CONTRACTING OUT OF SECURITY OF TENURE
AND SURRENDERS: ANALYSIS
Removal or reduction of a burden
The current law clearly imposes a burden on the parties
involved, since they are obliged to apply to the court if they
wish to agree a lease which excludes security of tenure, or if
they wish to conclude an agreement that the tenant will surrender
the lease at some future date. The Department argues that it also
imposes a burden on the courts, which are obliged to consider
such applications. The removal of the requirement to apply to
the court therefore removes a burden on landlords, tenants and
(arguably) the courts.
In addition, the repeal of section 24(2)(b) will
reduce the burden on both landlords and tenants represented by
the requirement that a surrender is not valid until the tenant
has been in occupation for at least one month. The Department
also argues that the repeal of this subsection removes an inconsistency
between that subsection and section 38(1) of the Act (see paragraph
28 above).
Imposition of a new burden
The requirement for the landlord to serve a notice
on the tenant containing a "health warning" about the
consequences of agreements excluding the tenant's renewal rights
and of agreements to surrender represents a new burden on landlords.
Similarly, if the 14-day minimum notice requirement is not met,
the requirement for the tenant to sign a statutory declaration
that he has received, read and accepted the consequences of the
notice imposes a new burden on tenants. We discuss the proportionality
of this new burden below.
Necessary protection/proportionality
Overall effect of the proposed changes: necessary
protection for tenants
Some consultees questioned the effect that these
changes might have on the overall framework for business tenancies
set up by Part II of the 1954 Act. They suggested that, if the
procedures for contracting out of the provisions of the Act are
made easier, contracted-out leases will become the norm. The protection
for business tenants provided by the Act will thereby be negated,
they argue, since no landlord will offer a tenancy with security
of tenure.
However, we consider that the fact that the procedures
for contracting out are to be made less cumbersome does not necessarily
mean that more landlords are likely to take advantage of them.
Rather, we suggest that it will just make the process easier
for those landlords, and tenants, who decide to do so. We have
seen no evidence that the cumbersome nature of the current process
deters landlords from offering leases without security of tenure.
Indeed, there is as now likely to be some incentive for landlords
not to offer contracted-out leases, since a lease with security
of tenure would be likely to command a higher rent than one where
security of tenure is excluded. We do not therefore consider
that the proposals would remove necessary protection by negating
the purpose of the 1954 Act.
Detail of the proposed changes: necessary protection
and proportionality
The removal of the requirement to apply to the
court before a lease excluding security of tenure can be agreed
removes some protection from the tenant. However, that protection
is replaced by the requirement on the landlord to serve a notice
on the tenant warning him of the consequences. We are satisfied
that the burden on the landlord which this requirement represents
is proportionate to the benefit to the tenant of ensuring that
he is aware of the consequences of what he is doing.
The removal of the requirement that an immediate
surrender (i.e. one not made in pursuance of a prior agreement)
cannot be valid until the tenant has been in occupation for one
month would not remove any necessary protection. As the Department
indicates,[16]
once the tenant has been granted a lease, there is no good reason
for preventing him from surrendering it (for example if he finds
that he is unable to pay the rent and the landlord is prepared
to accept the surrender). To prevent the tenant from surrendering
would be an unjustifiable interference with his freedom which
is not necessary to defend the statutory right to renewal. However,
as indicated at para 27 above, different considerations apply
in relation to agreements to surrender.
We were, however, initially doubtful whether the
Department's proposal in relation to agreements to exclude security
of tenure and agreements to surrender would either maintain necessary
protection for the tenant or be proportionate to the benefit which
would be likely to result. We discuss our concerns, the Department's
response, and our conclusions below.
