Martin Reynolds, Senior Commercial Solicitor at Barrett & Co, looks at two hypothetical scenarios in which tenants are occupying commercial premises on expired short leases.
I am often asked by my commercial clients to advise on a scenario where they have various tenants occupying commercial premises on expired short leases (around 5 or 10 years) and some of the expired leases are contracted out of protection under the Landlord and Tenant Act 1954 (“the Act”) whilst others are not. I have therefore prepared a brief overview of the two scenarios below.
Leases which are not contracted out
The situation regarding these leases is relatively simple:
S.24 of the Act provides that:
“A tenancy to which this part of the Act applies [i.e. a commercial tenancy which is not contracted out] shall not come to an end unless terminated in accordance with the provisions of this part of the Act.”
This means that (if the tenant remains in occupation and continues to pay rent) the tenancy does not come to an end at the end of the contractual term of the lease. The important thing to realise is that it is a continuation of the same tenancy/lease – the terms will therefore be the same.
If the lease provides for rent review (or an entitlement to break) every 2 years there will continue to be rent review (or entitlement to break) every 2 years. If, on the other hand, the lease provides for review (or break) on stated dates within the original term there will not be any further review (or break) unless or until a new tenancy is agreed as the dates will already have passed.
This does not mean that the situation is entirely “symmetrical.” The tenant is still entitled to surrender the lease or give notice to quit whereas you cannot obtain possession of the property unless one of the specific grounds provided for in the Act can be made out.
Either of the parties is, however, entitled to require a new lease (again complying with the procedure in the Act). This will be broadly in line with the terms of the old tenancy but up dated and at current market rent.
Leases which are contracted out
The situation in relation to these leases is more complex/problematic:
The basis of the tenant’s continued occupation is not the old lease (which is at an end) but the tenancy created by the combination of occupation (possession) and the payment of rent. This will – depending on the detailed circumstances – either be a tenancy at will or a periodic tenancy.
The important thing to realise is that it is, effectively, a new tenancy and detailed terms from the old lease (such as break clause and rent review provisions) will not automatically “carry over”.
If the arrangement is a tenancy at will then it can be terminated immediately by notice from either party.
If it is a periodic tenancy the notice period will be calculated by reference to the period for which rent is paid (continues to be paid). This is particularly problematic if rent provision in the original lease was that rent would be “£X per annum” which has been held to give rise to a 6 month notice period (ending on an end of year date) even in circumstances where rent was actually being paid quarterly (or monthly).
An additional problem created where the arrangement is taken to be a periodic tenancy is that the new tenancy itself will, effectively, have protection under the Act (tenancies at will are exempt). This means that there may be difficulty getting back possession of the premises from the tenant (if this is what is desired).
Whilst the Courts have on various occasions been willing to find that – where a tenant remains in occupation after the end of a (contracted out) lease and continues to pay rent while negotiations for a new lease are ongoing – there is a tenancy at will, there have been occasions where it has been held that the behaviour of the parties is not consistent with a tenancy at will. In these circumstances a periodic tenancy has been held to arise, with the consequent problems (see above).
It is therefore to be recommended that, for this category of lease, prolonged periods of continued occupation are avoided and that – if occupation is to continue after the end of the lease term – the basis of occupation should be properly documented (i.e. a written tenancy at will).
If you have existing leases or are in the process of granting a lease and require advice please contact me on 0118 958 9711 or [email protected].
Book an initial fixed-fee meeting with Martin, or one of Barrett & Co’s Commercial team, at our offices in Queen’s Road, Reading, for only £95.