Security of tenure: is the lease contracted out, and what does that do to the price?

Contents

1. What you are really buying: time on the premises
2. Is the lease inside the Act at all?
3. Reading the lease and the papers, line by line
4. Money if you lose the premises
5. What a renewal costs you
6. A worked example: one price, three leases
7. Turning the answers into a price
8. Sources

1. What you are really buying: time on the premises

Short answer: In a shop, café or office business, the lease is the part of the business you cannot rebuild elsewhere. Whether it can be renewed decides how many years of profit your price is paying for.

A buyer pays for a stream of profit. For a business that trades from one site, that stream only continues while you hold the premises. A customer base built around a particular street, a kitchen fitted out for one unit or a workshop next to your suppliers does not move with you.

Part 2 of the Landlord and Tenant Act 1954 changes what the end of the lease date means. A tenancy it covers does not end on the date written in the lease; it ends only by a route the Act allows (1954 Act s.24(1)). The tenancy continues on the same terms until the landlord serves a notice or the tenant makes a request, and the dispute is dealt with.

If the lease is contracted out, none of that applies. The parties have agreed in advance that sections 24 to 28 of the Act will not apply to the tenancy (1954 Act s.38A(1)). The lease ends on its date. You can ask the landlord for a new lease, but you have no right to one and no right to stay on.

The difference is large enough to change the price. A seller who is asking three times annual profit for a café with 89 days left on a contracted-out lease is asking you to pay for years that the landlord controls. Section 6 runs that case through with figures.

This post covers England and Wales, the territory the cited sections of the 1954 Act are marked as applying to.

The practical order of work is simple. First find out whether the Act can apply to this lease at all (section 2). Then find out whether it has been contracted out and what the lease and papers show (section 3). Then, if protection exists, find out what losing the premises and renewing cost you (sections 4 and 5). The last two sections turn this into a price.

You will meet this question in the first week of any deal. The lease is the one document that the seller can hand over immediately and that you can read yourself.

2. Is the lease inside the Act at all?

Short answer: Part 2 applies to a tenancy of premises that the tenant occupies for a business. Some tenancies fall outside it by law, whatever the lease says, so confirm which side of the line yours is on.

The Act applies where the property let includes premises the tenant occupies for the purposes of a business carried on by the tenant, whether wholly or with other purposes (1954 Act s.23(1)). Occupation by a company the tenant controls counts as the tenant's own occupation (s.23(1A)).

"Business" is wide. It includes a trade, a profession or an employment, and any activity carried on by a body of persons, corporate or unincorporate (s.23(2)). A café, a salon and a dental practice each fit that wording.

Two details matter for a buyer who looks at a small unit.

First, the protected holding excludes any part occupied neither by the tenant nor by someone employed by the tenant for the business (s.23(3)). If the seller has sublet the back room to another trader, the protection covers the part the seller occupies and not the sublet part.

Second, if the tenant runs a business in breach of a covenant that bans business use of the whole property, Part 2 does not apply unless the landlord or a predecessor consented or acquiesced. Where the breach is only a business run from home, Part 2 does not apply even with consent or acquiescence (s.23(4) to (6); the rules were added from 1 October 2015). If the lease says "residential use only" and the seller runs a business there, the tenure analysis in this post may not reach that premises at all.

The Act also excludes some tenancies by name (1954 Act s.43). These are the ones you could meet:

One exclusion no longer reaches pubs. The old exclusion for premises licensed for on-sales of alcohol was repealed for tenancies entered into on or after 11 July 1989, so a pub lease granted since then can be protected (1954 Act s.43(1)(d) and its note). If you are buying a pub business on a lease from before that date, ask for the lease date first, because the older rule may still bite.

The six-month rule has a trap for buyers of start-ups. A seller with a short "licence" or a three-month lease, then a rolling extension, may fall inside the twelve-months occupation limb once the seller and any predecessor in the business have been there for more than a year. Add the periods together before you assume the Act does not apply.

