As a tenant or landlord of a commercial property, an understanding of security of tenure, including how and and when it applies to your lease is really important.
In this article, we will cover:
Why landlords can benefit from security of tenure;
Understanding the requirements of security of tenure;
If tenants can be evicted under security of tenure.
What is security of tenure?
Security of tenure under the Landlord and Tenant Act 1954, gives commercial tenants the automatic right to keep possession of a business premises after the lease term has ended.
If a landlord wants to end a lease with a tenant, they can only do so If a Notice to Quit is issued. There are limited circumstances where this is an option for landlords.
These include:
If a tenant pays rent late consistently
The tenant has not kept the property in a good state of repair
There have been breaches to the tenancy agreement
The landlord can offer alternative suitable premises
The tenancy is part of a sublet
As a landlord, there may be other reasons for wanting to exclude security of tenure. These might include if you wanted to take back the lease of your property to redevelop it, or would like to take up residence there yourself.
A commercial landlord may have to pay compensation to a tenant if their lease is terminated, even if the tenant meets statutory grounds for terminating a lease.
How is security of tenure beneficial to a business owner?
Security of tenure is beneficial to a business owner if they don’t want to be rushed into making a decision about the future of their business.
It can also be favourable to businesses that have made modifications to their premises during their time as tenants. For example, an expensive kitchen fit out for a restaurant business can mean a business loses money, and the equipment they paid for, if their lease were to come to an end before they were ready to leave.
A tenant might also agree to contract out security of tenure when negotiating the terms of the lease. This may support in securing a better deal, as it is such an important requirement for commercial landlords that are desiring flexibility.
Security of tenure is not the most commonly known aspect of a lease. If you’re looking to discover other elements of a commercial lease, check out our guide on everything you need to know about commercial leases.
Why would a landlord want security of tenure?
Some landlords may favour security of tenure if they have a stable and trusted relationship with a tenant. They won't have to go through the process of finding new tenants frequently, which can be time-consuming and costly.
Other reasons include:
Stable income
With security of tenure, a landlord can have a stable and predictable rental income. This is because they know that the tenant can't easily leave or be asked to leave, providing financial stability for the property owner.
Reduced vacancy costs
High tenant turnover can lead to vacant periods in a property, which can be expensive for landlords. With security of tenure, there is less risk of frequent vacancies, reducing these costs.
Property maintenance
A long-term tenant may take better care of the property because they consider it their long-term place of business. This can lead to lower maintenance and repair costs for the landlord.
Property value
A property with a stable, long-term tenant is often more attractive to potential buyers, which can increase the property's value.
Market conditions
In certain market conditions, such as when there is a surplus of commercial spaces, landlords may use security of tenure as an incentive to attract tenants by offering them stability and protection against rent increases.
It's important to note that while security of tenure can be beneficial for landlords in some cases, it can also limit their flexibility in terms of changing rental terms or choosing new tenants.
Many commercial landlords choose to exclude security of tenure from their leases. This is because by removing the clause, landlords have more say over who rents their property in the short and long term.
Contracting out security of tenure from a lease allows landlords to evict tenants without a reason. Yet, tenants should be aware that just because security of tenure is contracted out of their lease, this doesn’t mean that they cannot extend their lease, if they can work out a suitable arrangement with their landlord.
We’ve created an article on the process of evicting a commercial tenant if you’d like to know more about how to deal with difficult tenants.
It's important to note that tenant’s rights mean that they have the ability to stay in the property until the end of their current term. Tenants can stay in the property up to the point that the lease is terminated under the statutory process.
What are the requirements for security of tenure?
Security of tenure is a right laid out in part two of The Landlord and Tenant Act 1954.
For security of tenure to be included in a lease, there are a number of requirements for tenants and landlords to follow.
Tenants must be using the building purely as a commercial property, so none of the tenant’s employees or owners can live in the premises.
Tenants also must be in occupation of the building during the lease. The tenancy must exceed six months and not contravene any exclusions included under the legislation.
