Contracted out leases – cutting through the confusion

15th December 2021

A ‘contracted out’ lease is a lease of business premises which has been excluded from the security of tenure provisions in the Landlord and Tenant Act 1954.

Under Part II of the 1954 Act, a tenant would normally have the right to renew their tenancy at the end of the term of the lease.

However, both parties can agree that a lease is excluded, which would see the tenant give up their statutory right to renew at the end of the agreed term and lose the ability to apply to the court for a renewal lease where it is unable to agree terms with the landlord.

For the landlord, excluding a lease from the 1954 Act provides security that the party who is named as the tenant in the lease must vacate after the last day of the term.

An excluded tenant has no rights to remain in occupation and there can be no holding over in the property. This can benefit the landlord in three ways:

Ultimate flexibility for the landlord at the end of the lease
The landlord can take the property back under its control immediately. There is no requirement for the landlord to serve any form of notice and there are less administrative issues for the landlord than there may be in managing a protected lease.  Additionally, there is no confusion after that date who the occupier is, who may be paying the rent and who may acquire protected renewal rights to the detriment of the landlord.

It also helps the landlord deal with problem tenants. The landlord, at the very least, knows that if it has a bad tenant the management of that tenant will be time limited by reference to the end of the term of the lease.

Cost savings
At the end of the term of a protected lease the landlord has to consider instructing agents to prepare new terms, or instructing solicitors to serve notices for renewal or terminating the lease without renewal. This can be a time and administrative burden for the landlord.
There are also other costs elements to consider where a lease is protected and the landlord wants to take the property back under its control. Most often landlords rely on no fault grounds so if for example the landlord is looking to redevelop the site and the lease was protected then they may be liable to pay compensation to the tenant.

Investment value
A tertiary site with a mixed class of protected tenants of varying covenant strength may undermine the value of a site. If the landlord has managed the site well, and all tenants are on contracted out tenancies then that allows a buyer the opportunity to spend time re-gearing the site after acquisition and maximising the investment potential of the site.

If you’d like more information on how contracted out leases can protect your property portfolio, contact Ellis Cullen at NG Chartered Surveyors and Paul Hinchliffe at Nelsons.

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To find out more, feel free to contact us, give us a call on 0115 958 8599 or email [email protected].