In his latest article, Mark Rowlands from our commercial property team talks about security of tenure and what giving up security of tenure actually means.
It was 20 years ago when legislation was introduced to simplify the process whereby a tenant gave up its rights of “security of tenure” under the LTA 1954.
Prior to 2003 a court order was required for a tenant to give up its rights; since then a Notice and Statutory Declaration is all that is now required. The simplification of the process means most commercial landlords will insist on their tenants giving up their rights as a matter of course.
But what is security of tenure and what does giving up security of tenure or “contracting out” actually mean?
Security of tenure gives the tenant a statutory right to renew its tenancy at the end of its contractual term. In a nutshell a tenant of a business lease has a statutory right to a lease renewal provided the arrangement satisfies certain criteria. At face value, if a tenant occupies the property, operates a business and the lease is for at least 6 months chances are the tenant has security of tenure.
If so the tenant has a two-fold advantage; firstly its lease will not automatically end upon the expiry of the contractual term as the Landlord must terminate the lease using the statutory process; secondly, the tenant has a right to apply for a new lease.
Even if the tenant applies for a new lease the grant of a lease is not automatic. The Landlord can serve a counter notice specifying one or more grounds of opposition.
The main grounds are the Landlord intends to demolish, reconstruct or occupy the premises itself. Alternatively, the Landlord can object on the basis of the tenant’s failure to comply with its repairing obligations, being in persistent rent arrears or substantially breaching other lease obligations.
But why are Landlords so keen to ensure that their tenants give up their rights?
Many landlords want certainty over their use of the property once the lease term expires. Excluding security of tenure means the tenant will have no right to remain in the property at the end of the contractual term.
On the face of it excluding security of tenure is a no brainer for the landlord, isn’t it? However this can be a short-sighted move on the part of the landlord.
Ultimately a landlord wants a tenant to pay its rent on time and meet its obligations under the lease. This happens if the tenant is operating its business successfully. To do so a tenant may fit out the property and invest in equipment and machinery for its business.
But a tenant without security of tenure is immediately dis-incentivised from doing so. Indeed, it is a foolish tenant who lavishes money on the business in these circumstances knowing at the end of the Lease term it has no guarantee of a new lease. Or may have to take a lease on onerous terms.
There are significant benefits for the tenant in having security of tenure but a pragmatic landlord will appreciate there are benefits for it as well.
So if you are a landlord wanting it all your own way you may find it useful to put yourself in the shoes of your prospective tenant. A tenant who has greater certainty over its future is likely to invest more in its business and in doing so succeed; and, by extension, to prolong its tenancy and pay the rent; after all that’s what a landlord wants isn’t it? Conversely a tenant without security of tenure has no reason to invest in its business if it fears getting turfed out by the landlord at the end of the lease term. A tenant who hasn’t invested in the business is less likely to have a successful and viable business, and by extension, is less likely to be able to renew its lease.
It seems counter intuitive, but a landlord who insists on the tenant giving up security of tenure may not necessarily provide the landlord with the control and outcome it wants or expects.