Granting or taking a commercial lease is a significant decision for both landlords and tenants. One of the most important considerations in England and Wales is whether the lease will have the protection of the Landlord and Tenant Act 1954. In some cases, the parties may agree that the lease will be “excluded” or “contracted out” of these statutory protections.
In this article, we explain what an excluded lease is, what security of tenure means, how the contracting out process works, and how Straw & Pearce can assist you.
What Is Security of Tenure?
Part 2 of the Landlord and Tenant Act 1954 gives business tenants security of tenure. This means that when a protected commercial lease is coming to an end, the tenant has a legal right to request to renew their lease on substantially similar terms and to continue to occupy the property for a further Term.
A landlord can only oppose the grant of a new lease on specific statutory grounds, such as redevelopment or where the landlord intends to occupy the property itself (“no-fault grounds”) or persistent breach of covenant (“fault grounds”). If a landlord successfully opposes a renewal based on “no-fault” grounds (like redevelopment or own occupation), the tenant is often entitled to statutory compensation based on the property’s rateable value.
Security of tenure provides valuable protection for tenants, particularly where a business relies heavily on its location. However, in some circumstances, both parties may prefer flexibility rather than long-term statutory protection.
What Is an Excluded Lease?
An excluded lease (often referred to as a “contracted out lease”) is a commercial lease where the parties have agreed that sections 24 to 28 of the Landlord and Tenant Act 1954 will not apply.
The effect of exclusion is that the tenant does not have an automatic right to remain in the property when the lease expires. Once the contractual term ends, the tenant must vacate unless a new lease has been agreed as the lease “dies”.
Excluded leases are common in short-term lettings, serviced office arrangements, and situations where a landlord requires certainty of vacant possession at the end of the term.
How Does Contracting Out Work?
- There is a strict statutory procedure that must be followed in order to validly exclude the tenant’s security of tenure. The contracting-out procedure must be completed before the tenant becomes contractually bound to take the lease (for example, before exchanging an Agreement for Lease).
The landlord must first serve a formal warning notice on the tenant. This notice explains that the tenant will be giving up important statutory rights.
The tenant must then make either:
- A simple declaration, if there are at least 14 days between receipt of the notice and completion of the lease; or
- A statutory declaration, if the lease is to be completed within 14 days.
The declaration confirms that the tenant understands the consequences of contracting out.
The lease itself must also contain specific wording confirming that the statutory procedure has been followed and that the relevant provisions of the 1954 Act are excluded.
If the correct procedure is not followed precisely, the exclusion may be invalid, and the tenant could retain security of tenure unintentionally.
Advantages and Disadvantages
For landlords, an excluded lease offers certainty. It ensures that the property can be recovered at the end of the contractual term without the need to rely on statutory grounds or court proceedings.
For tenants, agreeing to exclude security of tenure may make negotiations easier or allow access to premises that would not otherwise be available. However, it also carries risk, as there is no guaranteed right to remain in occupation once the lease expires.
Both parties should carefully consider their commercial objectives before agreeing to contract out.
When Should You Take Advice?
Because of the technical nature of the contracting out procedure and the significant legal consequences, it is important to obtain legal advice before entering into an excluded lease.
For landlords, this ensures that the procedure is carried out correctly and that vacant possession can be obtained when required. For tenants, it ensures a full understanding of the rights being waived and the potential impact on the business.
How We Can Help
At Straw & Pearce, our Commercial Property team advises both landlords and tenants on the negotiation and drafting of commercial leases, including excluded leases. We provide clear, practical advice on security of tenure, the contracting out process, and the risks and benefits involved
If you are considering granting or entering into a commercial lease and would like advice on whether it should be excluded from the Landlord and Tenant Act 1954, please contact our Commercial Property Team on 01509 268931 or email info@strawandpearce.co.uk.
