Shorter leases have been in vogue since the 2008 financial crisis. While tenants tend to prefer not to be tied in to long term contracts, landlords also favour the flexibility which shorter leases afford in addition to the certainty that the tenants will vacate the premises on a precise date.
Where shorter leases are negotiated, landlords also require that their prospective tenants ’contract out’ of the lease.
What Does it Mean?
‘Contracting out’ is a phrase that is used in the property industry all the time. Under the Landlord and Tenant Act 1954, a tenant has an automatic right to renew their lease at the end of the term, if they occupy the premises for the purposes of their business.
However, during the commercial negotiations at the outset of the transaction, the Act allows both the landlord and tenant to ’contract out’ of the provisions of the 1954 Act so that the tenant does not have an automatic right to renew their lease at the end of the term.
In such cases the tenant will be required to sign a Declaration or a Statutory Declaration before the lease is completed to confirm that they have received a notice stating that they have no right to remain at the premises.
What is the Difference?
A tenancy protected by the Landlord and Tenant Act 1954 will not terminate at the end of the term, it will continue until it is terminated by one of the ways set out in the Act, and the tenant can lawfully remain at the premises.
In contrast, a ‘contracted out’ tenancy will come to an end at the contractual expiry date; no notice from the landlord or the tenant is required, on this date the tenant must vacate the premises.
There are advantages and disadvantages with ‘contracted out’ leases for both landlords and tenants. If you are intending to contract-out of your lease, or you have any questions about the Security of Tenure provisions within the Landlord and Tenant Act, please contact a member of our Commercial Property Team.
For more information please contact Melissa Graham by email or call 020 7294 7330.