There is more to the recent high court case of TFS Stores Ltd v BMG (Ashford) Limited et al  EWHC, than immediately meets the eye.
On the face of it, the case appears to be about the procedure to be followed when a landlord and a business tenant agree to ‘contract-out’ of the security of tenure provisions contained in the Landlord and Tenant Act 1954, but in reality, the case is about much more than procedural law. Although, it would be wrong to say that the case does not serve to clarify some areas of uncertainty in relation to the contracting-out procedure, in the main, the judgement that was handed down, came with no real surprises.
The case does serve, however, to highlight the potential pitfalls an unsuspecting tenant may fall into when short-term savings are favoured over long-term security; the problems that are encountered when tenants do not fully understand the effect of the 1954 Act and the contracting-out procedure, and the issues associated with ensuring that those individuals purporting to have authority to enter in arrangements on behalf of a business, do in fact, have such authority. What was it all about?
TFS Stores Ltd, the tenant in this case, trades under the name “The Fragrance Shop” and operates a network of retail outlet stores, trading in fragrance products, serving customers throughout the UK.
The Fragrance Shop entered into six tenancies, all with different landlords, which all purported to exclude the security of tenure provisions contained in the 1954 Act. Upon expiration of the contractual terms of the tenancies, the respective landlords sought to recover possession of their premises. TFS brought proceedings against the landlords, arguing that the landlords could not recover possession of the premises as the relevant procedural requirements to contract-out of security of tenure had not been correctly followed and that the tenancies were therefore protected under the 1954 Act.
To contract-out of the security of tenure provisions, a landlord, before granting the tenancy, must serve a warning notice on a tenant which informs them that they are being offered a tenancy without security of tenure. The tenant, in response, must then execute a declaration (usually statutory), acknowledging the unprotected status of the tenancy and that they understand the consequences of entering into such a tenancy.
The Fragrance Shop’s main points of argument were:
And the Court found….
- that their solicitors were not authorised to accept service of the warning notices and, as such, those notices were invalid;
- that a senior manager of the business was not authorised to execute the declarations on behalf of The Fragrance Shop and as such those declarations were invalid; and
- that the statutory declarations were ambiguous and outside the prescribed form as they did not include the actual commencement date of the tenancy in question, and as such, they were invalid.
The court dismissed all of The Fragrance Shop’s arguments. It ruled that a) the solicitor’s authority had flowed from their instructions; b) that there was no evidence that the general authority given to the senior manager to bind the business had been restricted at any time by The Fragrance Shop and c) that the purpose of including the commencement date in the statutory declaration is to identify the tenancy to which it relates. The court ruled that the tenancies had been adequately identified in this case and as such the general phrase that had been used in substitution of an actual commencement date had adequately facilitated that requirement. To contract-out or not to contract-out, that is the question
In the case in question, The Fragrance Shop had clearly not considered the consequences of contracting-out of the security of tenure provisions or what this might mean for the business in the medium to long term.
The benefits of contracting-out are largely financial: a tenant might expect to pay a lower rent for a tenancy that has been excluded from the protection afforded by the 1954 Act. However, a tenant should be aware that by agreeing to contract-out of the protection, they:
- have no right to remain in the premises at the end of their tenancy;
- must leave the premises at the end of their tenancy unless the landlord chooses to offer a new lease;
- have no right to compensation from the landlord on leaving the premises at the end of their tenancy, and
- have no right to ask the court to fix the rent or the terns of the tenancy if the landlord chooses to offer a new tenancy.
The question of whether to contract-out of the security of tenure provisions is a complex one. There is no one right answer: what will be the right decision for one tenant will be the wrong decision for another.
However, the tenant should be cautious when choosing the short term financial benefits of contracting-out over long term security and should carry out a full risk analysis, as the consequences of contracting-out can be far reaching and difficult to foresee.
Furthermore, the case in question serves as a warning to the tenant, that if the wrong choice is made, the courts will be reluctant to reinstate the protection afforded by the 1954 Act when, for all intents and purposes, those provisions have been contracted-out of. Knowledge is key
It is imperative that tenants have a firm grasp of when the security of tenure provisions apply, how these are contracted-out of and the consequences of excluding them.
In The Fragrance Shop matter, the court found that the chief executive officer of the business, did not really understand what the protections were under the 1954 Act, whether they were excluded and if so what the overall effect was.
Unfortunately for The Fragrance Shop this absence of knowledge incurred a heavy cost and jeopardised the existence of six stores in its retail outlet portfolio. To add further insult to what was already substantial injury the landlords appeared to want to let their premises, once vacated, to competitors of The Fragrance Shop; which would have allowed the competitors to reap the benefits of the good will and custom, the Fragrance Shop had built up throughout their tenancy.
The chief executive officer’s knowledge, or lack of, came under greater scrutiny still in this matter, when the court determined whether he had inadvertently ratified the warning notices and the statutory declarations by signing the lease, which referenced them. The court held that the notices had not been ratified as this would, in effect, negate the protections afforded by the contracting-out procedure.
However, the very fact that the court had to consider this issue, should serve as a warning to any individual with authority to execute documents on behalf of a business, that a document should never be signed if it is not fully understood. Fail to prepare, you prepare to fail
The landlord’s refusal to grant new tenancies was something The Fragrance Shop clearly had not prepared for, as if they had, it is likely these proceedings would have never come about. This case serves as an important reminder to business tenants and landlords alike, that preparation is key.
If business tenants, in a similar position to The Fragrance Shop, make the commercial decision to agree to contract out of security of tenure for the financial benefits of doing so, it is imperative that a strategic plan is put in place to ensure the consequences of doing so are managed.
Strategic planning is as important to the landlord, as it is to the tenant. Although the failure of The Fragrance Shop to adequately understand and plan for the consequences of contracting out of the protection is fairly remarkable, having regard to the fact that it operates out of approximately 200 stores throughout the UK. This case equally highlights the landlords’ failure to capitalise on the commercial opportunity of having several businesses (i.e. The Fragrance Shop and their competitors), all vying for the same retail outlets. One is left to wonder whether a compromise could not have been sought, allowing both the Fragrance Shop and their competitors to occupy premises in the same retail outlet centres. The landlords’ failure is a stark one, when considering the demise of the retail sector over the last decade.
Therefore, landlords must also ensure that before refusing to allow a tenant to remain in occupation, they too have carried out a thorough analysis of the options available to them, to ensure that in times of economic instability, their premises remain fully tenanted Under whose Authority?
This case also laid bare the landlord’s failure to ensure that those on whom the warning notices were being served, had authority to accept them, and those that executed the statutory declaration, had authority to execute them. A prudent landlord should seek written confirmation that individuals have authority to serve and execute documents on behalf of their tenants. In this case, evidence of implied authority existed, but when the validity of notices are in question, evidence of actual authority is crucial.
Similarly, the tenant should also ensure that it is clear to all, which individuals within the business have authority to enter into arrangements on behalf of said business. Conclusion
What is arguably most striking about this case, is how easy it would have been for this dispute to have been avoided and how fundamental many of the mistakes made, by both the tenant and the landlord, were.
Both the landlord and the tenant should be mindful that although statutory safeguards are in place to put parties on notice of the effects of contracting-out of the security of tenure provisions, those safeguards are worthless, unless the parties genuinely understand what they are agreeing to and have a plan in place to circumvent any of the associated risks.