Most business tenants in England and Wales have a statutory right to stay in their premises when the lease ends and to ask for a new one. That right, known as security of tenure, comes from Part II of the Landlord and Tenant Act 1954. Many leases are now granted without it, through a process called contracting out, and the choice between a protected and an unprotected lease is one of the most important decisions in a letting. This article explains what security of tenure gives a tenant, how contracting out works, how a protected lease is renewed or ended, and what the current Law Commission review may change.
Security of tenure is often mentioned in heads of terms in a single line, and many tenants agree to give it up without fully appreciating what it means. A protected tenant whose lease is coming to an end is in a strong position. It can remain in the premises, it can ask the court to order a new lease at a market rent if terms cannot be agreed, and the landlord can only refuse on limited grounds, in some cases paying compensation. A tenant whose lease is contracted out has none of those rights, and must leave on the expiry date unless the landlord chooses to offer something new.
Where a tenant occupies premises for the purposes of its business, Part II of the Landlord and Tenant Act 1954 applies to the tenancy unless it has been excluded. The effect is twofold.
First, the tenancy does not end automatically when the contractual term expires. It continues on the same terms, at the same rent, until it is brought to an end in one of the ways the Act permits. A landlord cannot just ask a protected tenant to leave on the expiry date.
Second, the tenant has the right to a new lease. If the parties cannot agree the terms, either of them can ask the court to decide them. The court can grant a new lease of up to 15 years, at the rent the premises would command in the open market, and on terms that will usually follow the existing lease unless there is good reason to change them. The landlord can only resist a new lease on one of the grounds set out in the Act, and where it relies on a ground that does not involve any fault on the tenant's part, such as redevelopment, it may have to pay the tenant compensation.
For a business that has invested in fitting out its premises, built up local custom or depends on a particular location, those rights can be very valuable. They give the tenant a degree of certainty that its business will not have to move merely because the lease has run its course.
The Act protects a tenancy where the premises are occupied by the tenant for the purposes of a business carried on by it. Each part of that test matters.
There must be a tenancy. A licence, which gives permission to occupy without exclusive possession, is not protected, and nor is a tenancy at will. The courts look at the substance of an arrangement rather than the label the parties give it, so a document called a licence that in fact gives the occupier exclusive possession for a defined period may well create a protected tenancy. Landlords who use licences for short-term or flexible arrangements need to make sure that the arrangement is a licence in reality as well as in name.
The tenant must occupy the premises. A tenant that has sublet the whole of its premises will not usually be in occupation, and the protection will pass instead to its subtenants unless their leases have been contracted out. The occupation can be through a manager or an employee, and the Act treats occupation by another company in the same group, or by a company controlled by an individual tenant, as occupation by the tenant.
The occupation must be for the purposes of a business. "Business" is widely defined and includes a trade, profession or employment, and any activity carried on by a body of persons. It does not need to be carried on for profit, so clubs, charities and public bodies can be protected.
Some tenancies are excluded altogether. They include tenancies granted for a fixed term of six months or less, unless the tenant and any predecessor in the same business have been in occupation for more than 12 months in total. Agricultural tenancies, mining leases, certain service tenancies and home business tenancies are also excluded.
Timing matters too. For a fixed-term lease, the question that usually counts is whether the tenant is in occupation for business purposes when the contractual term expires. If it is not, the tenancy ends on the expiry date and the tenant has no right to stay. That can work in a tenant's favour if it intends to leave, as explained below.
The landlord and tenant can agree that the security of tenure provisions, which are sections 24 to 28 of the Act, will not apply to the lease. A lease that is validly contracted out ends on its expiry date. The tenant has no right to remain, no right to ask the court for a new lease, no right to have the court fix the rent if the landlord does offer a new lease, and no right to compensation.
Because the consequences are significant, the Act only allows contracting out if a prescribed procedure is followed before the tenant commits to the lease. The landlord must serve a warning notice on the tenant, in a prescribed form, explaining what the tenant is giving up and recommending that it take professional advice. The tenant must then make a declaration that it has received the notice and accepts the consequences.
There are two versions of the procedure. If the warning notice is served at least 14 days before the tenant commits to the lease, the tenant can respond with a simple declaration. If the notice is served less than 14 days before, the tenant must make a statutory declaration before an independent solicitor or another person authorised to administer oaths. In practice, many transactions use the statutory declaration route because it allows the notice to be served when the lease is close to agreed form. The lease itself must then refer to the notice and the declaration and record the parties' agreement to exclude the Act.
