When it comes to taking or granting a lease for commercial property, one of the key issues to consider is whether the lease will be inside or outside the Landlord and Tenant Act 1954 ("1954 Act").
The security of tenure provisions under the 1954 Act provides the tenant with an automatic right to a new lease on expiry (on similar terms but at the then market rent) unless the landlord can prove one of the grounds set out in the Act to defeat the tenant’s rights.
On the other hand, if the lease is outside of the 1954 Act, the tenant does not have an automatic right to a new lease on expiry (on similar terms but at the then market rent) unless the landlord can prove one of the grounds set out in the 1954 Act to defeat the tenant's rights.
So, which is better? This depends on the facts of the transaction and the bargaining power of the parties.
Inside the 1954 Act
Tenants usually prefer the lease to be inside of the act as it gives them more certainty because at the end of the term, they have a right to a new lease.
For landlords, this makes it harder to regain possession of the property because they can only do this if they can prove one of the grounds set out in the 1954 Act, for example, that the landlord intends to redevelop the property or occupy it themselves. Additionally, even if the landlord does regain possession, the tenant may be entitled to compensation and the level of this depends on the rateable value of the property and how long the tenant has been in occupation of the property.
Outside the 1954 Act
Landlords usually prefer the lease to be outside of the act because it gives them more control over the property, no compensation (as set out above) would be payable and makes it easier to regain possession at the end of the term if they want to re-develop or if the relationship with the current tenant has broken down.
If the parties agree that the lease should be outside of the 1954 Act, they need to make sure that the correct steps are taken before the lease is granted:
- The lease must contain a clause that it is to be excluded from the 1954 Act;
- The landlord must serve a valid notice on the tenant (in a prescribed form); and
- The tenant must either provide a statutory declaration or simple declaration. This shows that they are aware of the implications of taking a new lease outside of the 1954 Act.
If these steps are not followed, the lease may still be inside the 1954 Act.
Considering the above, it is important to seek legal advice when negotiating the terms of the lease. If you have any questions or wish to speak to a member of the team, please do not hesitate to contact us.
Although every effort has been made to ensure that the information provided in this article is accurate and correct, the information provided does not constitute any form of advice.