None of these exclusions is the same as contracting out. Contracting out is a choice the parties make, and it needs steps the law prescribes. The next section shows how to check them in the lease.

3. Reading the lease and the papers, line by line

Short answer: Look at the front pages, the clause about the Act and the last pages for endorsements. Then work out how long the lease has left and whether it appears on the Land Registry.

Work through the documents in this order.

1. Front page and term. Write down the date of the lease, the start date of the term and the number of years. A tenancy for a fixed term of more than one year is the case the tenant's own request covers (1954 Act s.26(1)). Then count the days from your planned completion date to the end of the term.
2. The clause about the 1954 Act. Look for words such as "the parties agree that sections 24 to 28 of the Landlord and Tenant Act 1954 are excluded". Its presence tells you the parties intended contracting out. It does not prove the steps were followed.
3. The endorsements. The lease should contain, or have endorsed on it, a reference to the notice and to the declaration or statutory declaration, and the agreement or a reference to it (SI 2003/3096, Sch.2 paras 5, 6). Look for those references in the body of the lease or on a page attached to it. If you find no endorsement, ask the seller for the standalone notice and declaration, and ask for the dates on each.
4. The dates around signing. Compare the date of the notice with the date the tenant signed. At least 14 days before the tenant became bound (or entered the lease, if earlier) is the test on the first route (Sch.2 para 2). If the dates are closer than that, the file needs a statutory declaration instead (Sch.2 para 4).
5. Who signed the declaration. The declaration may be made by the tenant or by a person authorised to act for the tenant (Sch.2 paras 3 and 4). Check that the name on the declaration matches the tenant named in the lease.
6. Any break clause or renewal clause. Note any option to renew or to break, with its notice dates, and keep those dates apart from the lease end date in your timetable.
7. Guarantors and deposits. These do not change the tenure analysis, but they change who is at risk. Note them for the price discussion.

Then check how long the lease has left and whether it shows up at HM Land Registry.

A lease of more than seven years must be registered at HM Land Registry. That applies if it is granted for valuable consideration out of unregistered land, and also if it is granted out of an existing registered title (HMLR Practice Guide 25 sections 2.1 and 2.2). The period to register is two months from the date of the deed that induces registration (Practice Guide 25 section 2).

A lease with seven years or less to run at grant is generally not registrable on its own (Practice Guide 25 section 4.1). So a typical five-year shop lease will not have its own title on the register, and you check it from the document in the seller's hand, not from the register alone.

Register evidence has one more use. The Land Registry may enter a notice of a lease of more than three but not more than seven years on the landlord's registered title, though the lease cannot be registered itself. A lease of three years or less cannot be noted (Practice Guide 25 sections 5.3 and 5.4). If the seller says "it is a seven-year lease" and the landlord's title shows no notice, ask why.

An assignment of an unregistered lease that has more than seven years left to run is compulsorily registrable if made for consideration, by court order, by assent or in the other listed cases. Transfers by operation of law and assignments of a mortgage term are examples of exclusions (Practice Guide 25 section 2.3). If your purchase involves a long lease, budget time for registration after completion.

Price official copies of the register and lease with HM Land Registry's fee calculator (fee-calculator.landregistry.gov.uk) before you plan the file (HMLR registration services fees page).

The guide is written for conveyancers and applies to England and Wales. The live page shows "Updated 1 June 2026" at the time of reading (checked 6 November 2026).

4. Money if you lose the premises

Short answer: A tenant refused a new tenancy only on grounds (e), (f) or (g) gets statutory compensation. Refusal on any other ground gives none. Check which ground a notice names before you value the downside.

Compensation under section 37 arises only where a new tenancy is refused solely on ground (e), (f) or (g) of section 30(1). If any other ground is also relied on, no compensation is due (1954 Act s.37(1) to (1C)).

