Avoid an unwanted periodic tenant

The recent decision of the Court of Appeal in Barclays Wealth Trustees (Jersey) Limited v Erimus Housing Limited (2013) EWHC 2699 (Ch) has provided some welcome clarity in determining the legal status of tenants who remain in occupation once the term of a contracted out lease expires.

It is often stated that on the expiry of the term of a lease and "without more" the payment and acceptance of rent will create an implied periodic tenancy. In order to avoid such an implication landlords are well advised to immediately initiate a rent stop against the tenant's account. The alternative (and preferable) position for a landlord is for the tenant to occupy under an express or implied tenancy at will, which is terminable without prior notice.

Periodic tenancies are particularly unwelcome for commercial landlords as occupiers 'for business purposes' may also acquire the statutory protection of the Landlord and Tenant Act 1954 (the "Act"). This may create additional difficulties in relation to terminating the occupancy, which must then be undertaken in accordance with the Act.

The courts have been alive to the difficulties that this situation can create. Indeed it is perverse that a lease that had previously been contracted out of the protection afforded by the Act can acquire such protection without the parties ever intending such an outcome.

Accordingly, whilst the payment and acceptance of rent is relevant to determining the basis of the continued occupation, it is not definitive, particularly whilst the parties may be in the process of negotiating terms for a new lease. Lord Justice Nicholls in Javad v Aqil [1991] 1 WLR 1007 stated the position as:

"Thus if one party permits another to go into possession of his land on payment of a rent of so much per week or month, failing more the inference sensibly and reasonably to be drawn is that the parties intended that there should be a weekly or monthly tenancy...but I emphasise the qualification 'failing more'. Frequently there will be more."

In particular, Nicholls LJ was keen to stress that where the parties are negotiating the terms of a new lease and the prospective tenant is allowed into occupation pending resolution of such negotiations, the law should be reluctant to imply any intention which provides the negotiating occupier with any greater interest than a very limited licence or tenancy at will.

As a consequence the High Court decision of John Jarvis QC in the Erimus case came as somewhat of a surprise against this relatively clear background. When holding (in Erimus) that the parties were not in the throes of negotiations and therefore the payment and acceptance of rent had given rise to an implied annual periodic tenancy, the effect was particularly adverse for the tenant who had to give 13 months' notice to bring its tenancy to an end. The tenant had already vacated the premises and yet was faced with a rental and service charge liability of c.£185,000.

The High Court decision in the Erimus case appeared contrary to the position as set out in Javad v Aqil. Lord Justice Patten, giving the main judgment in the Court of Appeal when reversing the decision, held that Erimus was occupying as a tenant at will throughout the period after expiry of its lease. Crucial to the Court of Appeal's finding was that, although rent had been paid and accepted, this was to be considered against the backdrop of the continuing negotiations on the terms of the new lease. The Court did find the negotiations over 3 years to have been 'desultory', but that they had never formally been abandoned. On this basis the Court gave weight to the fact that the new lease was to be contracted out of the Act and found that there was no need to imply that a periodic tenancy (which would be covered by the Act) was existing during the negotiating period. This would have created a position that neither party intended.

Erimus is somewhat unusual as the detriment in that case fell very firmly on the tenant. Our experience is that landlords are usually the party adversely affected, due to the unwanted protection of the Act and our advice is always to avoid the problem at the outset. Prior to expiry of the lease term the landlord (or their advisors) should send an open letter demanding possession of the property upon expiry. At the same time a 'without prejudice' letter should also be sent to the tenant stating that the landlord will refrain from issuing possession proceedings in order to allow for lease negotiations to continue. In order to avoid any uncertainty, we suggest that no rent payments are demanded or accepted during this period. Ideally the landlord should require the tenant to sign up to an express tenancy at will and make clear that negotiations are ongoing in relation to a proposed new lease.

Of course, if a landlord wants possession of its premises at the termination of a fixed term contracted out lease, then it should write to the occupier stating that they are a trespasser and require immediate vacant possession, failing which they will issue possession proceedings. Landlords should act quickly and certainly quicker than the landlord in the Erimus case, so as to avoid any unwanted inferences of a periodic tenancy occurring with the possible protection provided by the Act.

The situation is always fact dependant, but both landlords and tenants are advised to obviate the need to face any such risk by planning carefully in advance of the termination of the fixed term. Wherever possible, liaise with your contact in the Real Estate team at Collyer Bristow in good time to avoid these problems at the outset.

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