From cradle to grave: the life cycle of a commercial tenancy

Samuel Laughton & Georgia Bedworth

Ten Old Square, Lincoln’s Inn

GENERAL OVERVIEW

TYPES OF TENANCIES

Fixed-term tenancy

1. A fixed-term tenancy can only arise by express contract. The term may commence

from a past date but the actual interest of the tenant commences only on the execution

of the deed.

TOP TIP: As a general rule the tenant is not liable for matters arising before

the date of execution under the covenant to repair or to pay service charges.

2. A tenancy for a fixed term generally requires no notice to quit at the end of the term,

whether the term expires by effluxion of time, or on the happening of an event on

which it is expressed to determine.

Periodic tenancies

3. A periodic tenancy arises either by express agreement or by implication from

occupation and paying rent. It is generally determinable by notice to quit, which

should be generally be given so as to expire at the end of any current period of the

tenancy, and, unless some specified length of notice is required by statute, should be

equal to the length of the period, ie in a weekly tenancy a weeks’ notice.

TOP TIP: Any question as to the validity of a notice to quit may be avoided

by giving it in general form, ie to quit at the end of the next complete week or

other period of the tenancy after the service of the notice.

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Tenancy at will

4. A tenancy at will is a mere contractual arrangement under which the ‘tenant’ is in

possession, and which is determinable at the will of either landlord or tenant. It is

implied in cases of mere permissive occupation with or without payment of rent.

Common examples are (a) a purchaser who enters into possession of land pending the

completion of the purchase, and (b) an intending tenant who enters during negotiation

for a tenancy.

5. A tenancy at will is determinable by either party on his expressly or impliedly

intimating to the other his wish that the tenancy at will should be at an end. A tenant

at will has a reasonable time to remove himself and his chattels after the

determination.

DISTINCTION BETWEEN TENANCY AND LICENCE

6. The practical importance in distinguishing between a tenancy and a licence lies in the

fact that security of tenure under Part II of the Landlord and Tenant Act 1954 only

applies to tenancies, not licences. The general principle is that if the true legal effect

of the arrangement entered into is that the occupier of property has exclusive

possession of the property for an ascertainable period in return for periodical money

payments a tenancy is created, whatever the label the parties may have chosen to

attach to it. In deciding whether a grant amounts to a tenancy, or is only a licence,

regard must therefore be had to the substance rather than the form of the agreement.

The relationship between the parties is determined by the law and not by the

description which they choose to put on it.

TOP TIP: The fact that the agreement contains a clause that no tenancy is to

be created will not, of itself, preclude the instrument from being a tenancy.

7. A bare licence does not even amount to a contract, with the result that it may be

revoked by the licensor at any time without giving a right to damages to the licensee.

A contractual licence is revocable according to its terms. But generally the licensee is,

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in the absence of express contract, allowed a reasonable time to enable him to remove

himself and his possessions from the subject matter of the licence.

CREATION OF TENANCY

8. A tenancy may generally be made orally, or in writing under hand only, provided it is

for a term not exceeding three years, or a periodic tenancy. All tenancies granted for a

term exceeding three years must generally be by deed.

9. A tenancy which is invalid by reason of a failure to comply with these requirements is

construed as an agreement for a tenancy. In equity the tenancy is deemed to have

been effectively granted, and so for practical purposes the parties are in much the

same position as if the tenancy were valid at law.

TRANSMISSION OF BURDEN OF COVENANTS ON ASSIGNMENT OF

TENANCY

10. A covenant entered into between a landlord and a tenant is primarily binding as

between the two personally. However, upon an assignment, a covenant may also be

binding upon the assignee of the tenancy. The Landlord and Tenant (Covenants) Act

1995 generally applies to tenancies granted on or after 1 January 1996.

TOP TIP: In considering who is liable under leasehold covenants, first decide

whether the tenancy was granted before or after 1 January 1996.

Old Tenancies

11. A tenant’s covenant which ‘touches and concerns the land’ is generally binding on an

assignee of the tenancy. But it also remains binding on the original landlord.

New Tenancies

12. The assignee becomes bound by most covenants under the tenancy. But in this case,

the original tenant is released from the covenants as from the assignment. However,

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he does not escape liability arising from a breach of covenant occurring before the

assignment.

TERMINATION OF TENANCIES AT COMMON LAW

FORFEITURE

13. The right to forfeit, or the right to re-enter, is a right to bring the tenancy to an end

earlier than it would "naturally" terminate and is exercisable in the event of some

default by the tenant. A tenancy needs to contain an express proviso permitting the

landlord to forfeit, or re-enter upon, the demised premises upon the happening of

specified events, such as non-payment of rent, non-performance or non-observance

by the tenant of the covenants of the tenancy, or bankruptcy. Even if a tenant has

security of tenure under the Landlord and Tenant Act 1954, the tenancy may be

terminated by forfeiture.