The procedure must be completed before the tenant is contractually bound. That includes exchange of an agreement for lease, and it includes the tenant being let into the premises early, for example to fit out, before the lease is completed. If the tenant is allowed in before the formalities are done, it may later argue that it has a protected tenancy. If a guarantor might be required to take a lease in the future, the procedure should also be followed with the guarantor.
Some technical points can defeat contracting out. Only a lease for a term of years certain can be contracted out. In Newham London Borough Council v Thomas-Van Staden [2008] EWCA Civ 1414, the lease defined the term as including any period of holding over or extension, and the Court of Appeal held that this was not a term of years certain, so the tenant had security of tenure despite the parties' intentions. The courts have been more forgiving about the declarations themselves. In TFS Stores Ltd v The Designer Retail Outlet Centres (Mansfield) General Partner Ltd [2021] EWCA Civ 688, the Court of Appeal held that declarations which described the start of the term by reference to a formula, rather than a fixed date, were still valid because, read as a whole, they identified the lease and served the purpose of the prescribed form.
A contracted-out lease generally stays contracted out if it is varied, but a variation that extends the term or adds land will usually take effect as a surrender and the grant of a new lease, and that new lease will be protected unless the procedure is followed again. An option to renew in a protected lease does not itself take the lease outside the Act. The Court of Appeal confirmed this in Caterpillar Property Ltd v Park Cakes Ltd [2026] EWCA Civ 575, where the tenant of a factory kept its statutory protection even though the lease contained an option to renew.
Whether a lease is contracted out is a matter for negotiation. Landlords often prefer to contract out because it gives them certainty that they can recover the premises at the end of the term, whether to redevelop, to re-let on different terms or to occupy themselves. Contracting out has become common, particularly for shorter leases and for lettings in multi-let buildings.
From a tenant's point of view, the question is how much the business depends on staying in the premises. A tenant that expects to move on at the end of a short term, or that could readily find equivalent space nearby, may be content to accept a contracted-out lease, perhaps in return for a lower rent or other concessions. A tenant that is investing heavily in fitting out, or whose business depends on the location, such as a restaurant, a shop with established trade or a manufacturer with specialist installations, should think carefully before giving up the right to renew.
Where the landlord insists on contracting out, there are alternatives worth exploring. The tenant can ask for a longer term, so that the question of renewal is further off, or for an option to renew on agreed terms. The tenant can also ask the landlord to commit to giving notice well before the expiry date of whether it will offer a new lease, so that the tenant has time to plan. None of these is as strong as statutory protection, but each improves the tenant's position.
The decision should be made at the heads of terms stage. The Lease Code requires heads of terms to say whether the lease will have security of tenure, and changing position after the lease has been drafted is difficult. If the lease is to be contracted out, starting the procedure early avoids delay at completion.
A protected tenancy can be renewed by either party starting the statutory procedure. The landlord does this by serving a notice under section 25 of the Act, and the tenant by serving a request under section 26. Both must be in a prescribed form, must be served not more than 12 months and not less than six months before the date they specify, and cannot specify a date earlier than the end of the contractual term.
A landlord's section 25 notice either proposes terms for a new lease or states that the landlord opposes renewal, identifying the statutory grounds it relies on. A tenant's section 26 request proposes the terms of a new lease. A landlord that wants to oppose a tenant's request must serve a counter-notice within two months stating its grounds. If it does not, it loses the right to oppose and must grant a new lease. A tenant cannot serve a section 26 request if the landlord has already served a section 25 notice, and the landlord cannot serve a section 25 notice once the tenant has served a valid request. A tenant with a periodic tenancy, or a fixed term of a year or less, cannot serve a request at all.
Once a notice or request has been served, the parties usually negotiate the new lease. If they cannot agree, either can apply to the court, and the application must be made before the deadline set by the notice or request. That deadline is the termination date in a landlord's notice, or the day before the start date proposed in a tenant's request. The parties can agree in writing to extend the deadline, and can do so more than once, but each extension must be agreed before the current deadline passes. If no application is made in time and no extension has been agreed, the tenant loses its right to a new lease. This is one of the most common and serious pitfalls in the renewal process.
While the old lease continues, either party can ask the court to set an interim rent, which replaces the passing rent for the period until the new lease begins. Where rents have risen, landlords will often apply. Where rents have fallen, a tenant may be the one to benefit.
