The recent High Court decision in TFS Stores Limited v BMG (Ashford) Limited et al  EWHC 1363 (Ch) is an important decision dealing with the contracting out procedures under Section 38A of the Landlord and Tenant Act 1954 (1954 Act) and Schedule2 of the Regulatory Reform (Business Tenancies) Order 2003 (2003 Order).
Background and facts
The Fragrance Shop (TFS), a large perfume retail operator with over 200 stores nationally, entered into leases at six designer retail outlet centres and in each case the contracting out procedure was followed. Following the expiry of the leases, and the landlord's decision not to renew but to let the stores to a rival perfume retailer, TFS sought to establish that the six leases were protected by the 1954 Act.
The contracting out procedure
Unless a commercial lease is contracted out, the 1954 Act serves to protect the tenant's right to remain in occupation of the premises and its right to the grant of a new lease following the expiry of its existing lease.
The parties can agree that this protection is waived prior to the grant of a lease provided the following steps are taken:
- The landlord serves a warning notice explaining the tenant's rights that are being waived;
- The tenant makes a declaration to acknowledge that it understands the consequences of contracting out; and
- The lease includes an endorsement referring to the landlord's notice and the tenant's declaration and the parties' agreement that the relevant provisions of the 1954 Act are to be excluded from the lease.
Issues raised by TFS
The court firstly considered arguments concerning the alleged absence of authority of the tenant's solicitor and the tenant's retail director, as agents, to receive the warning notices and/or to make the declarations and secondly, the alleged defective wording in the statutory declarations due to the failure to include a fixed date for the grant of the lease.
The court considered the law of express and implied actual authority, ostensible authority and the imputation of knowledge via an agent, in order to answer the following two questions:
- Did the tenant's solicitors have authority to receive the warning notices as the tenant's agent?
- Did the person who made the declaration in each case have the authority to do so?
The judge held that the tenant's solicitors had actual authority to accept service of the warning notices on the basis that this formed part of their instructions to complete the transaction in accordance with the terms agreed between the parties, which included the leases being contracted out.
Where the tenant's retail director had made the declarations, the tenant argued that this was invalid because he was not a statutory director of the company. The court held that the tenant was bound by the acts of professional and employee agents as having actual authority to act as they did, meaning that the tenant was unable to challenge the validity for lack of authority by the person making the declarations.
Another argument put forward by the tenant was that the statutory declarations were invalid due to a failure to include the exact term commencement date of the leases. As the term commencement date was not known at the time of drafting the notices, wording was used to circumvent using an exact date, such as "the term of the lease to be granted would begin on the access date determined under the agreement for lease between the parties" or "for a term commencing on the date on which the tenancy is granted"
The judge held that an exact term commencement date was not essential because the purpose of the wording is to identify the tenancy to be granted and the wording used was sufficient for those purposes.
The court also confirmed that statutory declarations must be made "in the form, or substantially in the form" set out in the 2003 Order. The declarations could therefore be rescued by virtue of them being in "substantially" the form contained within the 2003 Order.
Ultimately, the court found that the leases were validly contracted out
The approach taken by the court in this case will be a relief to landlords and their lawyers as it confirms the validity of current market practice. Had the court reached a different conclusion, this could have caused practitioners significant difficulties, particularly in relation to specifying a future date in the warning notice where the term commencement date is not known in advance.
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.