Court guidance on contracting out commercial leases

The High Court has adopted a robust approach in a rare case involving the contracting-out procedure under the Landlord and Tenant Act 1954 that was introduced 15 years ago.

Background

The Fragrance Shop (TFS), a perfume retailer, had entered into leases in six designer retail outlet centres owned by different landlords, in respect of which the contracting-out procedure had been followed. When the leases expired, the decision was taken not to renew them and instead to let the stores to a competitor of TFS. In order to remain in occupation, TFS claimed that the leases had not been validly contracted out and therefore it was entitled to the grant of new leases of its stores.

The judge ultimately concluded that the leases were validly contracted out and that TFS had no right to remain in the properties.

Contracting out

The Landlord and Tenant Act 1954 (1954 Act) protects the right of a tenant to remain in occupation of its premises and to be granted a new lease when its lease comes to an end. However, before a lease is granted, the landlord and tenant can agree that these protections will not apply to that lease. The process for agreeing that this protection is not to apply is called contracting out.

Contracting out involves the landlord serving a warning notice on the tenant explaining the rights that are being waived, and the tenant, or a person authorised by it, making a formal declaration acknowledging that the tenant has received the notice and is aware of the consequences of contracting out the lease. The lease, when granted, states the procedures that have been followed and includes an agreement removing the tenant’s rights to remain in occupation. The declaration is usually in the form of a statutory declaration, to emphasise its importance.

Issues considered by the court

The court had to consider three legal issues:

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

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

The landlords’ solicitors had served the warning notices on the tenant’s solicitors. The tenant claimed that their solicitors did not have the necessary authority to receive them as the tenant’s agent.

The judge held that there was actual authority for the tenant’s solicitors to accept service of the warning notices. This flowed from their instructions to bring to completion a transaction reflecting the heads of terms that referred to the leases being contracted out.

This could be analysed as express authority to accept service of the warning notices as part of the authority to do everything necessary to bring the matter to completion or as implied authority, incidental to the express authority, to bring the matter to such completion. Even if the tenant’s solicitors did not have express or implied authority, 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.

The tenant also wanted to argue that service of the notices on the tenant’s solicitors was not in accordance with the prescribed procedure. The court was bound by the authority of earlier cases that service of a notice on the tenant’s agent is effective. The point was therefore not pursued by the tenant but it reserved its position should the case go to appeal.

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

In some cases, the statutory declarations had been made by the tenant’s retail director.  He was one of the people employed by the tenant with responsibility for the negotiation of leases, although he was not a statutory director of the company. The court held that the retail director had actual authority from the company to make the declarations. There was no evidence that his general authority to negotiate and complete leases was limited or that he was not authorised to do so. He also had apparent authority and had been held out as having authority to make the declarations by the tenant’s solicitors. The validity of the declarations could not be challenged for lack of authority on the part of the person making them.

The landlord also claimed that the tenant had ratified any prior lack of authority, on the basis of the statement in the completed leases that the persons making the declarations had been duly authorised to make them. Although it was not necessary to decide the point, the judge held that, based on the facts and knowledge of the person who executed the leases, ratification was not possible in this case.  Actual assent, whether express or implied, to what is being ratified must be made with knowledge of the material circumstances. The person executing the leases here, the CEO of the tenant, had not appreciated the effects of contracting out the leases or the procedures required to do so.  Consequently, the requirements for ratification had not been made out. Neither could the landlord rely on the statement in the lease as estopping the tenant from later challenging the validity of the contracting-out process, as this would defeat the purposes of the protections in the 1954 Act.
Did the fact that the tenant’s statutory declarations did not contain a fixed term commencement date mean they were not valid?

The statutory declaration requires the term commencement date of the proposed lease to be inserted. In some cases, the statutory declarations stated that the term of the lease to be granted would begin on the access date determined under the agreement for lease between the parties. In other cases, it was expressed to be the commencement date under the lease. In each case, the tenant argued that the requirements for contracting out the lease had not been met.

The judge held that a fixed calendar date does not have to be given. The purpose of the wording in the statutory declaration is to identify the tenancy in respect of which the tenant’s rights are being waived. The judge held that using the date when the interest under the lease commences, or the date from which the term is calculated, as the term commencement date were both adequate identifying badges of the prospective tenancy.

Implications of the case

As mentioned above, the court ultimately concluded that the leases were validly contracted out.

Lawyers acting for landlords will be relieved that the court took a robust approach to the tenant’s arguments. In particular, they will be relieved that the statutory declaration does not need to state a fixed calendar date as the term commencement date in order to be valid. In any letting where the property has not yet been completed, the term commencement date will not be known, but the prescribed form of declaration makes no allowance for this. It is helpful to know that the formulae devised by landlord’s solicitors to work around this problem have been held to be effective.

Further information