The amendments to the Landlord & Tenant Act 1954, which came into force on 1 June 2004, introduced a new regime and procedure for ‘contracting out’ of the security of tenure provisions of the Act. Nonetheless, numerous contracted-out leases granted before 1 June 2004 will be in force for many years to come. Accordingly, a recent decision of the Court of Appeal is of interest.

The essence of the decision in Brighton and Hove City Council v Collinson [2004] was that an agreement to contract out, contained in a lease, was valid notwithstanding that the proposed agreement which the court had sanctioned was to have been made between the landlord and a different party as the tenant.

This article briefly examines recent developments, in particular the Brighton decision, which provide guidance as to circumstances in which ‘last minute’ changes to the form of the proposed lease may affect the validity of an agreement to contract out contained in the actual lease granted.

Protection provided by the Act

As is well known, the purpose of the Act is to provide security of tenure for tenants in occupation of premises for the purposes of their business. The Act provides this protection in a number of ways. First, it continues the tenancy beyond the date upon which it would have come to an end at common law (eg the expiry of the contractual term granted) until the tenancy is determined by one of the methods recognised or prescribed by the Act. Secondly, if the tenancy comes to an end pursuant to a landlord’s notice to terminate under s25 of the Act, or a tenant’s request for a new tenancy under s26, the tenant is entitled to a new tenancy at a market rent and, broadly speaking, on similar terms to the current tenancy. The exception is where the landlord successfully opposes the grant of a new tenancy on one of the seven specified grounds set out in s30 of the Act. Thirdly, if the tenant’s claim for a new tenancy is successfully opposed, then unless the landlord opposed on grounds relating to default on the part of the tenant, or the tenant has been offered suitable alternative accommodation, the tenant is entitled to compensation on quitting the premises.

Contracting-out orders

Generally, the position prior to 1 June 2004 was that any agreement purporting to exclude the Act was void. An exception to this general rule was provided by s38(4)(a) of the Act, however. This section empowered the court to make an order authorising an agreement to contract out, if that order was made ‘… on the joint application of the parties who will be the landlord and the tenant in relation to a tenancy to be granted…’

The facts

In the Brighton case, the original proposal was that the contracted-out lease should be granted by the (eventual) landlord to a company by the name of Galaxi 3 Ltd (Galaxi), with directors of Galaxi being party to the proposed lease as guarantors. In due course therefore, a joint application for a contracting-out order was made. The applicants were the landlord, Galaxi and the two proposed guarantors. The joint application expressly stated that an order under s38 was being sought ‘authorising the inclusion in a lease to be made between [the landlord]… and [Galaxi] as lessee… and [the two directors in question] as sureties’ of an agreement to contract out.

In the usual way, a draft of the proposed lease which was to be granted accompanied the application. In the draft lease the landlord and Galaxi (identified therein as ‘the lessee’) expressly agreed that the tenancy created by the lease should be contracted out. The two directors in question were referred to in the draft lease as guarantors for Galaxi.

A contracting-out order was made (in the form of a draft provided to the court by the parties) in which the landlord was identified as ‘the applicant’ and Galaxi and the guarantors were identified as ‘the respondents’. The contracting-out order authorised ‘the grant of a lease by the applicant to the respondents’.

Subsequent to the making of the order, the two directors requested that the lease be granted to them direct – apparently for tax reasons. The landlord agreed, appropriate amendments were made to the form of lease, and the same was duly completed naming the two directors as the lessee. The completed lease still contained the express agreement to contract out, mentioned above, and a reference to the contracting-out order which had been obtained.

The tenants’ contentions

When the term created by the lease expired, the tenants contended that their tenancy had not been contracted out of the Act, and thus that they were entitled to a renewal lease in accordance with the provisions of the Act. They maintained that the contracting-out order was not effective in relation to the tenancy granted to them, as the application which had been made for the contracting-out order had been for an order authorising an agreement to contract out in relation to a tenancy to be granted by the landlord to Galaxi.

