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Tenants remaining in occupation

The case of Barclays Wealth Trustees (Jersey) Ltd v Erimus Housing Limited provides a useful reminder of the potential risks of a tenant remaining in occupation after the expiry of their lease if that lease has been contracted out of the provisions of Part II of the Landlord and Tenant Act 1954. In this case, it was to the detriment of the tenant that their occupation was not formally documented as a tenancy at will. However, landlords should also be wary of allowing tenants to stay in occupation after a contracted out lease has expired, as this can give rise to a periodic tenancy with 1954 Act protection.

The facts
The tenant was in occupation of the unit under a contracted out lease. The lease expired but the tenant remained in occupation. There is an implied assumption that when a contracted out lease expires, and the landlord and tenant remain in negotiations for a new lease, the continued occupation will be under a tenancy at will. However, this can change if the conduct of the parties is inconsistent with how parties would act under a tenancy at will. A tenancy at will is a tenancy that can be terminated by either party at any time immediately on notice.

In this case, the tenant continued to pay rent but negotiations for a new lease stalled, and then stopped altogether. In the interim period, the tenant decided that it no longer wanted to stay in the unit, and built new premises elsewhere.

The tenant then served notice on the landlord to leave the premises, though it remained in occupation for a period after the notice was served to give time to relocate. The tenant however asserted that because it had been in occupation after the expiry of the contracted out lease, it had a tenancy at will and could therefore terminate immediately on notice, and that the tenancy therefore terminated on the date the notice was served.

The Landlord disputed this, and argued that, as the tenant had been paying annual rent and the negotiations for a new contracted out lease had ceased, the tenant had an annual periodic tenancy, commencing on 31 October of each year. This meant that the tenant was required to give not less than six months' notice on 30 October in order to terminate the periodic tenancy. Because of the date on which the notice was served, the landlord argued that the tenant had run out of time to serve the requisite six months' notice and that, as a consequence, 13 months of the periodic tenancy remained with rent payable for this period.

The decision
The Court found in the landlord's favour. There were a number of reasons for this decision. First, the tenant had continued to pay rent, implying a periodic tenancy. Second, the negotiations for the new lease had ceased. Finally, the tenant had not served immediate notice, as is required for a tenancy at will, but had given the landlord notice that it was going to move out but in fact remained in occupation for some time after notice was given.

Therefore, it was held that the tenancy in place was an annual periodic tenancy, and the tenant was required to pay the rent for the remainder of the tenancy period.

The consequences
This is a timely reminder for both landlords and tenants to make sure that when a contracted out lease expires the nature of the tenant's occupation is documented.

Whilst there is an assumption that once the existing contracted out lease expires and the parties are negotiating a new contracted out lease there is a tenancy at will in place, the conduct of the parties can change this.

In this case, the fact that the tenant was paying rent was important, as this implies a periodic tenancy. It is therefore advisable to put a stop on the tenant's rent following expiry of their lease, to prevent a periodic tenancy being implied, unless or until a formal tenancy at will is put in place.

It was also significant here that negotiations had stopped between the parties in respect of the proposed new lease. It is therefore important once the existing lease has expired not to allow the negotiations of the new lease to fall by the wayside, and landlords, their solicitors and agents must keep the pressure on the tenant to agree a new lease as soon as possible.

The best way to avoid uncertainty is to put a written tenancy at will in place. Tenants may be wary of this as they may not want it to be documented that the tenancy can be terminated on immediate notice. However, it is important that something written is put in place for certainty. A good solicitor will be able to produce a short form tenancy at will very quickly.

If no legal agreement is put in place, and it is later determined that the tenant has a periodic tenancy, the tenant will have security of tenure under the 1954 Act. Termination would have to follow the 1954 Act procedure. This could interfere with any future redevelopment plans that the landlord has for the premises and also require the landlord to pay the tenant statutory compensation.

This article by Robert Marchbank first appeared in Property Investor News in December 2013.

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