Contracting Out of the Landlord and Tenant Act 1954: A Practical Guide for Commercial Leases

Introduction

When entering into a commercial lease, one of the most important legal considerations for both landlords and tenants is whether the lease will benefit from the security of tenure provisions contained in Part II of the Landlord and Tenant Act 1954 (“1954 Act”). These provisions can have a significant impact on a tenant’s ability to remain in occupation and a landlord’s ability to recover possession at the end of the contractual term.

In many commercial situations, the parties may agree that the lease should be “contracted out” of the 1954 Act. This article explains what contracting out means, how it works in practice, and the key issues commercial tenants should understand before agreeing to exclude these statutory protections.

Security of Tenure under the 1954 Act

The 1954 Act provides business tenants with security of tenure, meaning that when a lease comes to an end, the tenant has a legal right to remain in occupation and to apply for a new lease. Where the lease is not contracted out of the 1954 Act, the landlord may only refuse to grant a new lease on certain prescribed statutory grounds, such as an intention to redevelop the property or to occupy it for its own business purposes. A landlord may seek to rely on the following grounds to obtain repossession:

1. If the tenant has breached its repairing obligations under the current lease;
2. If there are persistent rental arrears;
3. If the tenant has substantially breached its other covenants in the lease;
4. If suitable and reasonable alternative accommodation has been offered to tenant;
5. If the landlord intends to redevelop the property and it is not possible without the landlord recovering possession of the property; 
6. If the landlord intends to occupy the property for themselves; or
7. f the current tenancy relates only to part of a larger property and the landlord could obtain a substantially higher rent by re‑letting the whole (or differently configured parts) instead of renewing the tenant’s lease of part.

It is important to bear in mind that the tenant may be entitled to statutory compensation where the landlord successfully opposes the grant of a new lease on certain no-fault grounds, but no compensation is payable where renewal is refused on fault-based grounds. Further, some of the above grounds are ‘fault’ grounds based on tenant default, whereas others are ‘no‑fault’ grounds; this distinction is important because it affects whether the tenant is entitled to statutory compensation if renewal is refused.

Where security of tenure applies, the terms of any new lease and the question of whether the landlord is entitled to oppose renewal can ultimately be determined by the court if the parties cannot agree. These rights are often central to a tenant’s long-term business planning and investment in the premises.

What Does Contracting Out of the Landlord and Tenant Act 1954 Mean?

Contracting out refers to the process by which the landlord and tenant agree that the security of tenure provisions of the 1954 Act will not apply to the lease. If a lease is validly contracted out, the tenant will have no automatic right to renew the lease at the end of the term and must vacate the premises in accordance with the lease terms.

In these circumstances, the relationship between the parties is governed by the contract during the term, and by common law principles after expiry. Any continuation of the tenancy after expiry will require the landlord’s express agreement and the grant of a new lease.

When Is Contracting Out Commonly Used?

Contracting out is commonly used where a landlord requires certainty that it will recover possession of the premises at the end of the lease. This often includes short-term lettings, properties earmarked for redevelopment or sale, or situations where flexibility is essential to the landlord’s future plans.

From a tenant’s perspective, contracting out may be acceptable where occupation is intended to be temporary, or where the tenant may be able to negotiate favourable commercial terms, such as a reduced rent, a rent-free period, or a break option, in return for giving up statutory protection.

The Statutory Procedure for Contracting Out of the Landlord and Tenant Act 1954

The 1954 Act prescribes a strict procedure that must be followed for contracting out to be effective. This procedure must be completed before the lease is granted. If the correct steps are not followed, the tenant will retain security of tenure regardless of the parties’ intentions.

In order for contracting out to be effective, a strict statutory procedure must be followed before the tenant becomes contractually bound to take the lease, typically involving a warning notice, a tenant’s declaration and appropriate wording in the lease.

First, the landlord must serve a formal warning notice on the tenant explaining that the tenant is proposing to give up its rights under the 1954 Act and outlining the consequences of doing so. This notice must be served before the tenant becomes contractually bound to take the lease (which may be at agreement for lease stage as well as at completion).

Secondly, the tenant must make a declaration confirming that it understands the effect of contracting out. A simple declaration may be used where at least 14 days have passed since the warning notice was served. If the lease is to be completed within 14 days, the tenant must instead swear a statutory declaration before a professional who is authorised to administer oaths (for example, a Commissioner for Oaths or a Solicitor).

Finally, the lease itself (and, where relevant, any agreement for lease) must contain clear and specific wording confirming that it has been agreed that the security of tenure provisions of the 1954 Act have been excluded and that the statutory procedure has been complied with (i.e., specific wording in the lease will need to be included referring to the warning notice served and the tenant’s declaration).

