Instead, says the Court of Appeal, it was a tenancy at will.

Key points

  • The negotiations between the landlord and tenant for a replacement lease were without any urgency or impetus. However, because those negotiations were never actually abandoned, the Court of Appeal was willing to find that the parties always intended that a new lease would actually be entered into.
  • Once the tenant announced an intention to vacate the premises, it was inappropriate for the court to find that a need for security of tenure arose at that point, to cover the period to the tenant's proposed departure date.
  • The continuing nature of the lease negotiations and a joint intention that a new lease be granted - until such time as one of the parties changed their mind - meant that the tenant's occupation was as a tenant at will.
  • This would be the case particularly where it was intended that the new lease itself be contracted out of the Landlord and Tenant Act 1954.

Background

In our November/December 2013 Property Update, we looked at a case where a tenant had remained in occupation of commercial premises after the contractual expiry date of its lease: Barclays Wealth Trustees (Jersey) Limited v Erimus Housing Limited. The lease had been "contracted out" of the Landlord and Tenant Act 1954 (LTA 1954) meaning that the tenant had no statutory right to remain in the premises beyond the lease expiry date.

When it stayed for almost another three years - paying rent to the landlord, and otherwise acting as if there was a lease in place on the same terms and conditions as the lease which had expired - the court was asked to rule on the basis of that occupation.

The High Court judge decided that, out of the all options available to him, the arrangement constituted an implied annual periodic tenancy. He felt that he could not find a tenancy at will nor any form of fixed-term tenancy. Under the common law rules relating to implied periodic tenancies, a minimum of six months' notice must be given in order to terminate an annual tenancy, and that notice must expire on the date that is the end of the relevant "period".

Because of the way various dates fell in the case, the application of those rules meant that the tenant had to give 13 months' notice in order to bring its tenancy to an end. As a result, the tenant was liable for 13 months' rent and service charge etc payments - amounting to some £185,000 - even though it had moved out of the premises a few months earlier.

As mentioned in our January 2014 alert, the tenant appealed.

The Court of Appeal's decision

The first instance decision has been reversed. The Court of Appeal - unlike the judge in the High Court - was willing to find a tenancy at will on the facts.

While the court acknowledged that the negotiations for the replacement lease had continued at a very slow pace indeed, it felt that they were never abandoned. The "obvious and almost overwhelming inference" would be that the parties did not intend to enter into any intermediate arrangement - covering the on-going occupation - which was inconsistent with the aim of the new lease being created. And, because the new lease was to be contracted out of the LTA 1954, why would the parties give the tenant the protection of that Act in relation to the interim arrangement?

The main consequence of the different finding is the fact that a tenancy at will can be ended by either party at any time. Accordingly, when the tenant wanted to leave, it did not have to give a period of notice after all; it could simply up and go. As it was, the tenant actually gave the landlord approximately three months' notice of its departure date, which was entirely acceptable.

Once the tenant had indicated it was vacating the premises, there was no reason to look again at the terms of the on-going arrangement and find - as the first instance judge had done - a point in time when the nature of the tenancy had perhaps changed into one which, itself, attracted the protection of the LTA1954.

It is not stated in the judgment, but presumably the landlord will have to repay the £185,000 to the tenant if this was paid following the first instance decision, keeping back any money relating to the three months' notice.

Things to consider

As mentioned in our earlier article about this case, it remains best practice to document - correctly, and as soon as possible if not in advance - the basis on which a contracted out tenant remains in occupation of commercial premises.

If the parties intend that the tenant will not benefit from the protections afforded by the LTA 1954, it is vital - from the landlord's point of view - that any tenant who remains in occupation beyond a lease expiry date is there under either a freshly-granted replacement lease which has, itself, been contracted out, or a tenancy at will. Alternatively, the landlord should immediately seek vacant possession in order not to run the risk of a protected periodic tenancy being found - just as it was at first instance in this case.