Contracting out

This page contains cases dealing with the contracting out provisions of Part II of the 1954 Act.

There was a fundamental change in the procedures in 2004, which are now contained in s38A of the Landlord and Tenant Act 1954 and Schedule 2 of Regulatory Reform (Business Tenancies) Order 2003.

Some of the cases relate to the provisions prior to that time but which still have some relevance. Topics covered on this page:

  • Must be a term certain.
  • Simple and statutory declarations.
  • Authority to receive warning notices and sign the statutory declaration - commencement of term not stated in declaration.
  • Changing the terms - introducing a break clause.
  • Change in the parties.

 

Term certain

A tenancy can only be contracted out of the security of tenure provisions if the tenancy was to be granted "for a term of years certain".  This is the case under the provisions introduced in 2004.  It was also the position prior to that time. This case is under the old provisions:

London Borough of Newham v Thomas-Van Staden

[2008] EWCA Civ 1414

Summary

Prior to the reforms to Part II of the 1954 Act made in June 2004 a lease could only be contracted out of the security of tenure provisions of sections 24 to 28 by court order. Then, as now, the lease had to be for a fixed term. 

Facts

In this case, the lease was granted for a term "from and including [1 January 2003] to [28 September 2004] (Hereinafter called 'the term' which expression shall include any period of holding over or extension of it whether by statute of at common law or by agreement". A court order was obtained authorising the contracting out of the tenancy. After the initial fixed period had passed the tenant remained in possession paying rent (albeit irregularly). The landlord subsequently wanted possession in order to carry out a redevelopment (starting in January 2009) and served a notice terminating the continuing tenancy (pursuant to a term in the lease). The tenant refused to leave.

Held

On a true construction of the lease, the term was not for "a term of years certain". It could not therefore be excluded from the provisions of ss 24 to 28; the court order was a nullity and the landlord was not entitled to possession.

Comment

An expensive mistake! There will still be many leases that have been contracted out under the old regime, or at least purportedly so. In this case the landlord wanted to redevelop the property. That is of course a ground for terminating a business tenancy under s30(1)(f) but if the landlord still wanted to go ahead it will have been necessary to serve a s25 notice and prove the ground etc.

 

Simple and statutory declarations

Using the statutory declaration when you should have used the simple one

The Chiltern Railway Company Ltd v Patel

[2008] EWCA Civ 178

Summary

Where a notice informing the prospective T that the lease is to be contracted out of Part II of the 1954 Act is served more than 14 days before the lease is entered into para 3 of Schedule 2 to the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003 says that the tenant (or duly authorised person) "must" sign a simple declaration. However, if he in fact signs a statutory declaration that will still be effective.

Key facts

  • On 3 August 2004 L served notices in correct form telling T that the two leases to be entered into were going to be contracted out.
  • On 10 March 2005 T made a statutory declaration in respect of each lease.
  • On 15 March 2005 L granted T leases of two shops. The notice was therefore served long before the the fourteen day period referred to in paragraph 2 of the 2003 Reform Order for service of the notice.

Citations

Lord Neuberger sitting in the Court of appeal at para 11:

    "It would .. be 'bordering on the absurd' if a statutory declaration was held to be ineffective on the grounds that it differed from the prescribed form because a) it was both expressly and in law in a more solemn form than that form; and b) although it stated that notice was served before the lease was entered into, it did not state that it was served more than fourteen days before the lease was entered into."

At para 13:

    "It is clear that on the facts of this case that paragraph 3, and not paragraph 4, applied. However, the requirement of paragraph 3 is not that a declaration must be 'in the form set out in paragraph 7,' but that it must be 'in the form or substantially in the form set out in paragraph 7'. Accordingly, the first issue is whether the statutory declaration in paragraph 8, as used in this case, is substantially in the form of the declaration in paragraph 7. ..Despite the submissions to the contrary on behalf of Mrs Patel, I find it quite impossible to accept that the differences between the two documents justify the conclusion that a paragraph 8 statutory declaration is not 'substantially in the form' of the paragraph 7 declaration ... Accordingly, it appears to me that the paragraph 8 statutory declaration is in the same form as the paragraph 7 declaration, save in the arid sense, that the wrong form of declaration was used, but that is precisely catered for by the words 'or substantially in the form' in paragraph 3."

