Breaking up is hard to do

Lie v Mohile [2014] EWCA Civ 728

Summary

The Court of Appeal has held that, where one business partner alone applies to renew a tenancy, the application will not be valid and so no new lease can be granted. Instead, all the original parties to the lease must apply for renewal.

This will be the case unless one of the statutory exceptions under S41A of the Landlord and Tenant Act 1954 ("the 1954 Act") can be applied. The Court of Appeal has confirmed that these exceptions are to be interpreted narrowly and thus will apply rarely in practice.

The facts

This case concerned two doctors, Dr Lie and Dr Mohile, who ran a general practice together under a partnership agreement. The practice operated from business premises which were owned by Dr Mohile. He had let the premises to the partnership in the joint names of himself and Dr Lie on a 1954 Act protected periodic business tenancy.

When Dr Mohile no longer wished to practice with Dr Lie, he attempted to dissolve the partnership. The Court found that the notice was ineffective and the partnership continued. Dr Mohile then turned his attention to the business premises. In June 2011, he served a Section 25 notice to terminate the tenancy on 1 January 2012.

Dr Lie responded by issuing an application to Court for the grant of a new lease in his sole name. The application was opposed by Dr Mohile on ground (g), i.e. on the basis that he wished to occupy the premises by himself.

At first instance, the Court found in favour of Dr Mohile. It found that it was necessary for the tenants to apply jointly for a new lease and that none of the Section 41A exceptions applied to exclude Dr Lie from this requirement.

Dr Lie appealed, but the Court of Appeal upheld the decision and found in favour of Dr Mohile.

The issues

The Court had to consider two key points:

  • Could an application be made by one of joint tenants?  
  • If so, did any of the Section 41A exceptions apply?

The decision

First, the Court of Appeal had to consider whether a single tenant could apply for a new lease in his sole name. Following the long-established case of Jacobs v Chaudhuri [1968] 2 QB 470, the Court agreed with the original decision that "tenant", for the purpose of applying for a new lease, must mean all the joint tenants under the existing lease. In this case, the application had been made by Dr Lie alone.

Consequently, Dr Lie could only be entitled to the grant of a new lease if the application fell within one of the Section 41A exceptions. Section 41A permits an application that is not made by all the tenants acting jointly where not all the joint tenants are continuing to use the premises for the purpose of the partnership. There are four criteria that Dr Lie had to meet if he were to fall within Section 41A:

  • The lease must be vested in two or more joint tenants;  
  • The demise must include property that is occupied for the purpose of the business;  
  •  At some point during the tenancy all the joint tenants must have carried on the business together; and  
  • The business must now be carried on at the premises by one or more of the joint tenants. However, no part of the property may be occupied for a different business operated by one or more of the other joint tenants

Here, the Court of Appeal found that Dr Lie satisfied the first three, but failed on the fourth. He failed because Dr Mohile was also continuing to operate from the property. This meant that the conditions for the exception did not apply, and so any application for a new tenancy had to be made jointly.

Advice for landlords and tenants

This is an important reminder of the rule that applications must be made together by joint tenants, and the exception in Section 41A will apply only in narrow circumstances where one or more partners has left the partnership and the premises altogether.

The Court considered whether this strict rule could be potentially unfair to partners such as Dr Lie who wished to renew their leases if the partnership had become fractured. However, it concluded that any unfairness was dealt with by the application of Section 41A, which would assist any applications whose partners had left the business.

It is clear from this that it will be difficult for partners to rely on Section 41A unless the narrow criteria can be met. We would advise taking legal advice at the outset, before any notices are served or any applications are made.

In order to avoid such problems arising in the first place, it may be sensible to consider structuring the business as a limited liability partnership or as a limited company at the outset. This can help to avoid disputes over which members of a partnership have the right to occupy the premises and to renew the lease.