UK: Short Term Occupation - Opportunities and Hurdles

Last Updated: 8 August 2002

Working on the basis that owners of property like to make their surplus space earn income, or at least not be a liability, this article looks at methods of allowing third parties to occupy commercial space on a short term basis, and potential hurdles that need to be overcome when doing so.

Background

Life would be very much simpler if we did not have to operate within the confines of the Landlord and Tenant Act 1954 Part II ("the 1954 Act") which, by way of a reminder, generally applies to periodic tenancies for in excess of six months where the property is occupied "for the purposes of a business carried on by him and for those and other purposes".

The effect of this legislation is that, with any business letting, a Landlord may well find that its attempts to regain possession at the end of the lease term are thwarted by the Tenant's claim that it has the protection of the 1954 Act. Any such claim may be based upon some form of written document (such as a lease or tenancy agreement) or simply because the tenant has been in occupation for a period in excess of twelve months. If the claim is substantiated, or the Landlord fears that it may be capable of being substantiated, the Landlord will then only be able to recover possession by agreement with the Tenant or by serving a statutory notice, which must be on not less than six and not more than twelve months to expire no earlier than the date on which the tenancy would have otherwise come to an end. Such notice must specify the statutory ground on which the Landlord would oppose the Tenant's application to the Court for a new tenancy. The Landlord is only able to recover possession on statutory grounds: for example, the Tenant's persistent delay in paying rent, Landlord's intention to demolish or reconstruct, offer of alternative accommodation, or Landlord's intention to occupy.

Even these statutory grounds for reclaiming possession have stings in the tail for the Landlord. Compensation equivalent to once or twice the rateable value will have to be paid (the higher multiplier applies where the business occupation exceeds fourteen years) and in the case of the Landlord's intention to occupy, he must have owned the superior interest for at least five years prior to the date of determination.

Dealing with Court proceedings begun by the Tenant claiming the new tenancy will be potentially expensive for a Landlord, in terms of legal fees, management time, and lost opportunities.

So how does the Landlord overcome the dangers of the provisions of the 1954 Act?

Exclusion Order under Section 38 of the Landlord and Tenant Act 1954

This is a relatively simple procedure whereby the proposed Landlord and the proposed Tenant make an application to the Court, in advance of entering into the new Tenancy, for an order excluding the provisions of Section 24 to 28 of the 1954 Act. The effect of such an order is that, when the Lease term comes to an end, the Tenant will have absolutely no right to a new tenancy, and will have to apply to the Landlord for a new tenancy, which the Landlord only need grant if it wishes to do so.

Over the years, the application to the Court for a new tenancy, which is a postal exercise, has been a popular and efficient mechanism for ensuring that a Tenant is entitled to occupy only for an agreed period, which can be for any length of time.

The mechanism is likely to become even easier to operate under the 1954 Act reform proposals (which are featured elsewhere in this review) where it is proposed that the parties will be able to agree that these statutory provisions do not apply without having to obtain the sanction of the Court.

Licence

Notwithstanding how an occupational arrangement is described - be it a lease, tenancy or licence - when considering the basis of occupation, a Court will not simply look at the name of the document, but will rather look at the arrangement as a whole. In particular, a genuine licence arrangement may not be caught by the security provisions of the 1954 Act, for example, if the Landlord is able to reallocate the space that the Tenant is entitled to occupy.

Even if specific space is allocated under a licence for a term in excess of six months, all may not be lost for the Landlord seeking to recover possession. In the case of National Car Parks Limited v Trinity Development Co (Banbury) Limited (2001), the Court held that a licence had been created without any 1954 Act renewal rights because the licence did not have the essential characteristics of a tenancy. In that instance, the licence neither reserved a Landlord's right of entry nor contained a Landlord's covenant for quiet enjoyment.

Tenancy at Will

A tenancy at will exists where the tenancy is on terms that either party may determine it at any time. Exclusive possession may be conferred, but there must be no certainty as to the length of term granted.

A potential danger is that, where a so called tenancy at will provides that rent is payable in advance by reference to a specific period, this will create a periodic tenancy and give the Tenant 1954 Act protection. However, if the tenancy at will document avoids any minimum period of notice; is personal to the occupier; contains an explanation as to why it is short term (for example pending redevelopment of the property); and provision to the effect that any demand in advance for rent by reference to a period (say a month) does not create or cause the Tenancy to become a periodic tenancy, the dangers of 1954 Act protection should be avoided.

Section 43(2) Landlord and Tenant Act 1954 Tenancy

If a tenancy is granted for a period of less than six months, it will not have the benefit of the 1954 Act.

The danger in Section 43(2) tenancies lies in the fact that if Landlord and Tenant agree to renew, the total period of occupation may well exceed 12 months and accordingly give the Tenant 1954 Act protection. If there is a renewal, it is really only safe if the renewal is for a term which commences immediately after the expiry of the original term.

Sub-Leases

Even if the parties agree to arrange matters so that they avoid the provisions of the 1954 Act, a further hurdle may lay in obtaining consent from a Landlord for a short term subletting.

Most well drawn leases do not permit third party occupation (unless by a group company) without the consent of the Landlord. Obtaining a Landlord's consent may be a time consuming process that can frustrate the Landlord's intention to take advantage of a demand for a short term occupation. To speed the process, an application for Landlord's consent for short term letting needs to be well presented with the application giving full particulars of the proposed Undertenant, backed up with supporting accounts, references and background information such as, the reason for the short term Underletting and the purpose to which the premises will be put.

A particular point that may well have to be brought into account is a requirement in a Lease that no underletting is permitted at less than the rent then payable under the Lease, even if that rent is higher than the market rent for the space to be underlet. Notwithstanding that the Underlease rent is expressed to be the passing rent, the Landlord will be entitled to withhold its consent to an application to underlet if there is to be an arrangement between a Tenant and the Undertenant whereby the Undertenant in reality pays less than the market rent. This has recently been emphasised in the case of Allied Dunbar Assurance plc v Homebase and another Court of Appeal (Simon Brown, Chadwick and Hale LJJ) 17 May 2002.

Conclusion

As a landlord, do not assume that a short term relationship expressed to be a Licence will enable you to regain possession at the end of its term, nor, in the case of an Underlease, that a Landlord will look benignly on an application for a short term occupation.

In either case, think ahead to anticipate future difficulties and be efficient in what you intend to do and how you organise short term third party occupation. The investment of time prior to the excitement of receiving income for surplus space will bring the reward of seeing the Tenant go when you intend - a simple message.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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