Further at para 21:

    "Mr Winter [for the landlord] also made the valid practical point that, when the notice is served, in many cases the parties may not know whether or not the tenant will in fact be committed to the lease in the next fourteen days, either because the precise date of service of the notice on the tenant may not be known to the landlord or, even where it is known, neither party may know precisely when they would be committed to the lease. It could therefore represent something of an unfair trap, particularly for a landlord, if the parties were required to use a paragraph 7 form, and could not use a paragraph 8 form, in a case to which paragraph 3 applied. It would lead to practical difficulties, such as either preventing the parties from entering into the lease when they wanted to, having to delay for fourteen days, or the tenant being put to the rather absurd expense of having to execute a paragraph 7 declaration and a paragraph 8 statutory declaration, to wait to see whether more than fourteen days elapsed between the service of the notice and the tenant being committed to the lease."

However, the converse is not the case. If a statutory declaration should be used a simple declaration will not be good enough. See Lord Neuberger at para 18 and Arden LJ at para 26.

 

Statutory declarations and warning notices

Authority to receive notice and sign declaration - commencement date of the term not stated

TFS Stores Limited v The Designer Retail Outlet Centres (Mansfield) General Partner Limited [2019] EWHC 1363 (Ch)

Summary

The tenant’s solicitor and an employee of the tenant had authority on behalf of the tenant to receive the required warning notices and sign the declarations in order to contract six leases out of the security of tenure provisions of the Landlord and Tenant Act 1954. The court also held that the fact that the statutory declarations did not contain a fixed term commencement date for the lease did not invalidate them.

Facts

The Fragrance Shop is a large retail operator with over 200 stores nationwide. In these proceedings it sought to establish that six of its leases at a number of McArthur Glen outlet centres were protected by the security of tenure provisions provided by ss24 – 28 of the Landlord and Tenant Act 1954 (1954 Act). This was sought despite the fact that the parties had, in every case, served warning notices and executed statutory declarations before either entering into agreements for lease or taking a lease as required by s38A of the Landlord and Tenant Act 1954 and Schedule 2 of Regulatory Reform (Business Tenancies) Order 2003.

Issues

The court had to consider three legal issues:

  1. Did the tenant’s solicitors have authority to receive the warning notices as the tenant’s agent?
  2. Did the person who made the declaration in each case have the authority to do so?
  3. Did the fact that the tenant’s statutory declarations did not contain a fixed term commencement date mean they were not valid?

Decision

  1. Did the tenant’s solicitors have authority to receive the warning notices as the tenant’s agent?

The warning notices had been served on the tenant’s solicitors and the tenant claimed its solicitors did not have the necessary authority to receive them as the tenant’s agent.

The judge disagreed; the solicitors had actual authority (express or implied) to accept service of the warning notices. This authority came from their instructions to bring to completion a transaction reflecting the heads of terms that referred to the leases being contracted out. Even if that were wrong, they would have had apparent authority to receive the warning notices and to represent to the landlord’s solicitors that they had authority to do so.

  1. Did the person who made the declaration in each case have the authority to do so?

The court held that there was actual or ostensible authority even where the person making the declaration was not a statutory director.

  1. Did the fact that the tenant’s statutory declarations did not contain a fixed term commencement date mean they were not valid?

Following receipt of the warning notice, the tenant must enter into a declaration in a prescribed form. The declaration requires completion of the following:

I....propose to enter in a tenancy of premises...for a term commencing on [ ]”.

The question was whether this should be an actual date to be valid, or whether, as in the case, wording such as “...for a term commencing on the date on which the tenancy is granted”, or even “for a term commencing on a date to be agreed by the parties” was sufficient.

