Secure tenancy or not?

04 Feb 2013

Contracting out of the security of tenure provisions, which form part of the Landlord and Tenant Act 1954 (LTA 1954), has implications which landlords and tenants, as well as their professional advisors, should be aware of.

Excluding the provisions is a significant decision for both the landlord and the tenant thus should be discussed at the outset and recorded in the heads of terms.

What are the security of tenure provisions?

These provisions give tenants a right to renew their lease on the same terms as their existing lease, other than rent, which will be the rent for the property on the terms of the lease as at the date of the renewal. Tenants can remain in their property at the expiration of their contractual term until the new lease has been signed. This is called ‘holding over’.  They continue to occupy on the terms and rent of the lease they are renewing. The statutory provisions protect the tenant from being evicted at the end of the fixed contractual term.

When does LTA 1954 apply to a lease?

The LTA 1954 applies if:
–  A tenancy exists;
–  The tenant is in occupation (for the purpose of the tenant’s business); and
–  If the tenancy is not excluded by the Act (see below).

The tenancy is excluded by the Act if it is a:

–  licence or tenancy at will (these allow either party to terminate the tenancy at   
   any time);
–  lease granted for a term of six months or less – unless renewal provisions exist 
   or the tenant has been in occupation for more than 12 months.

What is the procedure to follow to exclude security of tenure?

The following steps need to be taken:
1.  The landlord must serve a warning notice;
2.  The tenant must complete a declaration (simple or statutory); and
3.  The lease must contain clauses recording the agreement to exclude the security of tenure.

Length of the contractual term

It is commonplace for contracting out clauses to appear in leases where the tenant’s commitment to the property is limited or the landlord wants flexibility. Examples of this are:
–  Leases for less than 5 years;
–  Rent being inclusive of other outgoings so the tenants liabilities are reduced or simplified;
–  Tenants having early or multiple break rights;
–  Landlord has little knowledge of the proposed tenant;
–  Tenant is a start-up company.

Whether to exclude security of tenure or not

Excluding the security of tenure results in visible benefits for the landlord. If security is excluded, the landlord holds the deck of cards; he can choose whether to offer a new lease on different terms at the expiration of the term to the tenant, choose another tenant, or sell with vacant possession.  At face value this may seem an obvious decision for the landlord. However, one should not be hasty. If the proposed tenant is a company which has a good payment record then allowing the tenant the protection of LTA 1954 will most probably result in a steady rental income stream for a long period. A lease with security of tenure is regarded as attractive by the tenant and therefore it might command a higher rent or more commitment, which is clearly beneficial for the landlord.

The provisions place the burden on the landlord to prove that the landlord and tenant relationship is at an end. For the landlord to regain possession he must serve notice with one or more of the grounds for opposing the renewal of the lease such as the tenant’s failure to comply with tenant’s covenants or the tenant’s persistent delay in paying the rent. However, nearly all of the grounds relate to a fault on the tenant’s part, so it is more difficult for a landlord to oppose a renewal where the tenant has been a good tenant.

So in summary, there are occasions where excluding security of tenure is appropriate, but not always. We suggest you take advice before making a decision to contract out of the 1954 provisions.