Landlords - How should you deal with a former tenant that has remained in occupation of a property following the expiry of a contracted out lease of commercial premises?
December 2015 Contact:
By the provisions of the Landlord and Tenant Act 1954 (“the 1954 Act”), a tenant has a statutory right to renew its lease at the end of the contractual term if it occupies the premises for the purpose of its business. The landlord and tenant can however agree to "contract out" of the 1954 Act so that the tenant will not have the automatic right to a lease renewal at the end of the term.
Why does it matter? Ascertaining the status of a former tenant that has remained in occupation after the expiry of a commercial lease, which was excluded from the provisions of the 1954 Act, can be difficult particularly if the tenant has paid, and the landlord has accepted, rent.
Daniel Swimer Senior Associate Real Estate Dispute Resolution T: +44 (0)20 3755 5735 E: daniel.swimer@howardkennedy.com
If the former tenant's occupation has not been regularised, the terms upon which it continues to occupy may be unclear. Its continued occupation may be either a tenancy at will or a periodic tenancy unless action is swiftly taken to treat the former tenant as a trespasser and to secure possession. Tenancy at will: This can be created expressly or by inference and exists where there is a tenancy on terms that either party may determine at any time. It does not give the tenant a right to renew its lease under the 1954 Act. Periodic tenancy: This can be created by express agreement or by implication, if there is a landlord and tenant relationship and rent is demanded and paid by reference to a particular time period. The tenant has a right to renew its tenancy under the 1954 Act. The key feature of a tenancy at will is that it does not require the landlord or the tenant to give the other party a period of notice to quit the premises. It can be brought to an end immediately. Landlords are therefore best advised to avoid the creation of an implied periodic tenancy as regaining possession of the premises will only be straightforward where the tenant occupies under a tenancy at will.
What factors will be taken into account? A tenancy at will may be implied where:
There are ongoing negotiations for a new lease taking place.
The landlord's conduct illustrates a desire to recover possession.
The landlord or its managing agents accept rent by mistake.
The landlord's accounts department issues a rent demand and receipts automatically.
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Conversely, a periodic tenancy is more likely to be implied where there have been no negotiations or they have stalled for a substantial period of time and the landlord or its managing agents has continued to demand and accept rent from its former tenant.
A recent case In Erimus Housing Limited v Barclays Wealth Trustees (Jersey) Ltd & Ors [2014] EWCA Civ 303, a commercial tenant remained in occupation for two years following expiry of a contracted-out lease and continued to pay rent to its landlord. The tenant occupied business premises on a five year contracted-out lease which expired on 31 October 2009. Renewal terms had not been agreed by the expiry of that lease and subsequent discussions were sporadic, re-starting every 6 months or so. Heads of terms were agreed nearly two years after the expiry of the lease but negotiations over the renewal lease were not progressed and, on 21 June 2012, the tenant finally gave notice to the landlord of its wish to vacate on 28 September 2012. The landlord argued that a periodic tenancy had been created and that not less than six months’ notice was required. The tenant argued that it was occupying as a tenant at will. The Court of Appeal overturned the High Court's previous decision and held that there was a tenancy at will in place. The Court held that:
The payment of rent did not on this occasion give rise to a presumption of a periodic tenancy. Instead the parties' contractual intentions needed to be determined by looking objectively at all relevant circumstances
The most significant factor in this case was that the parties were negotiating the grant of a new formal lease even if those negotiations were sporadic. The Court considered that it would be inappropriate to draw the inference that the parties intended, at any point before the tenant vacated, that it should become an annual periodic tenant subject to the protection of the 1954 Act
The clear inference was that the parties did not intend to enter into any intermediate contractual arrangement inconsistent with the parties’ ongoing negotiations.
What should a landlord therefore do to safeguard its position on the expiry of a contracted-out lease? 1.
Commence discussions with its tenant in good time before lease expiry. If appropriate, make sure that its tenant vacates the premises on the expiry of the lease
2.
If its tenant is going to remain in occupation after the expiry of a contracted-out lease, then document the basis of its occupation
3.
If there are negotiations over the terms of a new lease and the tenant remains in occupation after the expiry of the contracted-out lease, make sure that a tenancy at will is agreed and documented without delay. Failure to do so could result in its tenant gaining renewal rights under the 1954 Act
4.
Once the tenancy at will is in place, agree the terms of the new tenancy as soon as possible.
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