The court took a purposive approach to the legislation. The question it had to decide was “whether the tenant understands that he is giving up protection” (as required under Receiver for the Metropolitan Police District v Palacegate Properties Limited [2001] Ch 131 which remains relevant, although decided under the previous court-based contracting out regime).

On that basis, the court upheld all of the various formulae used in this case; the purpose of inserting such details is simply to make it as clear as possible that the tenant confirms that it understands that this lease, which it intends to accept, will be outside the protection of the Act.

In any event, the court held, the statutory declaration must be made “in the form, or substantially in the form” set out in 2003 Order, so any possible query over the exact wording used, could be rescued by the fact that it was in any event “substantially” in the form set out in the Order.

As a result of these conclusions, it was unnecessary for the court to decide whether estoppel by deed or ratification by an employee’s signature would ‘save’ an otherwise defective process. However, the court considered (obiter) that neither would work as:

  • An estoppel argument would undermine the statutory process required by Parliament; and
  • Ratification required the person ratifying to fully understand what they are approving – and in this case it was clear that the person signing the declaration(s) had no real understanding of the concept of contracting out, and did not read or understand that the leases were recording an agreement to contract out.

Comment

The point as to the commencement date of the term is a practical question of significant importance to practitioners because it is very difficult to know with certainty, in advance, the exact date on which a lease will be executed. It is common practice to use wording that refers to the commencement date of the term contained in the lease, or some other formula. 

 

Old regime

Different terms - inclusion of break clause

Receiver for Metropolitan Police v Palacegate Properties Ltd 9 February 2000 Introduction In its old form s38(4) of the 1954 Act stated as follows

    "The court may-
      (a) on the joint application of the persons who will be the landlord and the tenant in relation to a tenancy to be granted for a term of years certain which will be a tenancy to which this Part of this Act applies, authorise an agreement excluding in relation to that tenancy the provisions of sections 24 to 28 of this Act."

T argued that s38 did not apply because:

  • The rent term was different payable annually in arrears on the draft - payable quarterly in advance on the final document.
  • There was a break clause therefore the lease was not for a term certain

Decision

  • The purpose of the section is to ensure that the tenant understands what he is giving up in terms of security under the Act.
  • The terms of the final lease must be substantially similar to that which was before the court.
  • Whether rent was payable annually in arrears or quarterly in advance was irrelevant. It had no bearing on security.
  • The break clause did not prevent the lease from being for a term of years certain for the purposes of s38(4).

Citation

    "The purpose of section 38(4)(a) is to enable a court to satisfy itself that the prospective tenant understands that he is foregoing the protection of section 24 to 28 of the Act. However, effect must be given to the words in relation to that tenancy in the subsection. I do not consider that a section that provides an agreement to waive protection needs the sanction of the court gives a green light to a landlord to make wholesale changes to the draft tenancy submitted to the court when approval was sought. The words that tenancy in section 38(4)(a) require its terms to bear a substantial similarity to that before the court when authority was given. In particular, changes material to the need for protection may nullify the authority granted. For example, the length of the term would be a material consideration in the case of a lease that contemplated substantial capital expenditure by the tenant."

 

Different parties

Brighton and Hove City Council v Collinson

[2004] EWCA Civ 678

Facts

The lease was to be granted to a company controlled by two brothers who were directors. The application named the company and the brothers as respondents. The draft lease that was attached named the company as tenant and the brothers as guarantors. After the order was made authorising exclusion of the security provisions from a lease to the respondents the brothers requested that the lease be granted to them personally, and not to the company. L agreed and the lease was so granted.

Held

There was no reason why an application under s38 could not be made by all the parties who might be the landlord or the tenant. The brothers were party to the application and the lease was granted to them. The fact that they were not named as parties to the lease on the draft attached to the application did not matter. The important thing was that the prospective tenant should understand that he was foregoing the security protection afforded by the Act. The lease granted was substantially similar to that authorised by the court. The court order was the governing document, not the draft lease. An overly technical view should not be taken of the rules; and one should look at the purpose of the system when deciding whether or not it has been carried out defectively.

 

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