Security of tenure, the right for a tenant to occupy a property after its lease expires, is a key protection offered to tenants under the Landlord and Tenant Act 1954 (the 1954 Act). However, landlords are keen to contract out of the 1954 Act to retain flexibility and control when a tenant’s lease comes to an end.
The government, in an aim to simplify the process, permits parties to contract out of the 1954 Act provided that three conditions are met:
- The tenancy is ‘for a term of years certain’ (Section 38A of the 1954 Act);
- The landlord has served a ‘Warning Notice’ ‘in the form or substantially in the form’, prescribed in Schedule 1 to the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003; and
- The tenant has made a simple or statutory declaration in the form or substantially in the form prescribed stating that it has received the Warning Notice and accepts its consequences.
A recent appeal considered whether the way in which a declaration is completed can render the contracting out process void. Here, it was the final condition that was the principal focus.
When this case was heard initially, the Judge held that the declarations were valid because they fulfilled their statutory purpose: namely, to identify the tenancy for which a Warning Notice had been given so the tenant could confirm it understood that it would be excluded from the 1954 Act protections.
However, the tenant appealed this decision, claiming that the Judge was incorrect.
Ultimately, the appeal was dismissed for one vital reason: the declarations were sufficiently clear to enable the tenant to identify the tenancy to which it related. Therefore, the parties had successfully contracted out of the 1954 Act provisions and the tenant had no statutory rights to a renewal lease under the 1954 Act – much to the landlord’s relief.
In TFS Stores Ltd v Designer Retail Outlet (Mansfield) General Partner Ltd and others , The Fragrance Shop (TFS) had six leases for retail units at various locations and their landlords had decided not to renew their leases when these expired. The parties had agreed to contract out of the security of tenure provisions and, accordingly, each lease contained a clause agreeing to do so and confirming that, before the tenant became bound by the lease, the landlord had served a Warning Notice on them and they had in response made a declaration. In three of these cases, there was an agreement for lease entered into prior to the lease.
All leases meet the first two conditions for contracting out. The appeal therefore considered the third condition to be met and whether, as the tenant asserted, two different types of wording inserted into paragraph 1 of the declarations rendered the declarations void. These were that the lease would be (1) ‘for a term commencing on a date to be agreed between the parties’ and (2) ‘for a term commencing on the date on which the tenancy was granted’.
The parties’ arguments
TFS submitted that the words ‘for a term commencing on’ were designed to echo the requirement that the tenancy should be ‘for a term of years certain’, and therefore that the declaration must state the date on which the proprietary interest created will commence.
Crucially, it was argued that whilst one purpose of the requirement to state the commencement date is indeed to identify the tenancy, there are three other purposes. These are to ensure (1) the declaration is made before the lease is entered into or, in the case of an agreement for lease, before the tenant becomes bound to enter into the lease; (2) to encourage the tenant to consider whether it will have the 14 days’ notice between receipt of the Warning Notice and performing its lease obligations to decide whether to sign the declaration; and finally (3), to allow the tenant to consider if the lease offered is for a term of years certain. TFS claimed that the declarations for two leases failed to identify either the date on which the tenancy commenced or the date it was contractually agreed to commence, instead only mentioning the date on which the tenant could have access to the premises.
TFS further asserted that the words used in the remaining leases (‘a date to be agreed’ and ‘the date on which the tenancy is granted’) provided no identifying information to the tenant, thus preventing the tenant from identifying the lease in question, which in turn should invalidate the contracting out process.
The landlord proffered a somewhat briefer, more practical view on the matter. They had two key arguments. Firstly, that the purpose of the first paragraph of the declaration is to identify the lease to which it relates so the tenant can confirm they understand that the specific tenancy will be excluded from the protection of the 1954 Act.
Secondly, that in reality, on the date the Warning Notice is given by the landlord and the declaration made by the tenant, the date of execution of the lease may be unknown (for example the grant of the lease may be contingent on planning permission or completion of building works) or the date inserted may not ultimately be the correct date for unforeseen reasons.
Therefore, a requirement to insert the date would create uncertainty and frustration when having to re-do the contracting out process where the date changes. Such muddying of the waters contradicts the government’s cited policy objective of simplifying the contracting out process.
The court’s judgment
The court considered the purpose of a declaration. To do this, it applied the approach to statutory construction set out in Pollen Estate Trustee Co Ltd v Revenue & Customs Commissioners. This states that the court should ‘give the statutory provision a purposive construction…to determine the nature of the transaction to which it was intended to apply’ and then decide whether the actual transaction ‘answered to the statutory description’.
By following this process, the court concludes that the essential purposes of a declaration are that:
- The tenant should acknowledge that the proposed lease excludes the security of tenure provisions;
- The landlord has served a Warning Notice in proper form; and
- The tenant has read the Warning Notice and accepts the consequences of entering into the lease.
Therefore, a declaration fulfilling these purposes will be ‘in the form or substantially in the form’ prescribed.
The arguments by TFS were rejected by the court as it was held that they would result in practical problems which were likely to have been unintended by Parliament when drafting the Act. In rejecting these arguments, the court validates the landlord’s arguments by claiming that entering possibly fictitious dates for the sake of entering a date would render the procedure more onerous and less flexible rather than easier, as intended by Parliament.
Overall, the court stated that due to the clarity of the declarations, there existed no doubt as to which leases were being referred to. As such, it was agreed unanimously that the appeal by TFS should be dismissed, and the parties deemed to have validly contracted out of the 1954 Act protections.
This case demonstrates the importance of seeking legal advice when contracting out of the 1954 Act and of knowing how to accurately complete a declaration.
It is believed TFS are seeking leave to appeal to the Supreme Court which will not be welcome news for landlords who won’t want tenants to be able to exploit the contracting out process in this manner.
TFS had until mid June to seek leave to appeal to the Supreme Court which they do not appear to have done. This will be welcome news for landlords who won’t want tenants to be able to exploit the contracting out process in this manner. However, in the current climate it may well be that similar arguments are raised in the future and it underlines how important it is to get the drafting of declarations and warning notices right when contracting out of the 1954 Act. HCR Hewitsons can assist with this and other commercial property matters. Please contact Sarah Baron on 07584 015566 or another member of our commercial real estate team.