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Commercial Lease Agreement: Opting Out

Commercial Lease Agreement: Opting Out
12 July 2017

Signing a commercial lease agreement is a big first step for new businesses.  Leases for commercial properties are much more complicated than residential tenancies. But a little knowledge goes a long way: once you understand the key legal concepts involved it doesn't seem quite so bad. In this article we'll look at 'opting out' and what that means for landlords and tenants.

What is 'opting out'?

Most commercial lease agreements in the UK are subject to the Landlord and Tenants Act 1954.  This act gives commercial tenants a statutory right of tenure.  This means that at the end of the fixed term part of a tenancy the tenant has the right to:

  • remain in the property
  • apply to the court for the grant of a new lease.

Under the Landlord and Tenant Act, the landlord can only object to a request to renew a lease and regain possession of the property for very specific reasons (grounds) including:

  • the landlord wants the property for his own use,
  • it has fallen into disrepair
  • the landlord is going to redevelop the property, or
  • the tenant is in breach of the tenancy contract e.g. rent arrears.

A tenant can agree to waive these rights i.e. to 'opt out' of the security offered by the Landlord and Tenant Act.  Both the landlord and tenant need to agree to exclude security of tenure before the lease is signed, and a formal procedure must be followed.

A commercial lease that has been opted out gives the landlord greater flexibility but gives the tenant less long-term security.  Whether opted in or out there are still formal procedures to follow and notices to serve to enter into and end a commercial lease agreement.

How does opting out affect a commercial lease agreement?

The discussion about opting out has to be discussed and agreed by the landlord and tenant before a commercial lease agreement is signed.  The contract itself must contain specific clauses setting out that:

  • sections 24 to 28 of the Landlord and Tenant Act do not apply to the lease
  • the landlord has served the correct notice to the tenant, and
  • the tenant has made the require declaration.

So, signing a commercial lease agreement is the last step of the process.  Here is what has to happen first:

  1. Landlord and prospective tenant agree that the commercial lease will be opted out
  2. Landlord gives (serves) the tenant a Schedule 1 warning notice at least 14 days before the commercial lease agreement is signed.  This document explains the implications of agreeing to opt out and advises the tenant to seek legal advice before signing the contract.
  3. The tenant sign another formal document (a 'declaration') acknowledging that they agree to contracting out and that they have received the Schedule 1 notice.  There are two forms of this document:
    1. Schedule 2 Para 7 declaration - this is the normal (advanced notice) declaration and can be signed no sooner than 14 days after the landlord has served the Schedule 1 notice.  The tenant simply needs to sign this declaration.
    2. Schedule 2 Para 8 declaration - if, for some reason, both the tenant and landlord want to enter into a lease agreement before 14 days is up then this declaration can be used.  This might be appropriate if, for example, the tenant's premises have been damaged and new premises are required urgently.  In any case, the landlord still needs to serve the Schedule 1 notice before the commercial lease agreement is signed.  The tenant must make a statutory declaration before  an independent solicitor (or other person qualified to take oaths) and sign the declaration.

What happens at the end of the lease?

If a commercial lease has been opted out from the Landlord and Tenant Act then when the lease comes to an end then the tenant can either ask the landlord for a new lease or leave.  If the tenant wants to stay then both parties would enter into new discussions about the term of a new lease.

The landlord is not obliged to grant a new lease nor to provide any reason why he wants to regain possession of the property.  If the landlord is happy to offer the tenant a new lease then he is free to offer whatever terms he chooses - he is not bound by the previous agreement in any way.

If the tenant stayed in the premises against the wishes of the landlord, then tenant would be a trespasser and the landlord could apply to the court order to evict the tenant.

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