Business Tenancies: The Right to Renew – Law Commission

If you rent premises for your business, you will likely be aware that the law provides important protections when your lease comes to an end, at least in principle. The Landlord and Tenant Act 1954 grants most business tenants the statutory right to remain in their premises and renew their lease at the end of the contractual term, a protection commonly referred to as “security of tenure.”

However, the 1954 Act allows landlords and tenants to agree to exclude these renewal rights when entering into a lease and this has become a very common practice, particularly for leases of 5 years or less.

This process is known as “contracting out,” and there is a prescribed procedure that must be followed for that exclusion to be legally valid. The Government is currently consulting on proposals to reform that procedure, and the changes, if implemented, could have significant implications for both landlords and tenants.

This article sets out the current position, the problems with the existing process, and the key proposals under consideration.

How the Current Process Works

To validly contract out of the statutory renewal rights, three steps must be completed, in the correct sequence, before the lease is entered into:

• The landlord serves a warning notice on the tenant, informing them that they will be giving up their right to renew their lease.
• The tenant makes a statutory declaration confirming they have received and understood the notice. If fewer than 14 days have passed between the service of the notice and the date of the lease, this declaration must be sworn before an independent solicitor. If 14 days or more have elapsed, a simple declaration suffices.
• The lease must contain a reference to both the warning notice and the declaration, confirming that the procedure has been properly followed.

What Are the Problems with the Current Process?

Whilst the procedure may appear straightforward, it gives rise to a number of well-documented practical difficulties.

• The 14-day period is routinely bypassed. The cooling-off period was intended to be the norm, giving tenants time to consider the implications of waiving their renewal rights, with the sworn declaration before a solicitor reserved for exceptional cases. In practice, the opposite has occurred – the sworn declaration route is used as a matter of routine, adding inconvenience without, in many cases, providing meaningful additional protection to tenants.
• The process does not provide effective tenant protection. The current procedure was designed to ensure tenants make an informed decision before waiving their renewal rights. In reality, many tenants, particularly smaller or unrepresented businesses, go through the motions without fully appreciating the significance of what they are agreeing to.
• It is bureaucratic. The multi-step process outlined above creates administrative hurdles and potentially causing transaction delays for both parties.
• The risk of mistakes is significant. As the procedure must be completed in a precise sequence before the lease is entered into, errors (however minor) can inadvertently invalidate the entire contracting out, leaving the tenant with statutory renewal rights that neither party intended.
• Common commercial arrangements create particular difficulties. Where parties enter into an agreement for lease or an option to renew, before the lease itself is granted, the current procedure can cause problems. As contracting out must take place before the agreement is entered into, there is a risk that changes in the identity of the landlord or tenant between the agreement and lease completion will affect the validity of the contracting out.

What Changes Are Being Proposed?

The Law Commission’s provisional proposal is a fundamental overhaul of the existing procedure. Rather than retaining the current system of advance warning notices and statutory declarations, the proposal is to replace the entire process with one that takes place within the lease itself.

The Core Proposal: Contracting Out Within the Lease

Under the proposed new procedure, a contracted-out lease would need to contain two elements, both displayed prominently within the lease document:

• A prescribed warning — included within the body of the lease, explaining to the tenant that the lease is contracted out and setting out the implications of this in similar terms to the current warning notice; and
• A prescribed declaration — signed by the tenant when executing the lease, confirming that they have read and understood the warning.

The Law Commission provisionally proposes that both elements should be set out in outlined text boxes within the lease, to ensure they are prominently displayed and cannot easily be overlooked.

It is also being considered whether the warning and declaration should appear at a specific position within the lease, for example, at the start of the document or near the signature block.

This represents a significant departure from the current law. There would be no separate warning notice served in advance, no statutory declaration (whether simple or sworn before a solicitor), and no 14-day waiting period. The entire contracting out process would be completed at the point the lease is signed.

Agreements for Lease and Other Future Arrangements

The proposals also address the difficulties that currently arise with agreements for lease, options to renew, and similar arrangements. The Law Commission provisionally proposes that:

• The lease referred to in an option would itself be contracted out by including the prescribed warning and declaration within the lease when it is ultimately granted, in the same way as any other contracted-out lease.
• Prescribed wording should also be included in the agreement for lease (or option or guarantee), explaining that the future lease will be contracted out. This would impose a contractual obligation on all parties, including any successors in title, to contract out the future lease when it comes to be completed.
• Importantly, failing to include the prescribed wording in the agreement would not prevent the future lease from being contracted out. It would simply mean that neither party could require the other to contract it out.

This approach resolves the current difficulties caused by the time lag between the contracting out process being undertaken and the lease being completed, since the operative act of contracting out would take place at the point the lease is signed.

Extending Contracting Out to Written Periodic Tenancies

Currently, only fixed-term tenancies can be contracted out. The Law Commission provisionally proposes that it should be possible to contract out all written tenancies within the scope of the 1954 Act, not just fixed-term tenancies. This would address a technical trap in the current law and bring greater flexibility to the market.

Arguments in Favour of the Proposals

• A simpler, more streamlined process. Replacing the current multi-step procedure with a single process contained within the lease itself, removes the administrative complexity and the risk of procedural errors that can have disproportionate consequences.
• Resolving the problems with agreements for lease. By making contracting out take place within the lease itself, the time-lag issues that currently affect agreements for lease and similar arrangements are effectively eliminated.
• Easier to digitalise. Because the new process would not require separate documentation or statutory declarations, it would be significantly easier to accommodate within digital and electronic transaction platforms.
• Tenant protection is maintained. The prescribed warning and declaration requirements are retained, ensuring tenants are still clearly informed that they are waiving their renewal rights and must actively confirm that they have read and understood the implications before doing so.

Arguments Against the Proposals

• Tenants may not notice the warning within the lease. Under the current procedure, the warning notice is a separate document served on the tenant in advance of the lease, which draws attention to the significance of contracting out. Under the new procedure, the warning would be contained within the lease itself. There is a risk that, despite being in an outlined text box, it could be overlooked, particularly by tenants who are not legally represented.
• The removal of the advance notice period. The current 14-day period, whatever its practical limitations, does at least create a window during which a tenant can reflect on, and take advice about, the decision to contract out before committing. The new procedure would remove this entirely, with contracting out taking effect at the moment the lease is signed.
• The risk of contracting out becoming more prevalent. If the procedure becomes simpler and less burdensome to complete, there is a concern that contracted-out leases will become even more widespread, further diminishing the practical value of security of tenure for business tenants.
• Consequences of non-compliance. The Law Commission acknowledges that imposing detailed requirements as to how the warning and declaration must be displayed within the lease increases the risk that a requirement is inadvertently overlooked, which could invalidate the contracting out. A careful balance will need to be struck between prominence and practicality.

What Does This Mean for You?

Whether you are a landlord or a business tenant, these proposals, if enacted, will fundamentally change how contracted-out leases are documented. The days of the separate warning notice and solicitor-sworn declaration would come to an end, replaced by a streamlined process contained entirely within the lease itself.

For tenants in particular, it will be important to read the lease carefully and to ensure that any prescribed warning and declaration are fully understood before signing, as contracting out involves the waiver of significant statutory rights. We would always recommend taking legal advice before agreeing to contract out of your statutory renewal rights.

We will continue to monitor developments and will provide further updates as the position progresses. In the meantime, if you have any questions about how the current rules apply to your lease, or what the proposed changes may mean for you, please do not hesitate to contact us.