The changes to the Landlord and Tenant Act 1954 came into force on 1 June 2004. Jonathan Kelly runs through some practical issues on contracting out of tenant's security of tenure.
KEY POINTS
Court orders have now been replaced by health warning notices and statutory declarations.
The health warning notice will generally be served on the tenant once the form of lease has been agreed.
The need for a statutory declaration will cause a degree of inconvenience for tenants, but much less so than the old court order system.
NEW REGIME FOR LANDLORD AND TENANT ACT 1954
Enclosed with the March issue of this newsletter was our client note on the newly streamlined Landlord and Tenant Act 1954. The client note gives details of the new contracting out system and the changes to the lease renewal procedure. For additional copies please contact Jacqui Joyce in our London office on 020 7296 2000 or e-mail:
This article will now concentrate on some practical issues relating to the new system for contracting out.
How does the new contracting-out system work?
The previous system of applying to the court for a consent order has been abolished. Instead, the landlord must serve a "health warning notice" on the tenant; the tenant must then make a "declaration"; and the lease must contain a clause excluding security of tenure and confirming that the correct procedure has been followed.
The landlord's health warning notice and the tenant's declaration must be completed before the tenant becomes legally bound to take the lease. This means before the lease is granted or, if earlier, before any agreement for lease is exchanged.
The health warning notice simply warns the tenant about the implications of contracting out, no doubt familiar to readers of this article.
The tenant's declaration acknowledges that a health warning notice has been served on the tenant, and confirms that the tenant appreciates the effect of excluding security of tenure.
There is one version of the landlord's health warning notice, to be used in all cases. In contrast, there are two versions of the tenant's declaration:
a "simple declaration", for use where the health warning notice was served on the tenant at least 14 days before the tenant became legally bound to take the lease; and
a "statutory declaration", for use where the health warning notice was served on the tenant less than 14 days before the tenant became legally bound to take the lease.
The content of the two declarations is the same, but the procedure is different. The simple declaration is signed by the tenant, or an authorised representative. No witness is required. Conversely, the statutory declaration must be formally made before an independent solicitor or a commissioner for oaths, who must also sign the declaration.
When should the health warning notice be served?
The new legislation is not clear about this. The obvious answer would be to serve the notice as soon as heads of terms are agreed.
However, under the old system a court application could not be made until the final form of lease was settled. It is just possible that the same rule might also be applied in future to the new notice procedure. The new wording of the 1954 Act does not cover the point one way or the other.
Accordingly, until the point has been clarified by the courts, the advice we and most other city law firms are giving is not to serve the health warning notice until the lease has been finalised.
Will people generally be using the "simple" declaration or the "statutory" declaration?
Lovells, and most other city law firms, are advising landlords and tenants to use the statutory declaration rather than the simple declaration. The reasoning for this follows from what has been explained above:
it is advisable to delay serving the health warning notice until the form of lease has been settled
the simple declaration can only be used if the health warning notice was served at least 14 days before the tenant became legally bound to take the lease
it is rare for there to be a 14 day gap between the form of lease being settled and the tenant becoming legally bound to enter into it.
Therefore the statutory declaration procedure will have to be used. This will cause tenants a certain amount of irritation, because the statutory declaration procedure is more time consuming and less convenient than the simple declaration procedure.
On the other hand, the irritation will be infinitely less than under the old court order procedure. Many readers will recall painful experiences of waiting weeks, without explanation, for a court to deal with a routine application for an exclusion order.
Practicalities of doing a statutory declaration
The statutory declaration is made by the tenant, or by somebody authorised by the tenant. If the tenant is a company, the declaration will be made by a director, the company secretary, or some other employee or representative whom the company has specifically authorised to make the statutory declaration. This can include the company's solicitor (but see below).
The tenant (or its authorised representative) making the statutory declaration must attend the independent solicitor or commissioner for oaths to make the declaration in person.
The fee payable to the solicitor or commissioner for witnessing the statutory declaration is fixed at £5.
The following people are disqualified from witnessing the tenant's statutory declaration:
the tenant's solicitor, the landlord's solicitor or any member of their respective firms; and
an in-house lawyer employed by either party.
Companies who enter into a lot of leases as tenants may find it useful to set up a standing arrangement with a friendly firm of local solicitors to witness their statutory declarations as and when required. A tenant who is not using a solicitor must still find a local solicitor to witness the statutory declaration. That solicitor must not give the tenant any advice - otherwise he or she cannot witness the declaration!
On whom is the health warning notice served?
The landlord's solicitors should serve the notice, on the landlord's behalf, by sending it to the tenant's solicitor (if one is acting) or to the tenant direct.
Some leading law firms consider that one cannot validly serve the health warning notice on the tenant's solicitor, principally because the new rules do not specifically say that one can. We respectfully disagree with this viewpoint, for a number of reasons:
the normal rules of agency should apply unless they are excluded by the legislation (they are not)
the statutory declaration and the lease both contain a specific acknowledgement by the tenant that the health warning notice has been served on the tenant, thus preventing any subsequent suggestion that such service was not effective
in cases under other statutes where notice was served on the tenant's solicitor, the Court of Appeal have ruled this to be valid: Galinski v McHugh (1989, leasehold enfranchisement under the Leasehold Reform Act 1967) and Yenula Properties v Naidu (2002, shorthold tenancy under the Housing Act 1988).
