Contracted out tenants: Take note

Contracted out tenants: Take note


Author: Jessica Ready

We tend to focus on the risks to a landlord of a tenant remaining in occupation beyond the expiry of a contracted out lease.

However, the recent case of Barclays Wealth Trustees (Jersey) Ltd v Erimus Housing Ltd [2013] serves as an important lesson to tenants of a contracted out lease.

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 prior to the expiry of the lease, terms were not agreed by 31 October 2009 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.

Tenancy at will or periodic tenancy?
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; such notice to expire at the end of the annual period on 31 October 2013.

This would require the tenant to pay an additional 13 months' rent for the period September 2012- October 2013. The total cost to the tenant of such additional rent was £185,000. The landlord sought a declaration from the court to this effect.

The tenant argued that it had merely occupied the premises under a tenancy at will whilst the parties negotiated the new lease - and as such the occupation was purely an interim measure which did not give rise to any rights. It argued that either party was at liberty to terminate the arrangement at any time and without notice.

The High Court examined the conduct of the parties in the post-expiry period to ascertain whether the property had been occupied by the tenant under a periodic tenancy or a tenancy at will.

The court found that there had been a periodic tenancy. It considered that the sporadic negotiations were a 'very half-hearted exercise', and that the occupation was much more of a permanent arrangement - not (as the tenant argued) a temporary arrangement whilst a new lease was concluded.

Furthermore, 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 so 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. Indeed, when the tenant first voiced its desire to vacate, it advised that it would do so in more than six months' time - a clear indication that this was not a tenancy at will.

It is important to note that in allowing the tenancy to continue as it did, the landlord had given a protective tenancy under the Landlord and Tenant Act 1954. The judge concluded that this was simply not of concern to the landlord in this instance.

In most cases a well advised landlord would take steps to ensure that a tenant did not obtain statutory protection, and so would not allow negotiations to drag on in such a way as they did in Barclays.

However, where a landlord is not concerned by this issue, as would appear to be the case in Barclays, a tenant needs to keep a close eye on post-expiry negotiations and ensure these are concluded in a timely manner. If they do not then they risk finding themselves remaining liable under the tenancy for a much longer period than they anticipated.