What is ‘Contracting Out’ in Business Leases?

So you’ve decided to take the plunge and start up your very own business. You might have begun your business empire from a modest start, perhaps working from home to begin with. To your surprise your new business has started to gather momentum and one new customer turns into repeat orders and before you know it, business is booming. 

You realise that you’re quickly outgrowing your home space and actually it would be nice to reclaim the dining room or the spare room. You need to find business premises. 

It can be daunting looking for business premises; there’s so much to think about. How big should the space be, how much room for growth should I allow for, do I really want to be agreeing to a 5 year Lease? Some of the jargon landlords and agents use can also be very confusing. Do I want a Lease that’s ‘contracted in’ or ‘contracted out’? You have absolutely no idea. 

So what is ‘contracting out’ of a Business Lease? 

The Landlord and Tenant Act 1954 is a very long established law which grants business tenants the right to ask for a new lease of the same premises once their existing lease term expires should they wish to remain in occupation. This is known as security of tenure. So for example, you take a Lease for 3 years and at the end of the 3 years you want to stay where you are so you have the right to ask your Landlord to grant you a new Lease on similar terms as your first Lease and your Landlord has to grant you a renewal Lease and can only object in certain limited circumstances, such as if you are behind in your rent or if the landlord wants to redevelop the premises. 

Security of tenure is a valuable right and helps to protect business continuity. As you could imagine, taking a 3 year or a 5 year Lease is a big commitment at the time but if all goes well those years will soon pass and if you had to keep finding new premises after 3 or 5 years you would find yourself with both the expense and the hassle of relocating quite frequently. You might also find that your business benefits from its location especially if you rely upon passing trade which is very important in retail. 

So why might your new landlord wish to deny you this right? It is common for both landlords and tenants to want some flexibility built into a Lease. The landlord might be concerned that as a relatively new business you may not be able to afford the rent each month or quarter or the landlord may want to keep more control over who occupies his premises. Usually, if a lease is being offered to a tenant on a ‘contracted out’ basis this would be reflected in the rent charged because of the uncertainty for the tenant of what might happen at the end of the fixed term of the Lease. You may find that the rent is lower when a lease is offered on a ‘contracted out’ basis. However, just because the Lease is ‘contracted out’ doesn’t mean to say that your landlord would automatically ask you to leave at the end of your Lease, you just do not have the legal right to ask for another lease. 

When choosing new business premises, especially for the first time, you should have a good look around the area you want to base your business and see what options are available to rent. If you find there is a good mix of both ‘contracted out’ and ‘contracted in’ Leases you should think about how the other terms compare such as the rent being charged and the length of the Lease which is being offered. You should then decide whether the terms of a ‘contracted out’ lease are really worth giving up your legal rights of security of tenure. 

When you find business premises you should always have a written lease with your landlord as this sets out clearly what both of you are agreeing to do and avoid any future disputes and fall outs. Contracting out of the lease also requires a set procedure to be followed and you should always take legal advice before signing and legal documents.