Landlords will be buoyed by the High Court decision in TFS Stores Limited v. The Designer Retail Outlet Centres (Mansfield) General Partner Ltd  EWHC 1363 (Ch) which took a pragmatic approach to interpreting the rules on contracting out commercial leases from the security of tenure provisions of Part II of the Landlord and Tenant Act 1954 (1954 Act).
Pursuant to the 1954 Act, a commercial tenant will have automatic rights to a new lease upon expiry of its existing lease. This is so, unless the tenant and the landlord agree to "opt out" by following the contracting out procedure set out in the 1954 Act and the Regulatory Reform Order 2003 (the 2003 Order). These require the landlord to first serve a notice in the prescribed form on the tenant (or a person authorised by the tenant to accept notice) prior to the tenant becoming contractually bound to enter into the lease confirming that the tenant will not have the right to a new lease at the end of the lease term. The tenant must then swear, before an independent solicitor or commissioner for oaths, a statutory declaration in the prescribed form (or a simple declaration if there are more than 14 days between the service of the notice and the tenant becoming contractually bound to enter into the lease) to acknowledge that the lease will be contracted out of the security of tenure provisions of the 1954 Act.
TFS Stores (otherwise known as The Fragrance Shop) was the tenant of various retail outlet leases, of which six were considered by the court in these joint proceedings. In each case the landlord was a nominee of an investor group, managed by McArthur Glen (UK) Limited. The tenant argued that the leases were not properly contracted out and therefore it benefited from security of tenure, meaning it had a statutory right to renew at the end of the contractual term of each lease.
Breaking down the tenant's argument, there were three key issues before the court:
- whether the tenant's solicitors were authorised to accept service of the warning notice;
- whether an employee of the tenant, who was not a director, had the authority to execute the statutory declarations on the tenant's behalf; and
- whether the statutory declarations were validly completed since they did not set out a fixed term commencement date for each lease.
In respect of issues (1) and (2), there was a further question of whether the authority was nevertheless ratified retrospectively or, failing that, whether there could be an estoppel by deed (since each lease contained an acknowledgement by the tenant that it had been validly contracted out).
Did the tenant's solicitors have authority to accept service?
The court looked at the tenant's solicitors' retainer and concluded that they were acting as agent for their client. The tenant's solicitors' authority to accept the warning notice "flowed" from the nature of their instructions which were to do everything necessary to complete a lease in accordance with the agreed heads of terms. The heads of terms expressly stated that the leases were to be validly excluded from the protection of the 1954 Act. Whether the solicitors' authority was express or implied did not (in the court's view) matter for these purposes and, in any event, the court was satisfied that the solicitors would have had apparent authority to accept the notices.
Did a non-statutory director have authority to execute a statutory declaration on behalf of the tenant?
The court also concluded that the tenant's employee did have actual authority to execute the statutory declarations. The court's approach was a contextual one:
- Mr Thompson (the employee) was a retail director (albeit not a statutory director), and he acted as the sole point of contact with the tenant throughout the transaction;
- there was nothing to suggest that Mr Thompson's authority had been limited to exclude executing a statutory declaration; and
- although on other occasions the tenant had provided written authority confirming Mr Thompson's authority to execute statutory declarations, on such occasions the written authority had not done anything other than confirm an existing authority. As such it made no difference in this case that no written authority had been provided.
With both authority issues having been found in the landlord's favour, there was no need to consider the ratification or estoppel points. However, in some obiter comments, the court doubted that the estoppel argument would have worked in any event. If estoppel were to apply as contended by the landlord (i.e. by virtue of a statement in the lease to the effect it had been validly contracted out) that would remove the ability for tenants to challenge the validity of the contracting out process – a key statutory protection. As such this part of the judgment casts doubt over the effectiveness of such statements in leases.
Were the statutory declarations in a valid form?
The tenant had argued that the statutory declarations were invalid because they did not specify a fixed term commencement date. Some declarations referred to the term commencement date as "the Access Date under the Agreement for Lease", others to "a date to be agreed by the parties" and some even stated that it would be the "date on which the tenancy is granted". The tenant argued that, as none of these were certain dates, the declarations were invalid.
The court adopted a practical approach to this. The purpose of setting out the term commencement date was to enable the person giving the declaration to identify which tenancy was going to be excluded from 1954 Act protection. The form of the statutory declarations that had been used was therefore "substantially" in the form set out in the 2003 Order. A fixed commencement date was not absolutely necessary and instead the formulae used in the declarations for identifying that date were acceptable.
Commercial landlords will be pleased to see the court taking a common-sense approach to the contracting out process. The confirmation provided by this case is also helpful for practitioners in situations where the term commencement date of a lease cannot be known in advance (perhaps because the grant of the lease is conditional on building works).
Though contracting out is often treated as a straightforward preliminary step in a transaction, this case highlights the need to bear in mind the question of authority (to be served and to execute the various notices and declarations) as well as ensuring a statutory declaration is substantially compliant in form with the 2003 Order.
As such you should consider the following points when commencing the contracting out procedure:
- What is the nature of the retainer between the tenant's solicitor and client – if no express authority has been given to accept a warning notice, can the authority be said to "flow" from their instruction generally? Is clarity needed on this before proceeding? Consider asking the tenant's solicitor to confirm that it has its client's express authority to accept the notice on its behalf.
- Does the tenant (if it is an organisation) have any procedure or policy about the execution of property documentation? Does authority need to be conferred? Does evidence of authority need to be requested?
- If the commencement date for the lease cannot be known in advance, can you specify contractually what that date will be? While various formulae were accepted in this case, best practice would be to always be as precise as possible.
Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.