Last updated at 16:17, Friday, 03 August 2012

Are you negotiating a new lease of business premises? Surveyors and solicitors often use the terms ‘contracted in or contracted out’ but what does it mean?

The starting point is the Landlord & Tenant Act 1954: subject to some important conditions, a business tenant generally has the right to a new lease when the original lease expires.

As a tenant you are ‘contracted in’. You have security of tenure, and that is good.

However, the landlord and tenant can, before the lease begins, agree to ‘contract out’ in which event the tenant has no security of tenure.

The 1954 Act is complicated with exceptions so what follows is a broad outline of the general position.

In the “good old days” pre 2007, landlords generally preferred a lease to be ‘contracted out’ so that when the tenancy expired the landlord was in a good position to urge the successful tenant to pay much more rent for another term.

A tenant would probably want to be ‘contracted in’ so that the business could continue in the longer term and so justify capital expenditure even though a rent review clause would probably mean more rent would be payable.

In the current climate, it has been much harder to find good tenants, and some landlords have had to accept reduced rents in order to keep the property occupied, and keep someone else paying the rates!

Now we find more landlords are happy to give tenants a ‘contracted in’ tenancy because it encourages the tenant to stay and pay a sustainable rent.

Even if the tenancy is contracted in, there is still a problem where the landlord wants the property to occupy itself or redevelop.

A few years ago I acted for tenants who had run a cafe for many years. They had spent a lot of money on refurbishment knowing they had security of tenure.

However, the landlord served notice before the end of their lease informing them that the landlords would refuse a new lease on the grounds that the site was to be redeveloped.

The compensation which the landlords had to pay was much less than the value of their business.

The procedures for excluding security of tenure must always be followed closely or they may not work.

Even if there is security of tenure pitfalls remain. It is important that, as a landlord or a tenant, you always take legal advice before finalising the terms of your lease, so you always make the right choice.

First published at 14:09, Friday, 03 August 2012
Published by http://www.cumberlandnews.co.uk