Barclays Wealth Trustees (Jersey) Ltd & anr v Erimus Housing Ltd [2014] EWCA Civ 303

Summary

The Court of Appeal has provided further guidance as to whether a tenant that is holding over after the expiry of its lease is doing so under a new periodic tenancy or a tenancy at will.  The ruling indicates that the Court will be reluctant to infer that parties intended to enter into periodic tenancies without good reason.  All relevant factors will be taken into account, not just the payment of rent. 

In this case, the Court of Appeal has overturned the High Court's original decision, and found that the existence of continuing negotiations and the assumption that a new lease would eventually be granted meant that the tenant was occupying as a tenant at will, and not a periodic protected tenant.

Why does it matter?

The distinction between tenancies at will and periodic tenancies is very important to both landlords and tenants. First, business tenancies that have arisen in this way will be entitled to security of tenure under the Landlord & Tenant Act 1954 ("the Act"). This could be disastrous for a landlord that requires possession of the property. Periodic tenancies are tenancies that arise and recur every "period", usually calculable by reference to the rent periods.

Conversely, tenancies at will are terminable on immediate notice by either party. They do not have the protection of the Act. The flexibility can be very useful for a party that either wishes to vacate or to take back possession at short notice, but the lack of long-term interest can also be problematic for both the tenant's business and the landlord's asset management.

The facts

In this case, the Tenant was the tenant of business premises in Middlesbrough. The original lease had been granted for a five year term expiring on 31 October 2009. It was contracted out of the Act.

Negotiations for a renewal of the lease commenced between the parties in May 2009, but no new lease had been completed before the term ended. Thereafter, the Tenant remained in occupation, continuing to pay rent as it had always done. 

The parties continued to negotiate the terms of the new lease, but these were rather desultory, and very protracted. It was not until June 2011 that terms for the new lease were agreed.  Even then, the parties did not complete the new lease, and eventually the Tenant's solicitor served notice to quit in June 2012. The Tenant finally vacated the Premises on 28 September 2012.

However, the Landlord refused to accept the position, claiming that a periodic tenancy had arisen, and that the earliest termination date that could be given was 31 October 2013.

The first decision

The High Court found in favour of the Landlord. The judge found that there was an implied annual periodic tenancy which had arisen when negotiations stalled but the Tenant remained in occupation.

He also found that the Tenant had attached importance to having security of tenure under the Act in its negotiations, until it changed its mind in March 2012. Consequently the Tenant remained on the hook until it could terminate the periodic tenancy.

The Court of Appeal overturned this decision and found in favour of the Tenant.

The issues

The key issue considered by the Court of Appeal was whether the Tenant's notice to quit was effective to terminate its tenancy when it vacated. 

This depended on whether the Tenant had been occupying under a tenancy at will or a periodic tenancy. If a periodic tenancy had arisen, the Tenant's notice would be ineffective and the Tenant would remain liable until it had served a valid notice to determine the lease on 31 October 2013.

The decision

The Court of Appeal found in favour of the Tenant and allowed its appeal, holding that the Tenant had occupied the Premises pursuant to a tenancy at will.

Although the Tenant had continued to pay rent, the Court noted that the negotiations for the new lease had never been abandoned, even if they had become slow and protracted. Indeed, they reached fruition in June 2011. Consequently it would have been difficult to ascertain when a periodic tenancy could have commenced. 

The Court found that it would have been a step too far to infer a periodic tenancy from the payment of rent alone. 

Finally, it was agreed that the new lease would have been contracted out of the provisions of the Act, as the old lease had been. This would be inconsistent with a periodic tenancy, which would have fallen within the scope of the Act. Conversely, nothing in the negotiations was consistent with the creation of a yearly periodic tenancy in advance of the grant of a new lease.

Our advice for landlords

For various commercial/practical reasons, it will not always be possible to formalise a tenant's occupation before it takes possession of a premises, or after its lease expires.  However, an unwanted periodic tenancy with protection under the Act could have serious consequences for a landlord looking to redevelop, while an unwanted tenancy at will could see a landlord's revenue stream disappear overnight if a tenant serves notice to quit. Although this case law is helpful for landlords who do not wish tenants to acquire security of tenure, it is better not to rely on it, as each case will depend upon its own facts.

Advice should therefore be taken at an early stage, either before a lease expires or before a party is allowed into occupation, to ensure that an uncertain position does not arise.

Our advice for tenants

Uncertainty concerning a tenant's occupation can be very damaging for a tenant's business, particularly where a tenancy at will is inferred that can be terminated forthwith at any time by a landlord.  This could be disastrous for a tenant with staff in place or who has just spent money on an expensive fit-out. Although flexibility may be advantageous in certain scenarios, we recommend that a clear strategy is considered before situations such as these start to develop.

Again, tenants whose lease is due to expire, or who wish to take up occupation before formalising the terms should seek early advice.