Posted on 22 November 2023
Contracting out of the 1954 Act – what does that mean, and why is it important? This week’s topic in my “A to B” Series (HOTs) is the flip side of my previous article on Security of Tenure. If you are doing a property deal (or other deal), you will find this Series useful. For a general introduction to HOT’s, a good place to start is my first article What are HOTs?. This will give you an overview of Heads of Terms and what they should contain. Later blogs dive into more detail on things to think about when agreeing terms – like this one on Leasehold Assignment. This time I’m talking about contracted out leases.
Contracting out of the 1954 Act – What does that Mean?
The 1954 Act is shorthand for the Landlord and Tenant Act 1954. This legislation was brought in by the government to provide protection and security of tenure to business leases. Business tenants, so long as they satisfy certain criteria, gain two main pieces of protection:
- The Right to require a new lease from their landlord, even when the contractual term of their existing one has expired; and
- The Right to “hold over” in the premises at the end of the contractual term, until a new lease is granted or the previous one is terminated.
I have explored these rights in detail in my previous “A to B” Series article. Please take a look at my article on Security of Tenure for more information.
There are certain situations where the landlord does not want the tenant to have such protection. In such cases, the 1954 Act provides a procedure whereby the parties can agree to “contract out” of such protection. l.e. to agree, by contract, to exclude the statutory protections.
The Heads of Terms may reference “Lease to be contracted out of the 1954 Act” or similar. This is what that means.
How do you go about contracting out of the 1954 Act?
There is a defined procedure for contracting out of the 1954 Act, which contains the following elements.
At this juncture, I must put a health warning. I would not be tempted to try and run this procedure yourself. I’ve seen many people do so, believing it to be straightforward, but there are numerous pitfalls for the unwary. Miss out one technical step, or get that step wrong, and you risk failing to properly contract out the lease from the 1954 Act.
Why does it matter? Well, it matters because then the tenant will have the protection granted by the 1954 Act. If you (or the client you are acting for, if you are a commercial property agent) wish to then remove that tenant, you can only do so on certain grounds. If you are trying to use a “non-fault” ground, like redevelopment, then you will have to pay compensation based on the rateable value of the premises. This will increase to 2x rateable value for longstanding tenants (14 years+). If resisted, it will take a lot longer to remove the tenant via the courts, rather than simply changing the locks and sending in the bailiffs.
I’ve set out the requisite steps in brief terms only. This is not legal advice, but an introduction to the topic only. You should seek legal advice before trying to implement anything mentioned here.
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Contracting out of the 1954 Act – Step 1 – Notice
First, a notice must be served on the tenant. This must be in the format prescribed by the 1954 Act. The point of this is to highlight to the tenant what rights it is missing out on by accepting a contracted out lease.
Contracting out of the 1954 Act – Step 2 – Declaration or Statutory Declaration
Secondly, the tenant must swear a declaration or a statutory declaration. If they swear a simple declaration, there must be a 14-day “cooling off” period between the service of the exclusion notice, and the completion of the lease. More commonly therefore, a statutory declaration must be sworn. This is a declaration by the tenant that they understand the consequences of contracting out of the 1954 Act. It is sworn formally in front of a solicitor.
On a practical note, it is important to remember that this takes time. For safety’s sake, the notice should only be served on the tenant after the lease is agreed and in final format. The statutory declaration can only be sworn after the notice. If there are substantial changes to the lease after the notice is served and statutory declaration sworn, the procedure should be repeated. This is to avoid arguments from the tenant later down the line that the lease they agreed to contract out, was not the lease they finally entered into. Legal arguments are expensive, and to be avoided. However, this does mean the procedure can have to be done in a bit of a rush at the end. Allow time for that in your planning, as it can take a tenant a few days to find a solicitor willing to administer the swear.
On a further practical note, it is relatively easy to arrange a statutory declaration. Most, if not all, solicitors’ practices are willing to do them. You can telephone any solicitors and ask if they can witness a statutory declaration (commonly known as “doing a swear”). It takes about 5 mins, and costs £5 (a fee prescribed by statute).
Contracting Out of the 1954 Act – Step 3 – Endorsement on the Lease
The Lease must contain certain prescribed information. It should contain:
- A reference to the landlord’s warning notice;
- A reference to the tenant’s declaration or statutory declaration; and
- The parties’ agreement that Sections 24-28 LTA 1954 are to be excluded from the lease
Importantly, the rest of the lease should not contain provisions implying that the term may continue beyond the end of the contractual term. These can be tricky to spot, but can undermine a successful contracting out procedure.
Why is all this important?
Well, if you are the landlord, you don’t want to inadvertently grant security of tenure, by not following the correct procedure. I cannot recommend enough that you seek legal advice on this, to ensure you get it right.
If you are the tenant, you need to understand what rights you are giving up by contracting out of the 1954 Act. You also need to understand that there will be a procedure to follow, and that this will take a little time (when no doubt you are chomping at the bit to get into the premises and start fitting out).
Forewarned is forearmed, so it can be very useful to talk to your solicitor at the Heads of Terms stage to ensure that you understand what you are signing up to, and what that means for the transaction as a whole.
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As always, if you have any queries, then do get in touch for a no-obligation, free, quotation via enquiries@mcleanlegal.co.uk or on 01384 872069 or via my Free Enquiry Form. I carry out all work through Nexa Law Limited, which is authorised and regulated by the SRA.
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Thanks for reading my above article, and I look forward to seeing you on the next blog post!
Finally, the above article is for general information purposes only. I am not providing legal advice in the above and it may or may not be appropriate for your specific circumstances. If you require legal advice, please do get in touch and I will be delighted to assist.
Thanks
John
