Contracted out tenants: Erimus revisited

Contracted out tenants: Erimus revisited

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Author: Jessica Ready

The Court of Appeal has found in favour of a business tenant and decided that, despite protracted negotiations for a new lease on expiry of its contracted out lease, a periodic tenancy had not been created in the intervening period.

Back in November 2013 we reported on the High Court decision of Barclays Wealth Trustees (Jersey) Ltd v Erimus Housing Ltd [2013] - highlighting the potential risk to a tenant of remaining in occupation at the expiry of a contracted out lease and allowing prolonged negotiations of a new lease.

The tenant, Erimus Housing Ltd, has now successfully appealed against this decision.

Re-cap of background facts

The tenant occupied business premises on a five year contracted out lease which expired on 31 October 2009 (the Lease). It paid an annual rent under the Lease.

Whilst the parties both put forward a number of proposals as to the terms of a new lease before the expiry of the Lease, terms were not agreed by the end date and the parties indicated further discussions would follow. These discussions were sporadic, re-starting every six months or so. Heads of terms were finally agreed in June 2011, nearly two years after expiry of the Lease.

The renewal lease was never progressed because in August 2011 the tenant advised the landlord that it wished to relocate, indicating its intention to vacate the premises in March 2012. On 21 June 2012 notice was served by the tenant giving three months' notice of the tenant's wish to terminate on 28 September 2012.

The landlord argued that on the grounds the premises were occupied on a yearly basis, a periodic tenancy had been created and notice of not less than six months was therefore required to end the Lease, such notice to expire at the end of the annual period on 31 October 2013 - thereby requiring the tenant to pay an additional 13 months' rent amounting to £185,000.

High Court decision

The High Court found in favour of the landlord holding:

  • the sporadic negotiations were a 'very half-hearted exercise'. The occupation was much more of a permanent arrangement, not - as the tenant argued - a temporary arrangement whilst a new lease was concluded
  • a relationship had been developed whereby it was accepted on both sides that the landlord would not simply evict the tenant without notice, as it would be entitled to do if the tenant occupied purely on the basis of a tenancy at will
  • the premises were the tenant's principal offices and essential for the way in which the tenant's business operated, and it was clear that the tenant had expected some degree of protection from the landlord

Court of Appeal decision

The Court of Appeal held in Erimus Housing Ltd v Barclays Wealth Trustees (Jersey) Ltd & Ors [2014] that an implied periodic annual tenancy of commercial premises had not come into effect during the period of stalled negotiations of the new lease, but that the tenant had occupied by way of a tenancy at will.

The payment of an annual rent did not give rise to a presumption of a periodic tenancy, and was not inconsistent with a tenancy at will.

The parties' contractual intentions should instead be determined by looking objectively at all relevant circumstances, the most obvious and significant being the negotiation of a new formal lease. Whilst the negotiations had been protracted, they had never been abandoned, and confirmed that both parties had continued to work on the assumption that a new formal lease would be granted. There was no need for the negotiations to be intense.

Comment

The Court of Appeal's decision confirms that in circumstances where there are ongoing negotiations for a new lease, there will be implied a tenancy at will, notwithstanding the continued payment of annual rent.

This decision will be of interest to both tenants and landlords alike. Tenants can breathe a sigh of relief that in these circumstances they will not risk having to pay rent for an extended notice period, and landlords will be comforted that they can obtain possession of their premises more quickly following a breakdown in negotiations for a new lease.

Parties would still be best advised to start lease negotiations in good time and ensure that any new lease is agreed and put in place before the contracted out lease comes to an end.

About the Author

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Jessica Ready

Associate

03700 86 6748

Jessica is a real estate lawyer who has a wide experience of landlord and tenant matters, asset management, commercial development as well as providing property assistance in corporate transactions.

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