The amount is the appropriate multiplier, set by statutory instrument, times the rateable value of the holding. It is times twice the rateable value where the tenant and any predecessor in the business have occupied the premises for business purposes throughout the 14 years before the tenancy ends (s.37(2), (3), (8)).

Two points decide how much this is worth to you.

First, the statute counts the tenant "and any predecessor in the business". The occupation history of the business, not only of the person who signs the lease, affects the multiplier. Ask the seller who traded from the premises in the last 14 years, and ask for evidence such as old rates bills or earlier leases.

Second, compensation is tied to the rateable value, not to what the business earns or what you paid for goodwill. In Franses the statutory compensation figure relied on in the courts was £324,000 (Franses para 5), against a landlord's scheme budget of £776,707 excluding VAT. Compensation from the statute can sit far below the price of a business.

Ask the seller for the current business rates bill, because the rateable value of the holding is the figure the multiplier applies to.

For a buyer, the conclusion is not "compensation protects me". It is that compensation, where it is due, follows a formula that has no link to your price. Treat it as a small cushion. Treat a refused renewal on ground (a), (b), (c) or (d) as a loss with no cushion at all.

5. What a renewal costs you

Short answer: A court-ordered renewal runs for up to 15 years at an open-market rent that ignores your goodwill. Read that rent as a likely rise when the current rent is below market.

Where the court orders a new tenancy, it is the tenancy the parties agree or, failing agreement, one the court finds reasonable in all the circumstances. If for a term of years certain, it is for not more than fifteen years and starts when the current tenancy ends (1954 Act s.33).

The rent is what the parties agree. Failing agreement, it is the rent at which the holding might reasonably be expected to be let in the open market by a willing lessor (s.34(1)). The court disregards four things when it sets that figure:

The goodwill disregard is the point to hold on to (s.34(1)(b)). You are protected against paying a landlord rent on the trade you built. You are not protected against a general rise in market rent for the street.

The court may also include rent variation provisions in the new tenancy (s.34(3)). Ask what rent review pattern the current lease has, because the court can set one in the new lease.

While the dispute runs, either party may apply to the court to fix an interim rent for the period the tenancy continues under section 24. Neither may apply if the other has applied and not withdrawn. No application is entertained more than six months after the tenancy ends (s.24A(1) to (3)). If you take over a lease in the middle of a section 25 notice, the rent you pay may change by court order while you trade. Keep a reserve for it.

Put numbers on this before you complete. If the current rent is £24,000 a year and a surveyor tells you the open-market rent is £30,000, a renewal costs you £6,000 more each year (illustrative figures). On a profit of £42,000, that leaves £36,000. Section 6 uses these figures.

6. A worked example: one price, three leases

Short answer: The same café, with the same profit, is worth different amounts on a protected lease, a protected lease with a landlord's notice and a contracted-out lease about to end. Put the lease position in the price, not in a side letter.

Illustrative figures. A café makes £42,000 profit a year after paying £24,000 rent. The seller asks three times profit, £126,000 (3 × £42,000). The lease is the only premises the business can trade from.

Case A: protected lease, no notice served. The business can stay after the lease date (1954 Act s.24(1)). If a renewal is agreed or ordered at an open-market rent of £30,000, the rent rises by £6,000 a year (section 5). Profit falls to £36,000. At the same three-times multiple, the business is worth £108,000 (3 × £36,000). The £18,000 gap from the asking price equals three years of the extra rent (3 × £6,000).

Case B: contracted-out lease with 89 days left. The lease ends on its date and you have no right to stay or renew (s.38A(1)). Two things now drive the price: whether the notice and declaration are on the lease (section 3), and whether the landlord will sign a new lease before you complete.

With a signed new lease at £30,000, the figures match Case A and the price is £108,000. Without one, the £126,000 asked pays for a trading period of 89 days that the landlord controls. A lawyer's question here: "Does the landlord's draft new lease dated [date] carry the Schedule 2 notice and declaration, or does it preserve the Act?"

