Whether you’re a landlord or a tenant, there may come a time when you want to renegotiate your lease or terminate it altogether. But how can a landlord or tenant do this when security of tenure is in effect?
What is security of tenure?
The Landlord and Tenant Act 1954 (“the 1954 Act”) provides business tenants the right to security of tenure. This means that once the term of their lease has expired they have the right to renew it on the same terms as the previous lease, provided that the landlord is unable to make out any of the statutory grounds for refusal.
When entering into a commercial lease the parties will agree whether the lease is ‘protected’ by or ‘contracted out’ of the security of tenure provisions contained in the 1954 Act. It is important to know why a tenant might want their lease to be protected and why a landlord might want it to be contracted out.
Why security of tenure is important for tenants?
For tenants of a commercial property security of tenure is important because it gives them peace of mind knowing they can invest and grow their business without having to worry about vacating the property at the end of their lease. It allows a tenant to establish a base of operations with a degree of permanence, which is particularly important for customer facing businesses.
A protected tenancy does not automatically end upon the expiry of the original term. Instead, the tenant may decide to ‘hold over’ and remain in occupation or serve a ‘Section 26 request’ for a new lease. If a landlord cannot make out any of the statutory grounds to oppose such a request then the tenant has a right to a new lease on terms to be agreed by the parties or to be determined by the court.
Why would a landlord want a tenancy to be contracted out?
Landlords will often want the tenancy to be contracted out because it means that they can have tighter control over their property. If a tenancy is contracted out a landlord does not need any reason to ask the tenant to leave once the lease expires. This is beneficial for a landlord who wishes to sell the property with vacant possession or lease it to another tenant on more favourable terms.
Even where a landlord can make out that one or more of the statutory grounds for ending a protected tenancy applies they would still need to incur the time and expense associated with serving a ‘hostile Section 25 notice’ (or counter notice if the tenant has served a Section 26 request) in order to obtain possession. If the tenant does not accept that the landlord has a right to possession the landlord may even be forced to make an application to court to remove the tenant.
How can a landlord and tenant contract out of security of tenure?
Before entering into a new lease a landlord and tenant have the option to ‘contract out’. This is achieved by the landlord serving notice on the tenant and the tenant agreeing to surrender their statutory right to a new lease by signing/swearing a declaration confirming that they understand the lease is being offered without security of tenure. A clause will be included in the lease to reflect this. At the end of their tenancy the tenant will be required to vacate the property unless the landlord offers them a new lease.
By contracting out of security of tenure the landlord is not obliged to offer the tenant compensation upon leaving the property.
What happens at the end of a protected tenancy?
If a landlord is not opposed to granting the tenant a new lease at the end of the original term they may serve a ‘friendly Section 25 Notice’ specifying the termination date for the existing lease and setting out their proposals for the new lease. A valid notice will set out the proposed terms of the new lease, how much rent would be payable and what property will be leased.
If a landlord wants to terminate a lease without renewal they need to serve a hostile Section 25 Notice specifying the date they would like the lease to end (provided it is no earlier than the end date of the term under the lease or 6 months from the date of the notice) and the grounds for terminating the lease.
The statutory grounds for terminating a lease are as follows:
- the tenant has failed to keep the property in a good state of repair
- there are repeated delays in the tenant paying rent that is due
- there have been substantial breaches to other obligations under the tenancy
- the landlord is able to offer alternative accommodation
- the tenancy was created by the sub-letting of part of the property and the landlord can obtain better rental yields from letting the property as one unit
- the landlord intends to demolish, reconstruct or build on the premises
- the landlord intends to occupy the property for their own purposes
If a tenant wants to request a new tenancy they need to serve a Section 26 Request which must outline the details of the new lease and specify a termination date of the existing lease. This can only be done if the landlord has not already served a Section 25 Notice or the lease is in the last year of its term. It is worth noting that the landlord is still able to oppose the Section 26 Request based on the grounds laid out above.
If the tenant wishes to terminate their lease without renewal, they can:
- Leave the property by the contractual expiry date of the current lease
- Serve a Section 27 Notice on the landlord, giving at least 3 months’ notice in writing directly to the landlord.
Get expert advice on landlord and tenant disputes
The Landlord and Tenant Act 1954 is a complex area of law, so whether you’re a landlord or a tenant, it’s important to seek independent legal advice when negotiating or renegotiating tenancies.
At Preston Redman, our team has specialist expertise in advising on all aspects of landlord and tenant matters for both commercial and residential properties. For advice, contact William Buchanan on 01202 638322 or use our enquiry form at the top of this page.