What does it mean when you see the term ‘Contracting Out’?

Commercial tenants normally have security of tenure under Part II of the Landlord and Tenant Act 1954. This gives a statutory right to remain in occupation at expiry of the lease and to request a new lease, unless the landlord can prove one of the limited statutory grounds to oppose renewal and, in some cases, pay compensation.

“Contracting out” means the landlord and tenant agree that these statutory renewal rights will not apply to the new lease. At the end of the contractual term, the tenant has no automatic right to a renewal and must vacate unless a new deal is agreed.

Why landlords ask for it and when tenants accept it

Landlords

Flexibility to recover possession at term end, redevelop, relet on different terms, or adjust to market conditions without the 1954 Act process.

Tenants

May agree where they want a short, flexible occupation; where the premises are competitively sought after; or in exchange for concessions (e.g., rent-free, lower initial rent, lighter repairing scope, more generous break rights).

Key consequences for the tenant

  • No automatic right to stay or renew at expiry. Continued occupation requires the landlord’s agreement.
  • Negotiating leverage shifts to the landlord at renewal. Terms (rent, length, breaks, guarantors, deposits) may be more demanding.
  • No statutory compensation if the landlord declines a new lease.
  • Timetable risk: if renewal terms are not agreed in time, the tenant must be ready to vacate on the contractual end date.
  • Holding over risk: if the tenant stays beyond expiry without a documented arrangement, the status can be uncertain (e.g., tenancy at will), with short-notice termination and limited protections.

What is required from the tenant in practice

  • Provide correct details for the Landlord’s warning notice (legal name and address matching the lease party).
  • Calendar management: confirm the date the notice is received and the intended completion date to determine whether a simple or statutory declaration is needed.
  • Execute the correct declaration:
    • Simple declaration: sign after the 14-day period has started and before entering into the lease.
    • Statutory declaration: arrange a short appointment with an independent solicitor to swear/affirm; modest fee usually payable.
  • Keep evidence: retain copies of the warning notice, the signed declaration, and the completed lease clause for your records.

Frequently asked client questions

Can contracting out be negotiated away?

Sometimes, but many landlords insist. If so, seek concessions in return (e.g., rent-free period, lower initial rent etc).

Can a contracted-out lease include an option to renew?

Yes, if negotiated. This is a private contractual right and should be drafted clearly with timelines and pricing mechanisms.

What happens at expiry if we want to stay?

You must agree a new lease. If not agreed by the end date, you must be ready to vacate. Avoid drifting into occupation without a clear interim arrangement.

Action points for tenants considering contracting out

  • Seek commercial give-and-take in heads of terms to reflect the loss of statutory protection/right to remain in occupation at expiry of the lease.
  • Plan the contracting-out timetable early to avoid needing a statutory declaration at the last minute.
  • Align fit-out, dilapidations, and exit obligations with the shorter security position.
  • Start renewal discussions early (often 9–12 months before expiry) to avoid cliff-edge decisions.

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Blog by Harry Somerfield