Our concerns
Firstly, we questioned the need to employ a statutory
declaration (under the Statutory Declarations Act 1835) in the
case where the 14 days' advance notice requirement could not be
met. We had a number of reasons for considering that a statutory
declaration might be inappropriate in this context, all tending
to suggest that the use of a statutory declaration was disproportionately
burdensome, and might have undesirable consequences.[17]
We also noted that there was nothing on the face
of the proposed order indicating the circumstances in which the
two procedures should be used. They would be alternatives[18]
and there would be no obligation to give the 14 day notice even
where this was in fact practicable. We were therefore doubtful
whether the notice proposal would achieve its intended purpose.
More seriously, we noted that, in the case where
at least 14 days' notice is given to the tenant, there was no
requirement for the tenant to make any declaration that he has
read and understood the health warning and accepted the consequences
of entering into the agreement. As noted above,[19]
the Law Commission's proposals would have included such a requirement,
designed to ensure that the tenant realises that the agreement
to contract out is a matter is a matter of some importance requiring
separate consideration.
Finally, we noted that a number of consultees had
raised similar objections, albeit to the Department's slightly
different original proposals (see paragraphs 18 to 24 above).
We therefore asked the Department:
- why it had departed from the Law Commission's
proposals in respect of the procedures for contracting out of
security of tenure, given that those proposals received substantial
support from respondents to the Department's consultation
- why, in relation to the case where the minimum
14 days' notice had been given, there was no requirement for the
tenant to sign a simple declaration that he had read the health
warning and accepted the consequences of entering into the agreement,
and for the declaration to be endorsed on the lease, and
- why (in the case where the minimum 14 days' notice
is not given by the landlord), the tenant would be required to
sign a statutory declaration (under the Statutory Declarations
Act 1835), given the problems to which such a declaration appears
to give rise.
The Department's reply
In response, the Department explained that it was
concerned to ensure that, wherever possible, tenants should receive
the "health warning" in good time before committing
themselves to a contracting out agreement. They would then have
time to take a considered view on abandoning renewal rights and
the practical opportunity to consider alternative options. The
Law Commission's proposals, the Department argued, would not necessarily
achieve this. While some tenants would become aware of contracting
out proposals by seeing them in a draft lease, in other cases,
particularly where the landlord was trying to manipulate the tenant,
the tenant would not see the "health warning" until
he or she was about to sign the lease. It would then be too late
to consider alternative arrangements, as the tenant would have
made business arrangements on the assumption that he or she would
be occupying the premises concerned.[20]
The Department went on to explain why it considered
the use of a statutory declaration desirable in the circumstances.
Having considered, and rejected, alternative options for ensuring
that the 14-day notice procedure was not waived unless it was
absolutely necessary,[21]
the Department concluded that the right solution was a mechanism
which "while not increasing existing burdens, would emphasise
that an exceptional procedure was being used."[22]
The proposed statutory declaration procedure, the Department
argued, would impose a minor hurdle for the parties, which would
have the effect of encouraging use of the 14day notice procedure
where practicable. Many tenants might find the need to make a
separate statutory declaration inconvenient, and might question
why they have to make one. If the tenant required accommodation
urgently, he or she would no doubt accept the need to follow a
special procedure to waive the requirement for 14 days' notice.
But if the landlord wanted to use the alternative procedure when
14 days' notice were feasible, the tenant might well be reluctant
to cooperate. The Department notes that the proposed form
of notice recommends the tenant to ask the landlord to use the
14day notice period where this is feasible.