However, readers involved on the tenant's side of transactions should be aware that some solicitors will insist on sending the health warning notice to the tenant's registered office by recorded delivery. While we think this is unnecessary, it is of course valid.
If the landlord serves a health warning notice on the tenant's solicitor, how can one be sure that the tenant won't claim ignorance afterwards?
A fair question. At lease expiry, landlords will not want to be faced with a tenant claiming that "my solicitor dealt with all the papers, received the health warning notice and made the statutory declaration, and no one ever mentioned contracting out". (Such an argument is unlikely to be upheld by the courts, but landlords will not want to take the chance.)
We are advising landlords to request that the tenant's statutory declaration be made by the tenant itself, rather than by its solicitors. Where the tenant is a company, one would ask for the tenant's statutory declaration to be made by a director, company secretary or other authorised employee of the tenant.
Alternatively, if the tenant insists its solicitor will sign the statutory declaration, then we advise landlords to request that the tenant itself sign and return a copy of the health warning notice (this can be done by fax) having added a handwritten note saying "received a notice of which this is a copy" or words to that effect.
Landlords and their solicitors will need to use some discretion about this requirement, eg if the tenant is a major company which clearly knows what it’s doing.
Why are some solicitors' firms now serving notices on guarantors, as well as on the tenants?
A typical guarantee covenant includes a clause which says the landlord can insist on the guarantor taking a replacement lease, if the tenant goes into liquidation or bankruptcy and the original lease is disclaimed.
Technically, it is at least arguable that the guarantor becomes legally bound to take the replacement lease when it signs the original guarantee covenant. If so, the argument runs, the landlord should serve a health warning notice on the guarantor and insist on the guarantor making a statutory declaration, before the first lease is granted. The same logic applies to an assignee's guarantor in a licence to assign, or to an assignor giving an authorised guarantee agreement.
If correct, this would mean a huge number of additional notices being served on guarantors for purely technical reasons. In practice, however, the issue is most unlikely ever to arise:
it is rare for these options to be exercised, and exceptionally rare where the lease is contracted out (contracted-out leases tend to be shorter and their guarantors tend to be less substantial)
In Hindcastle v Barbara Attenborough Associates, the House of Lords ruled that a guarantor's liability continues after a disclaimer, so the only reason for exercising these options is tidiness - it's not legally necessary and the landlord can simply carry on sending rent demands to the guarantor
the courts are unsympathetic to guarantors raising technical points, as evidenced by the recent case of Brighton & Hove City Council v Collinson
if the guarantor is the tenant's parent company, it may well be in liquidation itself, in which case its own liquidator can disclaim the replacement lease
often it's in the guarantor's own interests to cooperate, as this enables it to obtain a new lease which it can then assign or sublet.
It's also worth noting that if service of notices on guarantors at the start of the lease (with reference to a possible future replacement lease) is necessary under the new system, then it would have been necessary under the old system too3 - but nobody ever bothered to do so.
Surrender agreements
A completed surrender is valid, but an agreement to surrender a contracted-in lease at some future date is unenforceable unless specifically authorised. Under the old system before 1 June 2004, that authorisation took the form of a court order. Under the new system from 1 June 2004 onwards, the authorisation takes the form of a landlord's health warning notice, coupled with a tenant's simple or statutory declaration, in a very similar form to the new contracting out procedure.
Q: I obtained an order in May, under the old system. There was then a hold-up, and no lease or agreement for lease has yet been entered into. Can I rely on the May court order when granting the lease in June or July? Or must I now go through the new procedure?
A: Yes, you can rely on the May court order. (NB If you do use the new notice procedure, it also works.)
Q: I exchanged agreements for lease before the end of May. The agreement is conditional on getting a court order to exclude the lease from the 1954 Act. The lease has not yet been granted. Should I get a court order, or use the new notice procedure?
A: You must get a court order. You can still apply for this now. The court retains jurisdiction to grant orders pursuant to pre-1 June agreements for lease. You cannot use the new notice procedure because the tenant is already legally bound to take the lease.
Q: I have a lease which says "the tenant shall not underlet without contracting out the underlease by court order". How will this be interpreted in future?
A: As if it said "the tenant shall not underlet without contracting out the underlease using the new notice procedure". This applies whether the original lease was granted before or after 1 June 2004.
CONCLUDING REMARKS
The new contracting-out system was designed to make life simpler. Anyone who has read the four pages of this article might question whether it has done so.
We have noted in past issues of this newsletter that a similar notice system was introduced for residential shorthold tenancies in 1986. This created a mountain of litigation over mistakes made in the paperwork, and the notice requirement was eventually abolished in 1997.
It is surprising that a system which was so discredited in the context of residential tenancies has now been reintroduced for commercial tenancies. In our view, a much more workable solution would have been to require all new contracted-out leases to bear a health warning notice on the front cover.
However, despite the technical complexities and minor irritants of the new system, we do expect it to work better, and to cause less random delay and frustration, than the previous court order system.
