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Contracting “out”
really means out

Contracting “out” really means out

Published: 16th July 2019
Area: Real Estate & Planning
Author: Justine Ball

Estates teams are well aware of the procedure to contract out of a commercial lease to ensure that the security of tenure provisions in the Landlord and Tenant Act 1954 (the Act) will not apply.

However, the recent case of TFS Stores Limited v BMG (Ashford) Limited et al¹ shines a light on the importance of carefully complying with the contracting out procedure – or being at risk of unintended and significant consequences.

Facts

In this case, the tenant, TFS Stores Limited (trading as The Fragrance Shop) (TFS) sought to argue that a number of contracted out leases at various properties across the UK had not been properly excluded from the provisions of the Act.

TFS raised this argument in response to the landlord confirming that it did not wish to renew their leases. However, TFS wanted to remain in the premises and therefore brought a claim against the landlord arguing that their leases were protected by the Act because:

1) TFS’ solicitors did not have authority to receive the warning notices seeking to exclude the Act;
2) The TFS representative (its Retail Director) who signed the tenant declaration had no authority to do so; and
3) The tenant declaration signed by TFS was invalid because it failed to specify a commencement date of the term of the new tenancy.

Judgment

The court rejected TFL’s arguments and was not impressed by TFL’s attempt to side-step the contracting out process. In response to each of the above, the court held:

1) TFS’ solicitors had actual authority to accept the warning notices –  they were instructed by TFS to complete the lease in accordance with the Heads of Terms. The Heads of Terms expressly provided that the leases were being contracted out of the Act;
2) The Retail Director had actual authority to sign the tenant declarations – there was nothing to suggest that the signatory’s authority was somehow limited. The Retail Director was also heavily involved in the negotiation of the new leases; and
3) The failure to include a fixed term commencement date in the declarations did not invalidate them, as it is often not possible to know when the term will commence. It was enough that the new lease in question could be identified so that the tenant understood that the new lease would be excluded from the Act.

Practical points

Estates teams are likely to sigh in relief at the court’s judgment, but some practical points to take away are a) serve contracting-out notices on the tenant direct and send a copy to their solicitors and b) for corporate tenants, ensure that directors or someone who has authority to complete new lettings on a “contracted out” basis sign the declarations.

¹ [2019] EWHC 1363 (Ch)

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