In response to our concerns regarding the lack of
a requirement for a declaration by the tenant in cases where the
14-day notice requirement has been adhered to, the Department
argued that it would suffice for the tenant to receive the notice,
and for reference to it to be contained in or endorsed on the
instrument creating the tenancy. A requirement for the tenant
additionally to sign a declaration that he or she had read the
health warning and has accepted the consequences would, in the
Department's view, be unnecessarily onerous while not adding to
the protection proposed. The Department states that such a declaration,
made outside the tenancy agreement, would have no legal effect,
while any declaration within the body of the tenancy agreement
would be legally superfluous, as the whole presumption behind
a contract is that each party accepts the consequences of each
of the terms: "the tenant needs to accept the consequences
of the agreement to contract out". The Department also contends
that "... it would be unlikely that any tenant who had failed
to heed the contents of a formal notice would pay any more attention
to it when asked to sign such a declaration." Finally, the
Department remarks that it has "borne in mind the need to
balance the interests of larger and smaller businesses",
and suggests that providing a greater degree of protection for
smaller businesses might result in unnecessary bureaucracy for
larger ones with greater capacity for accessing legal advice.[23]
Our conclusions
We accept the Department's arguments regarding
the use of a statutory declaration, under the Statutory Declarations
Act 1835, in cases where 14 days' notice has not been given.
First of all, we agree that it is desirable
that a tenant should wherever possible receive advance notice
that he is to be asked to accept an agreement which excludes his
rights under the Act. We also agree, however, that it is in the
tenant's interest that there should also be provision for cases
where that advance notice cannot be given. The use of a statutory
declaration in these circumstances seems to be a reasonable response
to this situation. Although it may seem unduly burdensome, the
proposed procedure is less so than the current requirement for
court sanction. Further, the Department's contention that it
is that very burdensomeness which ensures the maintenance of necessary
protection against abuse of the emergency procedure is persuasive.
We are therefore satisfied that the burden on both landlord and
tenant represented by the requirement to go through the procedure
of making (or obtaining) a statutory declaration is proportionate
to the benefit of providing a disincentive to waive the 14 days'
notice requirement, and of ensuring that the tenant has every
chance of appreciating the significance of the agreement he is
entering into.
We are not, however, persuaded that it is not
necessary to provide for a requirement that the tenant sign a
simple declaration in cases where the advance notice requirements
have been complied with. We agree that
the tenant needs to accept the consequences of the agreement to
contract out. The point is, however, that it is vital that the
tenant understands what those consequences are.
We consider that the requirement for a declaration
is necessary to ensure the maintenance of necessary protection
for the tenant. The argument that it would be unlikely that any
tenant who had failed to heed the contents of a formal notice
would pay any more attention to it when asked to sign such a declaration
is not persuasive. We think it quite possible that a tenant, given
a large bundle of documents relating to a proposed lease agreement,
would fail to understand the significance of one document, the
"health warning", within that bundle. An unrepresented
tenant, in particular, might easily be persuaded by an unscrupulous
landlord that such a notice was perfectly routine and of no great
consequence. Even where this is not the case, the tenant may
fail to appreciate the significance of the notice. A requirement
to sign a declaration that he had read the notice and accepted
the consequences of the agreement would help to ensure that its
significance was not lost on the tenant. Indeed, in relation
to the Department's arguments (mentioned in paragraph 45 above)
against requiring the tenant to sign a declaration in a case where
the minimum 14-day notice is given, we note that under the Department's
proposal the tenant would (in a case where the minimum 14 days'
notice is not given) need to sign a statutory declaration that
he has received the notice and accepted the consequences of entering
into the agreement; and a reference to the notice and the declaration
would have to be contained in or endorsed on the lease. It seems
to us inconsistent to provide for such measures of protection
in the one case and not in the other.
As to the Department's remarks concerning the need
to balance the interests of larger and smaller businesses, we
do not consider that the need to minimise bureaucratic hurdles
for large businesses is a legitimate reason for failing to maintain
necessary protection for smaller ones. Where the minimum 14-day
notice has been given, the declaration which the tenant would
have to sign would be a simple declaration in the prescribed form,
not a declaration under the Statutory Declarations Act 1835.
We do not regard this as an onerous burden.
We therefore recommend that the proposal be amended
to provide for a requirement that, where the 14-day notice provisions
have been complied with, the tenant sign a simple declaration
(in a form to be prescribed) that he has received the notice and
accepted the consequences of entering into the agreement to exclude
security of tenure or the agreement to surrender.[24]
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