Guide
Contracting out of the 1954 Act: what it means and what it costs
Updated
This is the first question on any renewal, because the answer decides whether there is a statutory renewal at all. It is also the cheapest question to answer and the most expensive one to get wrong.
What contracting out does
Section 38A(1) of the Landlord and Tenant Act 1954 allows the persons who will be the landlord and the tenant of a tenancy to be granted for a term of years certain to agree that sections 24 to 28 of the Act are excluded in relation to that tenancy (legislation.gov.uk). Those are the sections that continue the tenancy and give the tenant the right to a new one. A contracted out tenancy simply ends when the term ends. There is no statutory renewal procedure, no section 25 notice, and no right to apply to the court for a new tenancy. Any new lease is a fresh commercial negotiation on whatever terms the parties agree.
The procedure that has to be followed
Section 38A(3) provides that an agreement to exclude sections 24 to 28 is void unless the landlord has served on the tenant a notice in the form, or substantially in the form, set out in Schedule 1 to the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003, and the requirements in Schedule 2 to that Order are met (legislation.gov.uk). In practice that means a warning notice served before the tenancy is granted, and a declaration or a statutory declaration by the tenant, with the timing between them determining which of the two is required.
Why solicitors check this before anything else
- It decides whether there is a renewal at all. Every other question, notices, rent, grounds of opposition, only arises if the tenancy is protected.
- The parties are often wrong about it. A lease described as contracted out is not contracted out unless the procedure was followed. That is a documentary question with a documentary answer.
- The consequences run both ways. A landlord who believes a tenancy is contracted out and is mistaken faces a statutory renewal they had not planned for. A tenant who assumes there is no security may accept terms they did not have to.
- It is inexpensive to establish compared with anything that follows, which is why it belongs at the start of the instruction rather than in the middle of a negotiation.
What it means for cost
A protected renewal is a statutory process with a timetable, a valuation and a fallback to the court, and it is priced accordingly. A contracted out lease coming to an end is a negotiation and a new lease, so the legal work resembles a fresh letting rather than a renewal. Neither is automatically cheaper. What changes is the tenant's negotiating position, and that has a commercial value that usually exceeds the difference in fees.
Section 38A(2) separately allows the landlord and tenant of a protected tenancy to agree that it will be surrendered, subject to its own notice and declaration requirements in Schedules 3 and 4 to the 2003 Order. Agreements under either subsection are void if the procedure is not followed, which is why the paperwork is worth checking rather than assuming.