Clarity for Contracting Out
The Case of The Fragrance Shop Stores v The Designer Retail Outlet Centres (Mansfield) General Partner Limited  EWHC 1363 (Ch) offers some welcome clarity in the area of contracting out under sections 24-28 and 38A of the Landlord and Tenant Act 1954 LTA 1954 and the Regulatory Reform Order 2003.
What is “contracting out?”
Where a tenancy is protected under LTA 1954, the tenancy will not automatically terminate at the end of the contractual term and the tenant will be able to renew the lease. Contracting out is where the landlord and tenant agree that the tenant will not have the statutory right of lease renewal at the end of the contractual term and, once the contractual term expires, so will the tenancy. In effect the tenant “contracts out” of its rights for a renewal. There is a procedure under the Regulatory Reform Order 2003 where the landlord must serve a notice on the tenant and the tenant must make a declaration agreeing to contract out.
The Fragrance Shop issued proceedings in relation to a number of its leases of retail shops in outlet centres managed by McArthur Glen (UK) Limited. The Fragrance Shop claimed that they had not validly contracted out of the LTA 1954 and therefore argued they had a statutory right to renew the tenancies once the lease terms had ended.
The case concentrated on three main questions summarised by Judge Davis-White QC :
“(1) Whether solicitors for the tenant…had the authority in each case to accept service of a Warning under the s38 procedure
(2) Whether a particular employee of the tenant who executed statutory declarations in relation to the same two tenancies….had authority to do so
(3) Whether the relevant statutory declaration was validly completed as regards the description of the tenancy in question…”
The High Court held that:
- The tenant’s solicitors had actual authority to accept service of warning notices on behalf of their client as such authority  “flowed from their instructions to bring the transaction to completion reflecting the heads of terms…”
- That the Retail Director had actual authority from the tenant company to make the declarations on behalf of the tenant company. He had been the sole point of contact throughout the transaction and there was nothing to suggest that his authority had been limited .
- That specific commencement dates did not need to be noted in the statutory declaration. Judge Davis-White QC noted that both the date that the interest under the lease commenced and the date from which the term was calculated were valid in this case. However, he highlighted that the statutory declaration must be made in the form set out by the 2003 Order and that the wording must identify the tenancy in which the tenant’s rights are being waived.
The Judge therefore found that the tenancies had been contracted out and the tenant had no right to remain in the properties.
The case serves as confirmation as to the wording that may be used in statutory declarations to contract out of sections 24-28 LTA 1954 when the commencement date of the lease is not known. The judgment can be seen as taking a straight forward approach to the contracting out process. Wording such as “on a date to be agreed by the parties” can be used in such circumstances. However, the case provides solicitors with a reminder to establish whether the tenant’s solicitor has express authority for service and whether the tenant has a set policy in relation to the execution of documentation.
Although not considered in the main judgment, Judge Davis-White QC also considered whether a statement in the lease referring to the fact it had been validly contracted out would remove the tenant’s right to object to contracting out. It was noted that this would  “negate the effect of the s38A procedure.” Therefore, proper process in relation to contracting out under LTA 1954 is vital to ensure validity and prevent a tenant’s claim in relation to security of tenure.
This briefing is for guidance purposes only. RadcliffesLeBrasseur accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.