Rights to remain at term end: TFS v BMG (Ashford) Ltd

The law:

The default position for a tenant occupying commercial premises is that when the contractual term expires, the tenant has a statutory right to a new lease even if the landlord is unwilling to grant a new lease on a voluntary basis. This protection for a tenant is found in the Landlord and Tenant Act 1954 (the “54 Act”). Faced with a request from a tenant for a new lease under the 54 Act, a landlord can only object on certain grounds found in section 30 of the 54 Act.

However, the parties can agree that the 54 Act will not apply so that when the contractual term expires, the tenant must vacate unless a new lease has been agreed voluntarily. The tenant is waiving important rights and to protect the tenant there is a procedure that must be complied with. This is found in the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003 (“the RRO”) and is usually referred to as the “contracting out” procedure.

For a lease to be validly contracted out, the RRO requires that before the lease is granted;

1. The landlord must serve a warning notice on the tenant. The form of notice is set out in the 2003 Order and must be in that form or “substantially in the form” of the 2003 Order.
2. The tenant or a person authorised by the tenant must complete a declaration, usually a statutory declaration, confirming that the warning notice has been served on them by the landlord and that the tenant understands what they are giving up. The declaration says that the tenant “accepts the consequences “of contracting out.
3. The declaration should also state the date that the lease term commences.

Until now, and although the RRO was made some 16 years ago, there has been little case law on what is, in practice, a very important part of completing a commercial lease. As a result of a recent High Court decision, now have some helpful guidance following “TFS v BMG (Ashford) Ltd “.

The facts of the case:

The Fragrance Store (TFS) is a national retail chain and the dispute centred around six of its stores where the leases that had been granted to TFS had ostensibly been contracted out as had been agreed in the Heads of Terms.  In all instances the warning notice had been served and statutory declarations had been completed before completion of the leases. TFS’s landlord wanted the premises back when the contractual term expired, but TFS was reluctant to vacate and litigation followed.

TFS’s arguments:

1. The warning notices had been served on their solicitors who were not authorised to accept service of the warning notices. The notices should have been served on TFS.
2. The person signing the statutory declaration was not authorised to do so. The declaration had been signed by TFS’s retail director who was not a statutory director.
3. The statutory declaration did not state a specific date on which the lease term was to commence.

The High Court’s decision:

The Court rejected all TFS’s arguments and decided on TFS’s arguments as follows:

1. TFS’s solicitors had actual authority to accept the warning notice. This resulted from their instructions from TFS to complete the lease in accordance with agreed Heads of Terms that referred to the leases being contracted out. The solicitor’s authority included doing all acts necessary to complete the matter and this included accepting service of the warning notices.
2. The retail director was heavily involved in the negotiation of the new leases and he had authority to sign the declarations. There was nothing to suggest that his authority was somehow limited or that he lacked the authority to sign the declarations. In other cases, the Court have asked whether the signatory was acting at his own instigation. In this case the answer was no, the retail director was acting within apparent authority.
3. The Court said that a fixed specific date for the start of the contractual term in the lease did not have to be stated in the declaration. In practice it will often be the case that the date for the start of the contractual term will not be known when the declaration is signed for example if there is an agreement for lease that provides that the term will commence when certain works have reached practical completion. The term commencement date will not be known as it is dependent on events, in this case practical completion, that have not yet occurred.

Comments:

There would have been substantial practical delays and difficulties had the Court agreed with TFS’s arguments as the practice adopted by the party’s professional advisors was, and still is, widely adopted in practice.

The case illustrates the importance of the protection given to a tenant by the 1954 Act. TFS were clearly prepared to devote considerable effort and resources trying to argue their case. Whether a lease is contracted out is normally negotiated in Heads of Terms and ultimately will be part of the agreed terms reflecting the state of the market, the parties bargaining position and the importance of the property to the tenant. In a weak property market, a tenant should have more opportunity to persuade a landlord to grant a protected lease.