TOP TIP: Except in cases of non-payment of rent, or bankruptcy, the landlord

must ordinarily serve the tenant with a formal s.146 notice before exercising

his right to forfeit.

14. A s. 146 notice must, in general,

• Specify the breach

• Require that the breach is remedied

• Require compensation

15. However, the right to forfeit may be waived. The essential element of waiver is that

the landlord must unequivocally recognise the continued existence of the tenancy,

either expressly or by some act which is only consistent with the continued existence

of the tenancy.

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TOP TIP: Demanding or accepting rent, even on a ‘without prejudice’ basis,

which has accrued due after the landlord had notice that the right to forfeit had

arisen generally waives the right to forfeit.

16. Where landlord wishes to forfeit the tenancy, he must commit an unequivocal act,

such as effecting peaceable re-entry, or serving proceedings.

TOP TIP: Where the property which is let contains both residential and

commercial elements (e.g. shop with flat above) the lease cannot be forfeited

by peaceable re-entry – the landlord must issue proceedings

17. However a court may in many cases grant relief against forfeiture on such terms (if

any) as it thinks fit. This usually involves restoring the position to that which existed

had there been no breach.

TOP TIP: a tenant is entitled to automatic relief from forfeiture for non-

payment of rent on payment of the rent arrears and any costs.

SURRENDER

18. Unlike forfeiture, which permits the landlord to terminate the lease without any input

from the tenant, surrender requires the consent of both landlord and tenant to be

effective. The tenant cannot force the landlord to accept the surrender of a lease.

19. A surrender may be express or by operation of law, i.e. when the parties act in a way

that is inconsistent with the continuation of the tenancy, for example where:

(a) the tenant redelivers possession of the demised premises; and

(b) the landlord unequivocally accepts that redelivery of possession.

TOP TIP: A landlord does not consent to a surrender merely by changing the

locks to secure the premises against trespassers.

20. Vacation of the premises by the tenant is not sufficient to effect a surrender of the

lease.

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TOP TIP: If the tenant vacates the premises, the landlord has no duty to

mitigate his loss by accepting a surrender. The landlord is entitled to sue the

tenant for rent as and when it falls due.

BREAK CLAUSES

21. Break clauses are contractual provisions which allow either the landlord or the tenant

to bring a lease to an end. If the lease does not have security of tenure, service of a

break notice by a landlord will be effective to bring the lease to an end. If the tenant

does have security of tenure, the service of a valid break notice will not bring the

lease to an end straightaway but will allow the landlord to bring proceedings under

the 1954 Act to terminate the lease before the contractual term.

22. A break notice will be valid provided that a reasonable recipient of the notice would

understand that the person entitled to exercise the break notice intended to terminate

the lease on the permitted date. A mistake will not invalidate the notice provided that

the meaning is clear. This is known as the “reasonable recipient test”.

TOP TIP: The “reasonable recipient test” will not save a notice which fails to

comply with a specific contractual requirement of the break clause e.g. that

the notice must be printed on blue paper or that it must be served in a

particular way

POSITION OF SURETIES

23. Often a tenant’s rent liability is guaranteed by a surety, who can (and will) be called

upon in the event that the tenant defaults. The liability of a surety becomes

particularly important if the tenant is insolvent.

24. A surety’s liability is parasitic on the liability of the tenant – therefore the surety’s

liability ceases once the lease has come to an end whether the lease has been

terminated by forfeiture, surrender, operation of a break clause or service of a notice

to quit.

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25. However, if the liquidator/trustee in bankruptcy of an insolvent tenant disclaims the

lease, the surety will continue to be liable. The disclaimer only releases the current

landlord and current tenant.

SECURITY OF TENURE

26. Under Part II of the Landlord and Tenant Act 1954:

(a) There is a general right to a renewal of tenancies available to all tenants of

business premises.

(b) The landlord can oppose the grant of a new tenancy on certain specified grounds

including bad conduct by the tenant and his own proposals to redevelop the

premises or to occupy himself.

(c) The tenant is entitled to compensation for having to leave the premises, but only

where his right to a new tenancy is successfully resisted by the landlord on certain

grounds, of which an intention to redevelop and an intention to occupy himself

are the two most important.

(d) The new tenancy ordered by the court will generally be on the same terms as the

previous tenancy, save that the rent is to be an open market rent. If there are

special circumstances, such as the landlord needing possession at an early date,

the court can properly order the grant of a short term or order the insertion of a

break clause in the new tenancy.

27. There are three essential conditions:

(a) There must be a tenancy, and not a licence.

