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Short term occupation with long term consequences

26 July 2010

Landlords and tenants often require flexible occupation arrangements. Though there are various ways of achieving this, the basis of occupation must be made clear. Otherwise, short term occupation can have potentially expensive, longer term consequences.

In the recent case of Katana v Catalyst Communities Housing Limited, a landlord with a long term aim of redeveloping business premises granted a three-month fixed tenancy. 

As the planning process was ongoing, the tenancy provided that if the tenant were to hold over at the end of the term, the tenancy could be ended at one week’s notice given by either party. As is usual for a short term arrangement, the tenancy did not allow underletting.

Nevertheless, the tenant granted eight and 10 year sub-tenancies of the premises to other business tenants, apparently without the landlord’s knowledge of the terms of those sub-tenancies.   

When the landlord wished to regain occupation of the premises, the Court of Appeal had to decide the nature of the tenant’s occupation after the initial three-month period had expired. If it was a periodic tenancy, then both the tenant and undertenants would have the benefit of security of tenure under the Landlord and Tenant Act 1954.    

However, the court held that the arrangement was a tenancy at will, and therefore neither the tenant nor sub-tenants had any right to remain trading at the premises.

This decision is surprising but no doubt a relief to the landlord.  Although the broad rule is that a tenancy at will arises on the expiry of a fixed term tenancy, notice was required to bring the tenancy to an end and a notice period is usually considered inconsistent with a tenancy at will.   

The sub-tenants were the real losers in the case, as the original tenant had disappeared before the case was heard. They had apparently relied on the tenant’s confirmation that the sub-tenancies could be granted validly and had built up goodwill for their businesses at the premises.   Sub-tenants should make full enquiries as to their landlord’s title to avoid taking the risks highlighted by this case. 

Although short term occupation of business premises can have significant benefits for both landlords and tenants, arrangements must be documented, and subsequently managed, carefully.

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Paul Hinett

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