Key Considerations for Commercial Tenants

For commercial tenants, agreeing to contract out represents a significant concession. Once the lease expires, there is no right to remain in occupation or to demand a new lease. Tenants should therefore carefully consider how the loss of security of tenure may affect their business, particularly where substantial fit-out costs or location-dependent trade is involved.

Tenants who are looking for short-term occupation of a commercial property or are otherwise unsure about their long-term needs may in fact prefer the flexibility that comes with a contracted-out lease. Tenants may also be able to negotiate more favourable lease terms (i.e., rent free periods or lower rent) in return for their agreement to contract out.

Tenants should also consider whether the lease term is sufficient to justify their investment and whether appropriate contractual protections, such as break clauses or renewal discussions well in advance of expiry, are in place. Independent legal advice should always be obtained before signing the required declaration.

Key Considerations for Landlords

For landlords, contracting out offers certainty and flexibility. It allows the landlord to plan confidently for redevelopment, sale, or occupation of the premises at the end of the lease without the risk of a statutory renewal claim. Landlords may want to re-let the property at current market rent levels (potentially at a higher level than the previously agreed rent).

However, landlords must ensure that the statutory process is followed precisely and that all documentation is correctly drafted. Errors in timing, form or wording can invalidate the exclusion and result in the tenant acquiring security of tenure unintentionally.

What Happens When a Contracted-Out Commercial Lease Ends?

When a contracted-out lease comes to an end, the tenant must vacate the premises in accordance with the lease. There is no statutory protection and no right to apply for a new lease. Any continued occupation requires the landlord’s consent and a fresh agreement.

If a tenant remains in occupation without permission, the landlord may be entitled to take steps to recover possession and claim mesne profits (an occupation rent) and/or damages as the former tenant would be trespassing.

There are further nuances here, as if the tenant remains and the landlord does not consent (for example, as evidenced by refusing to accept further rent), the tenant risks being treated as a trespasser, although in some cases the parties’ conduct may give rise to a tenancy at will or, depending on the parties’ conduct (including acceptance of rent referable to a period), a periodic tenancy by implication, so both parties should take clear, prompt advice at lease expiry.

Conclusion & How We Can Help

Contracting out of the security of tenure provisions of the Landlord and Tenant Act 1954 is a significant legal step for any commercial tenant. By agreeing to exclude these statutory protections, a tenant gives up the automatic right to remain in occupation and to renew the lease at the end of the term. This can have serious commercial and financial consequences, particularly where the premises are integral to the tenant’s business or where substantial investment has been made in fit-out works. It is therefore essential that tenants fully understand the scope and effect of what they are agreeing to before proceeding.

The law imposes a strict statutory procedure for contracting out, and failure to follow it correctly can invalidate the exclusion altogether. For tenants, this means understanding not only the legal consequences of losing security of tenure, but also the practical implications for business continuity. For landlords, ensuring that the procedure is followed precisely is critical to achieving certainty of vacant possession at lease expiry.

Landlords will typically require tenants to confirm that they have been properly warned about the loss of statutory rights and, in many cases, to obtain independent legal advice before entering into a contracted-out lease. Completion of the lease may be delayed or prevented altogether if the necessary declarations and documentation are not dealt with correctly and in good time.

Our specialist commercial property solicitors regularly advise both landlords and tenants on contracted-out commercial leases. We explain the effect of excluding the 1954 Act in clear, practical terms, review and prepare the necessary warning notices and declarations, and ensure that the statutory process is complied with correctly. For tenants, we help assess the commercial risk of contracting out and advise on negotiating appropriate protections within the lease. For landlords, we ensure that documentation is robust and enforceable, minimising the risk of future disputes.

If you are proposing to enter into a commercial lease that is to be contracted out of the Landlord and Tenant Act 1954, or if you have been asked to sign a declaration excluding security of tenure, we would be pleased to assist. Please email wewillhelp@jonathanlea.net with details of the proposed lease or agreement for lease, or call us on 01444 708 640 to speak to a member of our specialist commercial property team.

We usually offer a no-cost, no-obligation 20-minute introductory call as a starting point or, in some cases, if you would just like some initial advice and guidance, we will instead offer a one-hour fixed fee appointment (charged from £250 plus VAT depending on the complexity of the issues and seniority of the fee earner).

Please email wewillhelp@jonathanlea.net providing us with any relevant information or call us on 01444 708640. Following an initial discussion, we can provide a clear scope of work, a fee estimate, and confirm any information or documentation we would need to review.

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This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited. 

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