High Court takes practical approach in contracting-out case

2nd August 2019

Commercial Real Estate Litigation expert Martin McKeague, who specialises in advising landlords and tenants on all aspects of portfolio management, explains a recent case which highlights a number of practical considerations arising from the ‘contracting-out’ process.

Security of tenure and ‘contracting out’

The Landlord and Tenant Act 1954 (LTA 1954) affords to tenants who occupy premises for business purposes the right to remain in the premises after the expiry of the contractual lease term; and the right to seek a renewal lease.  Since June 2004 landlords and tenants have been able to ‘contract out’ of these provisions, such that security of tenure doesn’t apply, and the tenant’s right to occupy therefore simply comes to an end at the end of the lease term.

Contracting out is achieved by the landlord’s service of a warning notice, followed by the tenant’s making of a statutory declaration acknowledging receipt of the notice and agreeing to give up its rights.

TFS Stores v BMG: Why is this case of interest?

In the recent TFS Stores v BMG [1] case, however, the tenant sought to renege on its contracting out.  In a practical High Court decision that will be a relief to landlords, the tenant was given short shrift.

As is explained below, the case demonstrates the importance of ensuring that the correct procedures are followed to ensure that any contracting out is valid and effective.

The decision also highlights that it will be prudent, in many cases, for landlords to serve warning notices on the registered offices of their tenants, as well as on the tenants’ solicitors [2].

As a final legal and practical point, the case also clarifies that it is not necessary to specify a fixed calendar date, so long as the proposed tenancy can be identified.

What were the arguments in the TFS Stores case?

The Fragrance Shop (TFS), a large retail operator with over 200 stores nationwide, argued that six of its leases at a number of McArthur Glen outlet centres were protected by the LTA 1954, despite warning notices having been served, and statutory declarations having been executed, before it entered into the relevant agreements for lease or leases.

TFS’ main arguments were:

• Its solicitors did not have authority to accept service of the warning notices on its behalf. TFS’s solicitor had confirmed by email to the landlord’s solicitor that she could accept service of the warning notice on behalf of her client. TFS argued, however, that it had not authorised its solicitor to accept service and therefore that the warning notice had not been correctly served;
• The individuals who made the declarations on its behalf did not have authority to do so. The employee who made the declarations on TFS’s behalf was the retail director (not a statutory director); and
• The statutory declarations did not identify the commencement date of the contractual term. In two leases, the statutory declarations referred to the term commencing on the “Access Date”; and in the other leases the relevant wording was “for a term commencing on a date to be agreed between the parties” or “for a term commencing on the date on which the tenancy is granted”. TFS argued that no fixed calendar date was given and that this was ambiguous and therefore invalid.

As in interesting aside, the Landlord made a counterclaim against TFS pursuant to a provision which dates back to the eighteenth century, but which is still in effect today and can be an effective tactical tool for landlords. Section 1 of the Landlord and Tenant Act 1730 allows a landlord who has formally demanded possession to claim double the yearly value of the premises from a tenant that “wilfully” remains in occupation following expiry of its lease.  The landlord therefore counterclaimed for twice the current rental value for TFS’ ‘holding over’ period.

What did the High Court decide?

His Honour Judge Davis-White QC dismissed TFS’ claim, concluding that the leases had been validly contracted out. The High Court held that:

• TFS’ solicitors did have authority to accept service of the warning notices as a result of their instructions to bring to completion the transaction reflecting the heads of terms, which referred to the leases being contracted out.
• The retail director had responsibility for the negotiation of the leases and therefore had authority to make the statutory declarations on TFS’ behalf.
• A fixed calendar date does not have to be given. The purpose of the requirements of section 38A and Schedules 1 and 2 of the LTA 1954 is simply to identify the tenancy in question and confirm the declarant’s understanding that the tenancy will be excluded from security of tenure protection otherwise afforded.

The landlord’s counterclaim was also dismissed. The High Court decided [3] that to be wilful in this context meant being more than merely deliberate – that is, the tenant had to have an intention to stay on in the premises knowing that it had no right to do so.  That was not proven on the evidence in this case.

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[1] TFS Stores Limited v BMG (Ashford) Limited et al [2019] EWHC 1363 (Ch)
[2] See our earlier Walker Morris briefing for traps and tips when it comes to serving legal notices more generally
[3] in accordance with French v Elliott [1960] 1 WLR 40