If the matter goes to court, the court will decide the terms that cannot be agreed. The rent will be the open market rent, disregarding certain matters such as the value of improvements carried out by the tenant. The other terms will usually follow the existing lease, and a party that wants to change them must justify the change. The court can grant a term of up to 15 years. If the tenant does not like the terms the court orders, it can ask the court to revoke the order within 14 days, in which case the old lease ends after a short further period.
The timing of a notice or request can matter commercially. A tenant in a falling market may want to start the process early, while a landlord in a rising market may prefer to serve a section 25 notice promptly so that the new rent applies sooner. A tenant that has no wish to renew may be content to let the existing lease run on at the old rent for as long as the landlord takes no action.
A landlord can only oppose the grant of a new lease on one or more of the grounds set out in section 30(1) of the Act, and it must specify the grounds in its notice or counter-notice. In summary, the grounds are as follows.
The first three grounds depend on the tenant's conduct and are discretionary, so the court will consider whether the tenant ought to be refused a new lease in all the circumstances. The others depend on the landlord's own position.
The redevelopment ground is the one most often relied on. The landlord must show a firm and settled intention to carry out the works, and a reasonable prospect of being able to do so, at the date of the hearing. In S Franses Ltd v The Cavendish Hotel (London) Ltd [2018] UKSC 62, the Supreme Court held that an intention to carry out works only if the tenant refuses to leave is not enough. The test is whether the landlord would do the same works if the tenant left voluntarily. The own occupation ground has its own limit. A landlord cannot rely on it if it bought its interest within the five years before the end of the current tenancy, while the premises were let on a protected tenancy.
Where the landlord successfully opposes a new lease on the redevelopment ground, the own occupation ground or the ground relating to a letting of part, or serves notice relying only on those grounds and the tenant does not apply to court, the tenant is entitled to compensation when it leaves. The amount is the rateable value of the premises. It is doubled where the premises have been occupied for the purposes of the tenant's business, or the same business carried on by a predecessor, throughout the 14 years before the tenancy ends. The multiplier applied to the rateable value has been set at one since 1990.
Compensation can be excluded or reduced by a clause in the lease, but only if the business has been in occupation for less than five years when the tenant leaves. After five years of business occupation, any clause excluding compensation is void. A tenant with a contracted-out lease has no right to compensation at all.
A tenant with a protected lease is not obliged to renew. If it wants to leave at the end of the term, the simplest course is to move out before the contractual expiry date. A tenant that is not in occupation for business purposes on that date has no statutory continuation tenancy, and the lease ends when the term expires. The tenant can also serve a notice under section 27(1) of the Act at least three months before the end of the term, which removes any doubt.
If the term has already expired and the tenancy is continuing under the Act, the tenant can end it by giving at least three months' written notice under section 27(2). A tenant that simply stops paying rent and leaves after the term has expired, without giving notice, may find it remains liable.
A tenant should also bear in mind the position of any guarantor. A guarantee of a lease usually covers only the contractual term, and does not extend into the period during which the tenancy continues under the Act unless the guarantee expressly says so. Landlords commonly draft guarantees to cover any continuation, and guarantors should check whether theirs does.
The 1954 Act has been criticised for many years as complex and out of date, and the Law Commission is reviewing it. It published a first consultation paper in November 2024, asking whether security of tenure should be kept, changed or abolished. In June 2025 it published an interim statement in which it provisionally concluded that the existing model, with protection as the default and an option to contract out, should remain.
A second consultation paper followed on 16 June 2026 and closed on 16 September 2026. Its provisional proposals include taking most periodic tenancies outside the Act, raising the threshold below which short fixed-term tenancies are excluded from six months to a longer period, and simplifying contracting out so that the warning and the tenant's declaration are set out in the lease itself rather than in separate documents. It also considers changes to how the terms of a new lease are decided, to interim rent, and to the redevelopment ground.
The Law Commission is now analysing the responses and will publish a final report with recommendations. Any change in the law would then need legislation, and the current procedures will apply to leases granted and renewed in the meantime. Landlords and tenants should continue to follow the existing contracting-out procedure with care.
The points below summarise what we would expect each side to consider.
This article is general information on the law of England and Wales as at October 2026. It is not legal advice on any particular lease, and you should take advice on your own circumstances before agreeing to contract out of the Act or serving any notice under it.
Lawyerly's commercial lease solicitors advise tenants and landlords on new leases, contracting out and lease renewals, acting for one side only in any transaction. You can read more about how we work on our commercial lease solicitors page.