.
Serving notice on solicitors
The 2003 order requires the notice to be served “on the tenant” (Schedule 2, paragraph 3) — no provision is made for service on anyone other than the tenant.
The notice is, however, commonly served on the tenant’s solicitor, which should be in order so long as the tenant’s solicitor is authorised to accept service on behalf of the tenant. A prudent landlord should ask the tenant’s solicitor to confirm that and to see evidence of authority. However, the landlord may not be able to fully assess that — for example, how does a landlord know that the person authorising the solicitors is authorised?
In TFS Stores Ltd v Designer Retail Outlet Centres and others [2019] EWHC 1363 (Ch); [2019] EGLR 32, the tenant argued that its solicitors had not been authorised to accept service of the notice, but the court found in the circumstances that the solicitors were authorised. The fact that this question got so far might cause some concern that this decision could go a different way on different facts.
The safest course would therefore be to serve the notice directly on the tenant anyway — copying in the solicitors — thereby avoiding the need to assess any authority.
Service by email
It has also become quite common for service of the notice on the tenant’s solicitors to be by email.
Neither the 1954 Act nor the 2003 order specified any means of service and there is no direct authority yet on whether service by email is valid.
Section 196 of the Law of Property Act 1925 confirms that notices served by hand delivery at the last known address or by registered post (now recorded delivery) will be validly served. However, this is non-exhaustive, does not exclude other methods of service, and in 1925 email cannot be expected to have been anticipated.
The Civil Procedure Rules allow for service of documents relating to court proceedings by email, so long as:
- the party receiving the document has confirmed that it is willing to accept service by email and specified the email address(es) to use for that purpose; and
- the party serving the notice has asked the receiving party if there are any limitations to its agreement to accept service by email (such as file size or format) and complied with any such requirements.
A court may be influenced by the CPR when deciding if email service of a warning notice under the 1954 Act is valid and so it would seem prudent for the above steps to be followed.
However, the warning notice is not a document that relates to court proceedings. There have been cases relating to notices given under other legislation that have held email service to be invalid.
In Cowthorpe Road 1-1A Freehold Ltd v Wahedally (as executor of Ahamadally) [2016] EGLR 55, for example, it was held that service of a notice under section 21 of the Leasehold Reform, Housing and Urban Development Act 1993 was invalid if sent only by email.
It seems unlikely that the court would deem a notice served by email to be invalid — particularly if the steps referred to in the CPR have been followed and the receiving party has confirmed beforehand that it is happy to accept service by email.
The safest course may nevertheless be to serve the notice on the tenant by hand and/or recorded delivery, with a copy also sent to the solicitors by email for convenience.
The tenant’s declaration
The form of the tenant’s declaration must be substantially in the form set out in the 2003 order.
If there will be less than 14 days between service of the notice and commitment to take the lease, this must be a statutory declaration, ie must be sworn in front of an independent solicitor or commissioner for oaths. While few things now cost the same as they did in 1993, the fee payable to the independent solicitor for administering the oath is one of them: £5.
If a statutory declaration is used, there would be no need to prove at a later date that the requisite 14 days has elapsed. For this reason, many solicitors acting for landlords would prefer a statutory declaration to be used in all cases.
The prescribed form of the declaration includes a space for the commencement date, which may not be known. It has become common practice to state here that the lease is due to commence on a date to be agreed between the parties, which TFS confirmed was valid.
The form of statutory declaration set out in the 2003 Order does not include anywhere for the declarant to sign the declaration. However, most practitioners would consider it prudent to have the declarant sign it — since the declaration must only be “substantially” in the form set out in the 2003 order, there would be no issue adding a space for the declarant to sign.
The declaration must be made by the tenant or someone authorised by the tenant. If it is being made by anyone other than the tenant (or, for a company, a director of the tenant) it would be prudent for a landlord to require some evidence of that person’s authority to make the declaration.
Proceed with caution
While the 2003 order simplified and sped up the contracting out process compared to what went before, there are still a number of potential pitfalls to navigate.
The process still involves some risk and uncertainty for both parties — sometimes frustrating their commercial intentions — which hopefully the Law Commission will seek to address when it makes its recommendations.
However, it will remain to be seen how quickly the next government moves to implement any or all of those recommendations.
Until then, the best advice to parties seeking to contract out of the 1954 Act would be to take professional advice at an early stage to ensure that the contracting out procedure is fully complied with.
Kevin Manley is legal director at Brabners