(b) The tenant must occupy at least a part of the premises.

(c) The occupation by the tenant must be wholly or partly for business purposes.

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TOP TIP: Protected tenancies do not come to an end unless terminated in

accordance with the Act. So, notwithstanding the passing of the term date, the

tenancy simply continues.

Termination of Tenancies under the 1954 Act

28. The way in which tenancies to which the Act applies can be determined falls into two

categories. First, there are the special means provided by the Act:

(a) a landlord's notice under s 25; or

(b) a tenant's request for a new tenancy under s 26.

29. The second category contains a number of methods of determining tenancies at

common law which remain effective as a means of termination, for instance by

forfeiture or actual surrender.

TOP TIP: Where a tenancy is ended by forfeiture the tenant does not have the

right to apply to the court for a new tenancy.

The landlord's s.25 notice

30. The notice must specify the date on which the tenancy is to end. The date of

termination must be not more than 12 months and not less than 6 months from the

date of the giving of the notice. Subject to this, the principle is that the date chosen

must not be earlier than the date on which the tenancy could have been ended at

common law by effluxion of time or notice to quit apart from the Act.

31. There are broadly two forms of s. 25 notice:

(a) If the landlord is willing to grant a new tenancy the notice must state that he

would not oppose an application to the court for a new tenancy. The notice must

set out the landlord's proposals for the property to be comprised in the new

tenancy and the rent and other terms of the new tenancy.

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(b) If the landlord is unwilling to grant a new tenancy, the notice must state that he

would oppose such an application. This notice must also state on which of the

grounds open to him under s 30 the landlord will rely in opposing an application.

The tenant's s.26 request

32. The request must be made in the prescribed form and must set out the tenant's

proposals as to the premises, the rent and the other terms to be comprised in the new

tenancy. The same principles apply to the selection of the date for the termination of

the current tenancy as apply to notices under s 25.

TOP TIP: It is allowable for a tenant, in order to preserve his compensation rights,

to serve a s.26 request even when he has no genuine interest in taking up a new

tenancy.

33. Upon receipt of a tenant's request for a new tenancy a landlord who is willing to grant

a new tenancy need take no step. The landlord who wishes to oppose an application to

the court for a new tenancy must give notice of that fact to the tenant within two

months and must in the notice state the grounds under s 30 on which he will oppose

the application.

Applications for New Tenancies

34. The tenant can obtain a new tenancy by either applying to the court for it himself or

by the landlord applying for it. They can only make an application if either the

landlord has terminated the current tenancy by a s.25 notice or the tenant has

terminated the current tenancy by a s.26 request.

35. The application to the court is governed by a strict timetable. If the tenancy has been

determined by a s.26 request, the tenant must generally make his application for a

new tenancy no earlier than two months after the date of the request but before the

date specified in his request. Where the tenancy has been terminated by a s.25 notice,

the application must be commenced not later than the date specified in the notice.

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The Landlord's Right to Oppose the Grant of a New Tenancy

36. There are seven grounds of opposition on which the landlord may be entitled to rely

in opposition to the grant of a new tenancy. Some of the most common grounds are as

follows:

(a) The failure of the tenant to comply with his repairing obligations.

(b) The persistent delay of the tenant in paying rent.

(c) Substantial breaches of obligations under the current tenancy by the tenant or any

other reason connected with his use or management of the premises.

(d) The landlord will provide suitable alternative accommodation for the tenant on

reasonable terms.

37. The two grounds that give rise to most difficult disputes are grounds (f) and (g).

(a) Ground (f) is that on the termination of the tenancy the landlord intends to

demolish or reconstruct the whole or a substantial part of the holding or to carry

out substantial works of construction on it, and cannot do so without obtaining

possession.

(b) Ground (g) is that on the termination of the current tenancy the landlord intends to

occupy the holding wholly or partly for the purposes of his business or as his

residence. The landlord generally cannot rely on this ground of opposition if his

interest was purchased in the five years prior to the termination of the current

tenancy.

TOP TIP: the landlord can only rely upon such grounds as were stated in his s.25

notice or counter-notice as grounds on which he would oppose the grant of a new

tenancy.

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Interim Rent

38. Broadly, the 'interim rent' is the rent to be paid by the tenant during the continuation

period of the tenancy, following the service of an s.25 notice or s.26 request. Either

party may apply for an interim to be set, at any time after the service of the relevant

s.25 notice or s.26 request, but it will be backdated to the appropriate date.

Compensation for the Refusal of a New Tenancy

39. Where a landlord successfully opposes the grant of a new tenancy under the Act but

only on one of the grounds which does not involve default by the tenant (usually

grounds (f) or (g)), the landlord must generally pay a sum by way of compensation to

the tenant.