Background

The Landlord and Tenant Act 1954 (“LTA”) is not a new piece of legislation. It grants commercial tenants statutory rights, giving them the right to renew their lease on substantially the same terms if they remain in occupation at the end of the term.

Landlord and tenants can contract out of these rights and the law was revised by the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003 giving landlords greater flexibility in how to manage their property.

Contracting Out

To exclude the statutory rights the following steps need to be taken before the tenant becomes bound to take the lease:

  1. The landlord must serve a notice on the tenant in a prescribed form;
  2. The tenant must make a declaration acknowledging that they have received the notice and that they are willing to take the lease without the LTA protections;
  3. The lease (or agreement for lease if there is one) must include a reference to the contracting out procedure.

The landlord must ensure that these steps are carried out correctly because failure to do so means that the tenant will gain the protection of the LTA.

Why do these rights matter?

For tenants, these rights give stability. They enable a tenant to make longer term decisions about its premises and reduce the uncertainty that will inevitably occur at the end of the contractual lease term. Additionally, it enables tenants to argue against higher rents proposed by landlords because the tenant has the right to ask the Courts to set the rent and to resolve disputes about the lease terms.

For landlords, the rights curtail the ability to deal with the property as and how the landlord wishes. It prevents landlords from reletting premises solely on the basis of being able to achieve higher rents (although evidence of higher rents could influence a Court when setting the new rent) and can also create difficulties if the tenant no longer “fits” with a landlord’s plans for the property – which may be triggered by a changing tenant balance in a shopping centre, because they no longer fit within gateway criteria for a science and technology park, or because the landlord intends to redevelop the property is to be redeveloped.

However, institutional landlords are generally less concerned about who is renting the property provided that risks are low and the rent is paid. As such they are often willing to allow these rights to tenants and charge an increased rent.

TFS Stores Limited v The Designer Retail Outlet Centres (Mansfield) General Partner Limited and others

TFS Stores Limited, trading as The Fragrance Shop, occupies numerous locations across the country. This case relates to six leases where it agreed with the respective landlords to contract out of the LTA rights. At the end of the lease terms, the landlords refused to renew the leases, something which TFS’s director had thought highly unlikely. In response, TFS claimed that they had rights to renew their leases as the procedure for contracting out of the LTA had not been properly followed:

  • The statutory warning notice was served on TFS’s solicitors.
  • The TFS representative who signed the declaration did not have authority to do so.
  • The declarations were invalid because they failed to specify the commencement date of the term of the proposed tenancies correctly.

These issues are important because it is common practice for landlords and tenants to give their lawyers authority to accept service of statutory warning notices, and frequently authorise people other than statutory directors (i.e. those listed at Companies House), who are usually busy running the business, to make the declarations on behalf of the company.

Parties are often in a hurry to complete the deal so that the tenant can begin its occupation, and the landlord can begin receiving rent. As such it is not uncommon for declarations to say that the tenancy will commence “on a date to be agreed” on the basis that all parties want it to start as soon as possible and may not know the precise start date when the tenant makes the declaration.

The decision

The Court reviewed TFS’s arguments and determined that the contracting out process had been followed. The judge stated that it was not necessary to distinguish whether the authority was express or implied and that he was:

“entirely satisfied that there was actual authority given to [TFS’s lawyers] to accept service of the relevant Warning Notices… as part of the authority to do everything necessary to bring the matter to completion…”.

On the facts the judge concluded that TFS’s representative had actual authority and even if he hadn’t, that representative had the apparent authority to make the declarations and the landlord relied on such apparent authority.

Finally, the judge decided that the purpose of the wording in the notice was to identify the tenancy to be granted and that:

“the ambiguity in "commencement date" is such that either the date of grant or the date for calculating the commencement of the term is adequate”.

Otherwise, in the judge’s words, it would be “a recipe for confusion, uncertainty and the frustration of perfectly sensible commercial arrangements entered into between prospective landlords and tenants…where, if this is indeed the position, commercial parties might well with justification say that the "law is an ass".”

Thankfully, the judge took the commercially sensible approach.

Look before you sign

First, as a practical point for lawyers, this decision allows us to breathe a collective sigh of relief as the Courts show their support for the commercial way in which professionals have been conducting transactions.

Secondly, the case serves as a reminder that following the statutory process is an important consideration and landlords and their lawyers must ensure that the process is followed so that tenants cannot later challenge the validity of the contracting out provisions in the lease.

Finally, this case serves as a reminder to read what you are asked to sign. The judge commented that it was clear from the evidence that the representative signing the declarations did not understand what they meant. The judge said:

“At the end of the day, however clearly documents are drafted and however formal the execution process, there will always be some people that will simply sign on the dotted line in the belief that it is simply "another …hoop to jump through"

If the only lesson that can be learned from this case is this – don’t be that person.

About the author

Michael Goldfinch Solicitor

Michael works in the commercial property team assisting with a range of property transactions.