Security of tenure and different lease types
Security of tenure may be ‘within the act’ or ‘outside of the act’.
The Act gives business tenants certain legal rights regarding lease renewals and security of tenure. How it applies depends on the lease type:
Protected Leases: For leases that fall under the Act (most leases for business purposes do), tenants have a legal right to renew their lease when it comes to an end. This means they can stay in the property and continue their business. Landlords can only oppose renewal under specific circumstances, such as non-payment of rent or other serious breaches of the lease.
Excluded Leases: Some leases are excluded from the Act, and security of tenure doesn't apply. These often include very short leases, certain agricultural leases, and some tenancies with special conditions. In such cases, tenants do not have an automatic right to renew the lease, and landlords have more flexibility in deciding whether to renew.
Non-Protected Leases: If the lease initially falls under the Act but certain conditions are not met (e.g., the tenant didn't follow the correct procedures), it may become a non-protected lease. In this case, the tenant loses their automatic right to renew, and the landlord can decide whether to offer a new lease or not.
Security of Tenure Waivers: Sometimes, landlords and tenants may agree to waive security of tenure. In such cases, the tenant gives up their right to renew the lease under the Act. This can be a part of lease negotiations and is often used in short-term or specific-use leases where both parties want more flexibility.
It's important to note that the Landlord and Tenant Act 1954 provides a framework, but the specific details and application can vary based on the individual lease agreement, the conduct of the parties, and any negotiations that take place.
Both landlords and tenants should understand how the Act applies to their lease and consider its implications when entering into a commercial lease arrangement.
How to serve notice to exclude security of tenure
Commercial landlords can’t simply wave a magic wand if they want to remove security of tenure from their leases.
The Regulatory Reform (Business Tendencies) (England and Wales) 2003 legislation sets out the procedure that landlords must follow.
The landlord must first serve written notice to the tenant before the completion of the lease. Then, the tenant must sign a declaration agreeing that they are happy to take out a lease outside the act
If there are less than 14 days before the completion of the lease, the tenant must complete a statutory declaration.
If there are 14 days or more before the completion of the lease, the tenant only needs to complete a simple declaration.
As with many legal agreements, even small or seemingly inconsequential technical errors can lead to the notice being void. This could lead to financial repercussions for the landlord, as they may not be able to negotiate higher rent with new tenants. Or, their renovation plans could be delayed, setting them back time and money.
To ensure the notice is served to the tenant without issue, a landlord should:
1. Ensure they have the most suitable address for the tenant
Should the notice be served to the property the tenant is occupying? Or would it be best delivered to their home address? Alternatively, it can be handed to the individual responsible in person. Or a landlord can serve notice to the tenants’ solicitor, if tenant’s solicitor has written authority to accept service of the notice.
2. Confirm which tenant to notify
If there are multiple tenants, they all need to be served and each sign an individual declaration.
3. Ask, does the tenant have a guarantor?
A warning notice must be served to the tenant’s guarantor if they have one, and they need to provide a declaration.
Landlords considering contracting out security of tenure should seek legal advice before deciding whether it is right for them and before starting the procedure.
Removing a tenant if security of tenure exists
If a lease is within the act, a landlord still has the right to remove a tenant. To do so, a landlord needs to serve a ‘hostile’ Section 25 notice.
This notice will specify the date they want the lease to come to an end, along with the reason they give for wanting to terminate the lease.
If the tenant has served a Section 26, the landlord will need to submit a counter notice to regain possession of the building.
The tenant can counter the landlords claim if they do not believe the landlord has a right to repossession. If this is the case, a landlord would have to apply to the court to remove the tenant.
Get in touch for specialist advice
Commercial landlords and tenants should seek specialist advice in the first instance before taking out a lease, and in the event they want to end a commercial tenancy.
At Lawhive, our commercial property solicitors are on hand to help both landlords and tenants in the event of a dispute or a problem. Get a free case assessment and quote today to get started.