30 April 2014 #Commercial Real Estate
Difficulties can arise when a business tenant remains in occupation of a property when its right to do so has come to an end. This may be because the tenant has a lease that does not carry protection under the Landlord and Tenant Act 1954 (“the Act”) and the lease has expired. Alternatively the lease may be protected by the Act, and, following service by the landlord of a Section 25 notice terminating the tenancy, the tenant has not taken any steps to issue a claim for a new lease or extend time for doing so.
Often when a tenant remains in occupation it is because negotiations for a new lease are ongoing, but there is a risk that, if the situation is not resolved promptly, the parties can find themselves with an implied periodic tenancy. The legal status of the tenant will always depend on the specific circumstances of each case, but the key factors the courts will look at are whether rent is being paid and accepted, and whether the parties are actively engaged in negotiations for a new lease.
It is often landlords who will want to avoid a periodic tenancy arising, as any such tenancy will be protected by the Act (even if the expired lease was itself outside the Act). This means that the tenant will have security of tenure, and the landlord’s ability to terminate the lease will be significantly restricted.
In one recent case though, it was the tenant who was disadvantaged by the implication of a periodic tenancy. In Barclays Wealth Trustees Limited v Erimus Housing Limited, the tenant remained in occupation of the premises, paying rent, for three years beyond the expiry of its lease, which had not been protected by the Act. The tenant then decided that it no longer wanted a new lease and vacated the premises. The High Court found that an annual periodic tenancy had arisen and that, because this new periodic tenancy was protected by the Act, the tenant was required to give at least 12 months’ notice to bring the tenancy to an end, and was liable for rent and services charges for that period amounting to some £185,000.
However, the Court of Appeal has now overturned the High Court’s judgment and decided that (on the facts of that case) the tenant had a tenancy at will, which could be terminated at any time. The court was influenced by the fact that although the tenant had remained in occupation for three years, there had been some on and off negotiations for a new lease during that time, which had never been formally abandoned.
Given the uncertainty in this area and the risks for both landlords and tenants if a periodic tenancy arises, parties should not allow the situation to drift after the expiry of a lease or Section 25 notice. Landlords should ensure that they do not demand or accept rent, and should consider putting written tenancies at will in place if negotiations for a new lease are ongoing. If negotiations stall, immediate action should be taken to regain possession of the premises.