Should we stay or should we go?

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The recent case of Barclays Wealth Trustees (Jersey) Limited v Erimus Housing Limited [1] provides a valuable reminder that remaining in occupation at the end of a fixed-term tenancy can have adverse consequences for tenants as well as landlords. Real Estate Litigation specialist, Martin McKeague, explains the law underpinning this important decision.

Where a tenant occupies premises for business purposes, the Landlord and Tenant Act 1954 (the Act) gives the tenant security of tenure when his contractual tenancy [2] comes to an end. The Act provides that the tenancy continues on a statutory basis; the tenant may therefore remain in occupation, and he has the right to ask his landlord to grant him a new tenancy. A landlord may only object on certain limited statutory grounds [3] to the grant of a new tenancy.

However, if the parties so wish, by following statutory procedures prior to entering into a lease the landlord and tenant can agree that the tenancy will not have the security of tenure which would otherwise be conferred by the Act. Following the statutory procedure creates an ‘excluded tenancy’, which will simply come to an end on the contractual termination date.

Holding over

In practice, it is quite common for a tenant to remain in occupation of premises after his excluded tenancy comes to an end [4]. The landlord and tenant may be in the process of negotiating a new lease, or it may be that both parties are happy with their existing arrangements and are content to allow them to continue. Either way, the tenant will often remain in the premises and keep paying rent, which the landlord accepts.

In this situation, the tenant is no longer occupying the premises under its excluded tenancy because that has come to an end. Instead, the occupation and the payment and acceptance of rent creates either (a) a tenancy at will, or (b) a periodic tenancy. Which of the two types of tenancy is created depends on the parties’ intentions and conduct. Where the landlord and tenant are actively negotiating terms for a new lease, they may have created a genuine tenancy at will; if, however, the parties have simply allowed their existing arrangement to continue, then a periodic tenancy is more likely.

Tenancies at will are regarded by the law as temporary arrangements. They do not attract the protection of the Act, and can be terminated by either party at any time. Periodic tenancies, however, can attract the protection of the Act, and in any event more notice is required in order to bring them to an end.

Ending a periodic tenancy

Periodic tenancies are ongoing ‘period’ after ‘period’. The period is generally defined by the payment and acceptance of rent. So, where a tenant pays rent weekly, his is a weekly periodic tenancy; where a tenant pays rent monthly, his is a monthly periodic tenancy (and so on for quarterly or yearly rent).

To end a periodic tenancy, either party must give at least one period’s notice to quit to the other, with such notice expiring at the end of a period. Thus, if a tenant pays his rent on the 1st of each month, a landlord could serve notice to quit on 28 February (for example) to bring the tenancy to an end on 31 March. An exception is the case of an annual periodic tenancy, where the notice period must still expire at the end of a period but only six months’ notice is required.

How this can cause problems for tenants as well as landlords

When establishing the period of a periodic tenancy, however, it is not always just a question of seeing when rent is paid. If rent is paid quarterly but the amount of rent is referable to an annual amount, then the periodic tenancy is annual, not quarterly. So, if an excluded tenancy defined an annual rent of £100,000 paid in quarterly instalments of £25,000 on the usual quarter days, then any periodic tenancy created at the end of the excluded tenancy’s term will be an annual periodic tenancy.

In these circumstances, and bearing in mind the requirement that any notice to quit must expire at the end of a period, the notice required to end the tenancy may be as much as 18 months. This is often seen as being solely to the landlord’s detriment as he cannot compel the tenant to vacate; but if a tenant wishes to leave then he may not be able validly to terminate his tenancy for a considerable time. In the meantime, he would be liable for rents, service charges and so on.

This was exactly what happened in the Barclays case. Erimus Housing Limited occupied Barclays’ premises under a five-year excluded tenancy. When that ended on 31 October 2009, Erimus remained in occupation and the parties began negotiating a new lease. After two years, negotiations broke down and in June 2011 Erimus gave three months’ notice to quit. Barclays, however, claimed that the notice was insufficient. Barclays argued that Erimus had an annual periodic tenancy, so the earliest Erimus could terminate the tenancy was 31 October 2012. The High Court agreed. Erimus remained liable for rent until that time – some £185,000.

Practical considerations

Whether you are a landlord or tenant of an excluded tenancy, be aware that simply maintaining the status quo at the end of the tenancy’s contractual term can have long-term consequences. Have your solicitors review your position before the lease term comes to an end, and consider expressly entering into a new tenancy on terms that are suitable for your business.

[1] [2013] EWHC 2699
[2] Throughout this article, the terms ‘tenancy’ and ‘lease’ can be read interchangeably. The Act refers to tenancies rather than leases, which is why we generally do so here.
[3] It is outside the scope of this article to explain statutory grounds and procedures for terminating tenancies with security of tenure protection pursuant to the Act.
[4] This is often referred to as ‘holding over’, but the same phrase is also used where a tenant remains in occupation under the Act. In this article, when referring to a tenant remaining in occupation following the end of an excluded tenancy, we use the phrase “remaining in occupation”.