The default position for a tenant occupying commercial premises is that when the contractual term expires, the tenant has a statutory right to a new lease even if the landlord is unwilling to grant a new lease on a voluntary basis. This protection for a tenant is found in the Landlord and Tenant Act 1954 (the “54 Act”). Faced with a request from a tenant for a new lease under the 54 Act, a landlord can only object on certain grounds found in section 30 of the 54 Act.
However, the parties can agree that the 54 Act will not apply so that when the contractual term expires, the tenant must vacate unless a new lease has been agreed voluntarily. The tenant is waiving important rights and to protect the tenant there is a procedure that must be complied with. This is found in the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003 (“the RRO”) and is usually referred to as the “contracting out” procedure.
For a lease to be validly contracted out, the RRO requires that before the lease is granted;
Until now, and although the RRO was made some 16 years ago, there has been little case law on what is, in practice, a very important part of completing a commercial lease. As a result of a recent High Court decision, now have some helpful guidance following “TFS v BMG (Ashford) Ltd “.
The facts of the case:
The Fragrance Store (TFS) is a national retail chain and the dispute centred around six of its stores where the leases that had been granted to TFS had ostensibly been contracted out as had been agreed in the Heads of Terms. In all instances the warning notice had been served and statutory declarations had been completed before completion of the leases. TFS’s landlord wanted the premises back when the contractual term expired, but TFS was reluctant to vacate and litigation followed.
The High Court’s decision:
The Court rejected all TFS’s arguments and decided on TFS’s arguments as follows:
There would have been substantial practical delays and difficulties had the Court agreed with TFS’s arguments as the practice adopted by the party’s professional advisors was, and still is, widely adopted in practice.
The case illustrates the importance of the protection given to a tenant by the 1954 Act. TFS were clearly prepared to devote considerable effort and resources trying to argue their case. Whether a lease is contracted out is normally negotiated in Heads of Terms and ultimately will be part of the agreed terms reflecting the state of the market, the parties bargaining position and the importance of the property to the tenant. In a weak property market, a tenant should have more opportunity to persuade a landlord to grant a protected lease.