Case C: protected lease, section 25 notice opposing renewal. A notice that names a ground turns the lease into a dispute. Ground (a), (b), (c) or (d) leaves no compensation (section 4). Ground (f) is tested against the acid question from Franses: would the landlord do the same works if the tenant left voluntarily?

Check line: Case A and Case B with a signed lease give £108,000 each; Case B without a lease and Case C have no figure you can defend until the paper arrives. Do not agree a price for those two until you hold the lease position in writing.

The sample report shows how a findings file lists open items beside the figures, so a buyer sees which numbers depend on a document still to arrive.

7. Turning the answers into a price

Short answer: Price the lease position you can prove. Where a document is missing, make completion depend on it, or reduce the price by the sum the missing paper puts at risk.

Work in this order.

1. Fix the base. Take the profit the seller shows, after the rent the lease actually charges.
2. Set the rent for the next term. If the lease is protected, use the open-market rent a surveyor gives you, not the current rent (section 5). In the example the sum is £24,000 to £30,000.
3. Re-run the profit. Deduct the rent rise from profit and apply the same multiple the seller used. In the example, £108,000 against £126,000.
4. Sort the lease into a case. Protected with no notice is Case A. Contracted out is Case B. A notice is Case C.
5. Settle the missing paper before you pay. For Case B, a new lease signed before completion changes the position. For Case C, the landlord's ground decides how much of the price is at risk.

Two cautions keep the price honest. A contracting-out clause is only as good as its paper trail, so a missing notice or declaration can improve your position, and a court decides that. Compensation, where it is due, follows the rateable value and not your price (section 4).

Sources

Retrieved 2026-11-06 unless stated.

1. Landlord and Tenant Act 1954, section 23, legislation.gov.uk: https://www.legislation.gov.uk/ukpga/Eliz2/2-3/56/section/23
2. Landlord and Tenant Act 1954, section 24: https://www.legislation.gov.uk/ukpga/Eliz2/2-3/56/section/24
3. Landlord and Tenant Act 1954, section 24A: https://www.legislation.gov.uk/ukpga/Eliz2/2-3/56/section/24A
4. Landlord and Tenant Act 1954, section 25: https://www.legislation.gov.uk/ukpga/Eliz2/2-3/56/section/25
5. Landlord and Tenant Act 1954, section 26: https://www.legislation.gov.uk/ukpga/Eliz2/2-3/56/section/26
6. Landlord and Tenant Act 1954, section 30: https://www.legislation.gov.uk/ukpga/Eliz2/2-3/56/section/30
7. Landlord and Tenant Act 1954, section 33: https://www.legislation.gov.uk/ukpga/Eliz2/2-3/56/section/33
8. Landlord and Tenant Act 1954, section 34: https://www.legislation.gov.uk/ukpga/Eliz2/2-3/56/section/34
9. Landlord and Tenant Act 1954, section 37: https://www.legislation.gov.uk/ukpga/Eliz2/2-3/56/section/37
10. Landlord and Tenant Act 1954, section 38A: https://www.legislation.gov.uk/ukpga/Eliz2/2-3/56/section/38A
11. Landlord and Tenant Act 1954, section 43: https://www.legislation.gov.uk/ukpga/Eliz2/2-3/56/section/43
12. SI 2003/3096, Schedule 2: https://www.legislation.gov.uk/uksi/2003/3096/schedule/2
13. S Franses Ltd v The Cavendish Hotel (London) Ltd [2018] UKSC 62: https://caselaw.nationalarchives.gov.uk/uksc/2018/62
14. HM Land Registry, Practice Guide 25: leases, when to register: https://www.gov.uk/government/publications/leases-when-to-register/practice-guide-25-leases-when-to-register
15. HM Land Registry registration services fees: https://www.gov.uk/guidance/hm-land-registry-registration-services-fees
16. Landlord and Tenant Act 1954 (Appropriate Multiplier) Order 1990, SI 1990/363, as made: https://www.legislation.gov.uk/uksi/1990/363/made