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Inside Inside or Outside the Act, Contracting Out: What Does it Mean?

Hand holding guide to Commercial Leases:Negotiating Heads of Terms for Business Premises Lease

Inside or Outside the Act, Contracting Out: What Does it Mean?

Agreeing terms for a new lease will include whether the lease should be inside or outside the act.  Also referred to as contracted in or contracted out of the act.   What does this mean?

The act referred to is The Landlord & Tenant Act 1954 which gives business tenants automatic renewal rights when a lease expires.

Tenant Viewpoint

The tenant will want to minimise the prospect of upheaval and possible loss of business due to relocation when the lease term ends.  If the lease is not contracted out the landlord cannot simply say he does not wish to renew.  The landlord would be obliged to grant you a new lease unless one of the grounds set out below applied (see Landlord Viewpoint).  Furthermore, the new lease would need to broadly follow the terms of the old lease albeit with the rent at a new market value.

If when negotiating a commercial lease the landlord insists he will only give the tenancy on the basis that the lease is outside the act (and therefore you have no automatic right of renewal) consider whether you would prefer to look for alternative premises or agree a longer lease term with the landlord.

Landlord Viewpoint

If a lease is contracted out a landlord is free to deal with business premises as it chooses when the lease ends.  The landlord might choose to take possession for its own purposes or renegotiate terms for a new lease with a new tenant or the existing tenant.

If the lease is not contracted out then difficulties might arise if the landlord does not want the tenant to remain.  It can be done but only if the landlord follows a set notice procedure and is able to make use of one of the grounds set out in the act, these include:

  • the tenant is in breach of the lease such as rent arrears
  • the premises are in disrepair
  • the landlord wants to occupy the premises for its own use
  • the landlord wants to substantially develop the site.

How does Contracting out Work?

If the proposed new lease is to be outside the act there are strict procedures which must be put in place before the lease is signed in order for the contracting out process to work.  The process necessitates the tenant having notice that there is no automatic right of renewal and confirming its agreement to the same.

If you are a prospective business tenant or landlord negotiating terms for a new lease you need to understand the implications of agreeing whether the lease will be inside or outside the act as it will have a direct impact on the options available to you when the lease expires.

Whether you are a landlord or prospective tenant we are happy to give free heads of terms advice for commercial leases. 

 Whether café, shop, pub, restaurant, industrial unit or any sort of business lease we are happy to talk without obligation.

Please call 01446 678498 or click on the free consultation button, provide your contact details and we will call you.

 

 

 

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