The decision

The Court of Appeal rejected the tenants’ arguments as being ‘over-technical’. Given that the tenants were parties to the application for the contracting-out order, and that the contracting-out order itself authorised the grant of a lease ‘to the respondents’ (who included the tenants), the Court of Appeal considered that the contracting-out order had achieved the purpose of s38(4)(a) – that is, to ensure that a prospective tenant understands that they are foregoing the protection of the Act. Furthermore, relying on previous Court of Appeal authority (Receiver for the Metropolitan Police District v Palacegate Properties Ltd [2001]), the Court of Appeal held that, notwithstanding the changes made to the form of lease consequential to the substitution of the two directors as tenants in place of Galaxi, the lease granted still bore a substantial similarity to the draft considered by the court when the contracting-out order was made.

Comment

The Court of Appeal obviously did not like the technical and ‘unmeritorious’ arguments advanced by the tenants. It therefore did what it considered to be justice between the parties, ie by holding that what was important was that the tenants had been party to the application for the contracting-out order, and fully understood that the proposed lease was to be one to which the Act would not apply. Further, the Court of Appeal relied upon the (admittedly) equally technical ground that the terms of the contracting-out order (which it will be recalled, was in the form of a draft submitted by the parties) included the tenants as being amongst the ‘respondents’ to whom the proposed lease was to be granted.

While it is unlikely that this decision will open any floodgates, it is interesting to note the Court’s more liberal approach to a situation where the ‘letter of the law’ might have dictated that the decision go in favour of the tenants.

Contracting out after 1 June 2004

Numerous and significant amendments to the Act came into force on 1 June 2004. One of the most radical changes is that a court order authorising an agreement to contract out of the security of tenure provisions of the Act is no longer required.

Instead, a new warning notice and declaration procedure must be followed before the contracted-out lease is granted. This involves the prospective landlord serving a prescribed form of notice on the prospective tenant at least 14 days before the lease is granted. The prospective tenant must then make a simple declaration (again, in a prescribed form) that they have received the warning notice, before the lease is granted. If the parties cannot wait 14 days, the prospective landlord must still serve the warning notice, but if the prospective tenant then makes a statutory declaration in the prescribed form, the lease can be granted immediately thereafter. In either case, a reference to the warning notice and the declaration (simple or statutory) must be contained in, or endorsed on, the lease, and the agreement to ‘contract out’, or a reference to it, must be contained in or endorsed on the lease.

Likewise, a court order is no longer required to authorise an agreement to surrender a tenancy to which the Act applies, but a similar warning notice and declaration procedure to that described above must be followed (see ss38 and 38A of the Act).

Significance of the Brighton decision after 1 June 2004

It will no doubt be some years after 1 June 2004 before all contracted-out leases granted before that date expire by effluxion of time. If there are any cases concerning leases granted before 1 June 2004 on similar facts, the Brighton decision will of course be directly relevant.

In the case of leases granted after 1 June 2004, the new law requires the landlord to serve the warning notice upon the tenant. Furthermore, the new law requires the tenant (or a person duly authorised by them) to provide the simple declaration or statutory declaration (in broad terms, acknowledging receipt of the landlord’s warning notice and accepting the consequences of entering into a contracted-out lease).

Accordingly, it is difficult to imagine circumstances in which similar facts to those in the Brighton case will arise. This would appear to be so even though it is common practice (but not a statutory requirement) for landlords/their solicitors to attach a draft of the form of contracted-out lease it is proposed should be granted, to the prescribed form of ‘warning notice’. It is conceivable that, following service of a prescribed form of warning notice upon a proposed tenant company, the parties will subsequently decide (as in Brighton) that the lease should be granted to persons who were originally intended to be guarantors for the proposed tenant company. However, one suspects that it would be difficult to stretch the reasoning in the Brighton case so as to enable the landlord to argue successfully that the lease is contracted out, even though no warning notice was given to the eventual tenant.

Better safe than sorry

Given the common post 1 June 2004 practice of attaching a draft of the proposed lease to the landlord’s prescribed warning notice, the guidance provided by the Court of Appeal in Palacegate should be considered by landlords before granting a lease in a different form to that attached to the ‘warning notice’ (see box).

It must be acknowledged that it can sometimes be tedious to be obliged to reserve notices, and to require prospective tenants to provide a new declaration or statutory declaration. However, the time spent in rectifying matters at the outset pales into insignificance when compared with the costs and delay which might be suffered in obtaining vacant possession at the end of the term, if the tenant is provided with enough ammunition to generate uncertainty by claiming that the lease is inside the Act.

Jim Cotter is with the property litigation department of Nabarro Nathanson, London  © Property Law Journal