Commercial Leases: What does being ‘inside’ the 1954 Act mean for tenants?

We explain what it means to be inside the 1954 act or not mean

Commercial Leases: What does being ‘inside’ the 1954 Act mean for tenants?

Given the current state of the commercial property market, tenants are now increasingly eager to agree to early transactions with their landlords, just to ensure they secure occupation of their chosen commercial properties. Once tenants secure their perfect building or premises, which has no doubt taken them a significant amount of time and effort, in the majority of the cases, they tend to assume that they’ve done all the work and can now enjoy the fruits of their labour. However, in reality, their work is far from over.

A commercial lease is an important investment and a large source of outgoings for most commercial tenants, so it is vital that they negotiate, favourable to their business, terms and conditions at the outset. This is particularly true in relation to the protections afforded by the Landlord and Tenant Act 1954.

Having a lease that is ‘inside’ the 1954 Act means that the tenant will have a right to automatically renew the lease and remain in occupation of the premises upon the expiry of the old one, with the landlord having only a limited number of grounds to object. This is known as ‘security of tenure’ and entails the tenancy continuing to run until it is brought to an end in a prescribed way under the 1954 Act. Whilst contracting out of the 1954 Act is quite common, it is imperative that tenants are aware of the full consequences of opting out of the security of tenure provisions.

Generally, tenants tend to contract out of the 1954 Act in circumstances where the lease is for a short period of time, the landlord intends to carry out redevelopment, or the tenancy is an underletting of part of a bigger holding.

However, these aren’t the only circumstances where tenants may choose to exclude the protection afforded by the Act and ultimately, the decision as to whether or not a commercial lease is contracted-out from the security of tenure provisions will be a part of the normal negotiation process between the landlord and the tenant, prior to the grant of the lease. A protected lease could, however, command a higher rent than a contracted-out lease.

It’s important to realise that negotiating a commercial lease isn’t straightforward, so it is important that tenants seek legal advice from a competent solicitor. By default, most leases are always weighted in favour of the landlord, who will then expect you to negotiate terms. Much of your negotiating power will depend on the rental market so having a legal advisor in your corner can significantly enhance your chances of negotiating the lease in your favour.

Commercial Leases: What does being ‘inside’ the 1954 Act mean for tenants? Express ConveyancingNegotiating Terms Of Your Commercial Lease

Ideally, as a tenant, you will want to have a lease that is protected by the 1954 Act. The more your business grows, the more important the security of tenure becomes. That being said, whilst most landlords will not usually be open to rent negotiations, this doesn’t mean that you shouldn’t try and get the best deal for the money you are paying – you may wish to consider other alternatives and concessions at the start of the lease as well.

An example of this would be something like a break clause or a rent-free period, whereby the landlord would enter your premises to carry out repair or maintenance works and you, in turn, would not be asked to pay rent during that time. Whilst negotiations of terms relating to the day-to-day running of your business from the premises are no doubt important, they in no way ensure that you will be able to stay at the premises after the agreed CED.

One of the biggest mistakes that tenants tend to make is thinking they can enter into a lease as soon as possible and deal with renewal at the end, right before or upon the expiry of the term set out in the lease agreement. Whilst admittedly the benefits of being ‘inside the Act’ comes at the end of the lease, which may seem too far in the future to worry about at the start of the lease, a lack of forethought can leave you entangled in complicated and potentially business-threatening disputes over lease renewal.

Why Negotiate To Stay ‘Inside the 1954 Act’?

Whilst there is always a risk that Landlords may increase rent in exchange for granting an ‘inside the Act’ lease, there are a number of benefits that would outweigh these 3 to 10 per cent rent increases for tenants who are able to successfully negotiate a lease ‘inside the Act’:

1. First and foremost, security of tenure affords tenants the chance to stay at the currently occupied premises and save them the time and costs of finding a new property for their business. If you are happy with the premises you occupy, you will unlikely want to move and incur fees in doing so just because you failed to negotiate the appropriate protections at the start of the lease. Even if you do choose to change the location and move to a different area, having a lease that’s ‘inside the Act’ can allow you time to strategize and plan your next move. For example, you can get a year or so at the end of your lease during which you will have a three-months rolling break option, during which to find a different property or consider what other options you have. There are very few circumstances under which the landlord will be able to avoid such an extension. These are set out in Section 30 of the 1954 Act. However, even where these opposition grounds apply, tenants are likely to receive compensation and be allowed a period of over 6 months to move out.

2. In additions to saving money and time on finding new premises, when you do then renew your lease, subject to the Section 30 opposition grounds, this will be granted at a market rent by default, which means you would be getting a better deal. The only way this can be challenged is if the Landlord takes it to court.

3. Another important factor to consider if the possibility of you wanting to exit your lease early, a few years before it ends. Trying to sublet an ‘inside the Act’ lease will be significantly easier than one that has no possibility of renewal upon the CED. This is because given the particular nature of most business, business owners wont want to spend money on re-decorating the premises and fitting them out only then to face the consequences of a contracted-out lease. With an ‘inside the Act’ lease, you can easily assign it to a new tenant, who will then have the same rights as you i.e. they will be entitled to a renewed lease at market rent.

In general, tenants have a lot to gain from ‘Inside the 1954 Act’ leases and should not neglect the negotiation process in a rush to secure a lease at any cost. Leases are complicated legal documents requiring specialist attention so it is important that tenants give appropriate considerations and thought to the consequences of contracting out of the security of tenure provisions.

Our specialist Commercial Conveyancing Solicitors can advise and help you negotiate terms of your lease, including those with regards to staying inside the 1954 Act. Contact us today to find out more.

Disclaimer – our articles are designed to give you guidance and information. There is no substitute for proper direct advice, particularly as everyone’s circumstances are different. If anything in this article may affect you, please contact us for advice that is specific to your circumstances.

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