The process for contracting-out a new tenancy of business premises from the statutory right to renew under the Landlord and Tenant Act 1954 (the 1954 Act) is a key one for all landlords, and especially developers. Commonly, pre-lettings are negotiated even before ground is broken on a site. Certainty that all those lettings are properly contracted out of the 1954 Act is important.

Since 2003, the property industry had been following the contracting-out procedure with little problem, however that was brought into question in 2018 with TFS Stores Ltd v The Designer Retail Outlet Centres (Mansfield) General Partner Ltd & Ors. Fortunately, having refused permission to appeal the Court of Appeal's 2021 decision, the Supreme Court has now closed the door on the challenge to the procedure giving developers one less thing to worry about.

The contracting-out procedure

The procedure is simple. Before the tenant becomes contractually bound to take the new lease (ie before the grant of the lease itself or before completing an agreement for lease) and before they go into occupation, the proposed landlord must serve a health warning notice on the proposed tenant. The warning notice advises the tenant that it is being offered a new lease without any 1954 Act renewal rights. The tenant then replies with either a simple or a statutory declaration, depending on whether the new lease will be granted within 14 days of the warning notice.

The warning notice and the declaration needs to be in the form, or substantially in the form, set out in the 2003 regulations. This includes a blank space for the parties to record the date for the "term commencing on .............".

In a development context, the grant of the lease may well be conditional upon planning, vacant possession, practical completion, etc, and so the parties are unable to insert a specified date into that blank space. Accordingly, common practice developed for parties to refer to the term commencing on, for example:

  • a date calculated or defined by the lease or an agreement for lease;
  • a date "to be agreed between the parties"; or
  • "the day on which the tenancy is granted".

If the procedure is not followed correctly, the agreement to contract-out the tenancy may be invalid. The tenant will then have the benefit of renewal rights under the 1954 Act, plus a right to compensation if the landlord seeks to oppose any renewal on grounds such as redevelopment.

Challenging common practice

The Fragrance Shop, a retailer with over 200 shops in the UK, sought to challenge the validity of its statutory declarations in relation to six leases at various McArthur Glen outlet centres. Amongst other things, they argued that each statutory declaration required the exact date that the lease term would come into existence, ie the date of completion of the new lease. The asserted that anything else, including the formulations above, did not comply with the procedure and meant that the leases were not properly contracted-out.

The High Court dismissed these claims in 2019 and the Court of Appeal upheld that decision in 2021. As the purpose of the procedure is to ensure the tenant understands that it will not have any rights to remain in the premises after the lease expires or is terminated, the term commencement wording is only required to help identify the lease to be contracted-out. It is not a strict requirement to specify the exact date of lease completion, particularly as the regulations require the declaration to be in the prescribed form, or substantially in that form. However, The Fragrance Shop sought permission to appeal to the Supreme Court, leaving the issue alive.

Clarity once again

As the Supreme Court has now refused permission to appeal, developers can be confident that similar challenges will not be forthcoming, and their developments can be managed or sold with certainty over when the tenancies will end.

Instead, developers can once again turn their attention back to issues such as energy efficiency, the Building Safety Act 2022 and Residential Property Developer Tax.

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.