Deep dive: 1954 Act Consultation – contracting out of security of tenure (chapter 3): the Law Commission’s proposals for reform

What is “contracting out”?

One of the best-known features of the 1954 Act is that business tenants generally enjoy security of tenure. In broad terms, that means that when a protected business tenancy comes to an end, the tenant does not simply have to vacate. Instead, the tenancy continues by statute unless and until it is brought to an end in accordance with the Act, and the tenant will usually have the right to apply for a new tenancy unless the landlord can establish a statutory ground of opposition. 

Contracting out is the mechanism by which landlord and tenant can agree that a tenancy will not benefit from that statutory protection. 

What is the current procedure to “contract out”?

Before the tenant becomes bound to take the tenancy three main steps are required to ‘contract out’: 

1. the landlord must serve a prescribed form warning notice on the tenant;
2. the tenant must then make either:
   1. a simple declaration or,
   2. if less than 14 days’ notice has been given prior to the tenant becoming bound to take the tenancy, a formally sworn statutory declaration before an independent solicitor or notary public; and
3. the lease itself must contain an endorsement of the agreement to contract out, the warning notice and the relevant declaration. 

Why is the current process under scrutiny?

Although that framework is familiar to practitioners, the Law Commission considers that it has become too cumbersome, too technical and too prone to error, and is no longer functioning in the way it was intended. 

Common complaints with the current process are:

• Deal timetables do not always allow for a 14-day notice period under the simple declaration process, especially if the lease terms have to be agreed prior to service. Therefore tenants do not receive the period of advance notice originally envisaged, and incur the cost and inconvenience of having to swear a statutory declaration when it doesn’t, in practice add, additional security.
• the current framework is too administratively heavy, requiring documents to be generated, authorisations to be obtained, notices served, declarations signed, checked and retained alongside the lease.
• process delays also bring “hidden costs”, including lost fit out and trading time, rent commencement delays for landlords;
• technical mistakes in the process may mean a tenancy that all parties intended to be contracted out may turn out to be protected;
• tenancies without a fixed term cannot be contracted out. This means ill-advised landlords entering into such an arrangement could find themselves unintentionally trapped into a protected tenancy even if the contracting-out process is followed (known as the Van Staden drafting trap after a case of the same name).

The Law Commission's proposal

Question 8 asks whether the current procedure should be replaced with the new in-lease model, and seeks views on how the prescribed warning and declaration should be displayed within the lease.

Question 9 asks whether a parallel framework should apply to agreements for future leases.

Question 10 asks whether it should be possible to contract out all written tenancies within the scope of the 1954 Act, rather than only fixed-term tenancies.

The Law Commission’s proposal is to replace the current process entirely with a new model under which contracting out happens within the lease itself.

The principal advantages of this proposal are:

• the lease’s status should be clear from the lease alone with no separate warning notices and declarations to be retained with the lease;
• the process should become less complex and less prone to error;
• Tenants should receive notice earlier, when the draft lease is circulated;
• completion would not be delayed by any mandatory notice period nor any requirement to swear separate declarations; and
• the regime should be easier to digitise fully.

Our view

In our view the Law Commission’s proposal strikes the correct balance between an overly cumbersome process (and, thankfully, the Commission has also rejected the potential for a return to court approved contracting-out) and a scenario where there is minimal statutory regulation (reducing tenant safeguards and creating uncertainty as to the protected status of the lease).

How should the proposal be effected? If the prescribed wording is buried within the lease it could be overlooked. Equally if the prescribed wording is contained in the agreement for the grant of the lease then it could be clumsy to include it both in the agreement and again on later grant of the lease.

We therefore suggest:

• a clear section on the front of the lease should contain the prescribed form wording, and this section is then separately signed by the Tenant on execution of the lease confirming that the tenant has read and understood the warning;
• any agreement for the grant of a lease (including options and pre-emptions) will simply contain a contractual obligation to enter into a contracted-out lease;
• similarly, any agreement for the surrender of a protected lease should contain a contractual obligation to enter into a deed of surrender which contains the prescribed contracting-out wording;
• there should be no distinction between a lease without a fixed term and a lease with a fixed term; all leases should be capable of being contracted-out (removing the Van Staden drafting trap).

The key is to ensure the simplest procedure so there is certainty and no room for technical arguments so both parties have the certainty that the lease is contracted out.

If implemented broadly in this form, we believe the reforms would materially streamline one of the most familiar but frustrating parts of 1954 Act practice which should enable leases to be completed without the additional cost and delay of the current regime.

It is our belief that this is a “quick win” and that the changes should be prioritised by the Law Commission as all parties will be in favour of simplification.