26 Jun 2019

A recent reported case considered the procedure of contracting out tenancies from the statutory protection of the Landlord and Tenant Act 1954 and reached a decision which is of significant importance to commercial property solicitors.

Contracting Out

As a result of the Landlord and Tenant Act 1954 ("the 54 Act") a tenant can remain in occupation of commercial premises following the expiry of the fixed term of their lease and seek a lease renewal. 

However, this right can be excluded by the mutual consent of the landlord and tenant before they enter into a tenancy. The effect of this is that 

  • at the expiry of the fixed term of the lease the tenant has no automatic right to remain in the property or seek a lease renewal
  • the landlord is entitled to recover possession of the property
  • the tenant is not entitled to any compensation.

The procedure for excluding the tenant's right to renew is known as "contracting out" of the protection of the 1954 Act.

In order to contract out the landlord must in the first instance serve upon the tenant a warning notice to alert the tenant to the fact that the right to renew is being excluded and the tenant must execute a declaration before entering into the lease to exclude the statutory protection of the Landlord and Tenant Act 1954. The lease must also contain a clause to confirm that the lease is contracted out of statutory protection and that the procedure required under the 54 Act has been followed. 

The case

The procedure for contracting out recently came under scrutiny in the case of TFS Stores Limited v The Designer Retail Outlet Centres (Mansfield) General Partners Limited and others . TFS Stores Limited ("TFS") had over 200 stores nationwide but the issue before the court related only to six contracted tenancies in retail parks owned by different commercial landlords who had decided that they would let the units occupied by TFS to a commercial rival at the expiry of their leases. The only way that TFS could remain in possession of the six units was to argue that the leases had not been validly contracted out of the 54 Act and as such they were entitled to remain in possession and seek a lease renewal at the expiry of the fixed term.

TFS sought to argue that despite the fact that in every case warning notices had been served and statutory declarations had been entered into by them that the incorrect procedures had been adopted and as such as the invalidity of the procedure meant that the contracting out provision could not be relied upon. 

They issues the Court has to consider in relation to the contracting out procedure being as follows:

  • Did the tenant's solicitors have authority to receive the warning notices as the tenant's agent?
  • Did the TFS representative who executed the declarations have the authority to do so?
  • Were the declarations valid even though they did not specify the fixed term commencement date?

The findings of the Court were as follows:

Did the tenant's solicitors have authority to receive the warning notices as the tenant's agent?

The answer was yes. The court found that the tenant's solicitors had TFS's actual authority to accept service of the warning notices on behalf of TFS. Even if they did not, they would have the ostensible authority to receive the warning notices and it was appropriate for the landlords to believe that they had such authority.

Did the TFS representative who executed the declarations have the authority to do so?

The answer again was another yes. The company representative who executed the declarations was the retail director and the Court found that he had TFS's express authority to execute the declarations. The court found in any event that the landlord's solicitors were entitled to believe that he acted with the ostensible authority given that TFS's solicitors had represented such when they provided the declarations back to them. 

Were the declarations valid even though they did not specify the fixed term commencement date?

Often parties to a lease transaction when completing the declaration do not know the actual date of the commencement of the lease and as such property solicitors often use wording in the declaration such as "the commencement date stated in the lease" or "for a term commencing on a date to be agreed by the parties". The court found that this was a satisfactory approach to adopt and it was not necessary to have an express date in order for the declarations to be valid. 

The impact of the judgment

The court was critical of the tenant's attempts to argue that the leases had not been validly contracted out. The case again reinforced previous case authorities in this area that the Court was reluctant to allow a party to establish minor technical invalidities with the procedure in order to try to gain protection under the 54 Act. 

Importantly there is now certainty that a declaration is valid even if it does not state the actual date of the commencement of the lease