Tenants holding over on the expiry of a lease may place the landlord in a difficult position when it comes to rent, warn Zia Bhaloo and John Muncey.
Following the termination of a lease, it is not uncommon for the tenant to remain in occupation without the landlord seeking possession. This may be inadvertence on the part of the landlord or its managing agent. More commonly, however, the landlord will be happy for the tenant to remain because the lease is being renewed, although its terms have not been finalised.
In today's climate, the landlord is likely to want its tenant to continue in occupation so as to preserve the income stream. The question that is frequently asked in this situation is whether the landlord should demand and accept rent from the former tenant. By doing so, a new periodic tenancy may be created unintentionally.
However, if the landlord takes no action, it will risk losing its income from the property, particularly if the former tenant does not then take up a new lease and vacates, leaving the landlord with the problem of tracing that tenant and recovering the money.
Has a new tenancy been created?
This is not an issue for tenancies that have security of tenure under the Landlord and Tenant Act 1954.
Unless notice has been served under the Act (namely a landlord's notice to terminate under section 25, a tenant's request for a new tenancy under section 26 or a tenant's notice to terminate under section 27), the tenancy will automatically continue under section 24 of the Act where the tenant remains in occupation at the end of the contractual term. Accordingly, there is no reason for the landlord not to continue to demand and accept rent.
However, problems may arise where the tenancy is not protected under the 1954 Act but rent is demanded and accepted after the term of the lease has expired. It may be inferred from this that the parties had intended to create a new periodic tenancy, one that could have 1954 Act protection. In the circumstances, a landlord would be wise in hesitating to demand rent, but it potentially risks losing the opportunity to collect the rental income, particularly if the former tenant subsequently vacates. However, the question as to whether a new tenancy has been created is a matter of evidence, so the demand for and acceptance of rent will not necessarily lead to a new tenancy.
The most common situation in which a tenant is allowed to remain in occupation is where the parties are in negotiations for the grant of a new lease. In such cases, a different inference may be drawn. Although it is a question of fact whether the parties have agreed to a new tenancy, this constitutes the classic situation in which a tenancy at will might be implied. Whether a periodic tenancy or a tenancy at will has been created will depend upon the parties' intentions and with what intention rent has been received.
Tenants at will
In Javad v Aqil  41 EG 61, a tenant was allowed into occupation of business premises in anticipation of terms being agreed for the grant of a lease.
The tenant paid £2,500, which was expressed, in a receipt signed by the landlord, as being "rent for 3 months in advance". Almost a year later, a lease had not been granted and the landlord wanted possession. The Court of Appeal confirmed that no periodic tenancy could be inferred. The payment of rent was only one, albeit important, factor to be taken into account. More importantly, when the tenant had been allowed into possession it was in anticipation of a lease being granted, the parties not having agreed its terms. Therefore, no tenancy had been created.
The same principles have been applied where a tenant has remained in occupation following the expiry of its lease. In Dreamgate Properties Ltd v Arnot (1998) 76 P&CR 25, Dreamgate acquired the freehold of business premises from Eton College. The premises had been subject to a series of leases to Mr Arnot, the last of which had been in 1983 and had expired prior to the sale. However, after the expiry, Eton had demanded and accepted a quarter's rent from Mr Arnot. In proceedings for possession, Mr Arnot argued that a new tenancy had been created, relying upon the following facts:
- the property had been sold subject to the 1983 lease
- in correspondence, Dreamgate had sought to rely upon the landlord's rights contained in the 1983 lease and
- a notice to quit had been served by Dreamgate expressly referring to Mr Arnot as a quarterly tenant.
However, the Court of Appeal did not consider that this was sufficient to infer the creation of a new tenancy. It considered it relevant that the rent demand had been generated by a computer and, therefore, did not indicate the landlord's intentions. Moreover, Eton would not have imperilled a sale to a third party by granting a new lease.
In both cases, the occupier was held to be a tenant at will a tenancy on terms that either party may determine at any time. Such a tenancy has no protection under the 1954 Act. In Javad and Dreamgate, the tenancy at will had been created by inference from the party's conduct. However, a tenancy at will can also be created expressly. Where the parties are seeking to agree terms for a new lease, an express tenancy at will provides the landlord with certainty and the opportunity to demand rent without creating a tenancy with statutory protection. Alternatively, the parties may seek expressly to agree a licence to cover the period of holding over, but since the tenant will retain exclusive possession, there is a risk of a tenancy being created, regardless of the label that the parties have applied to the agreement.
An express agreement for a tenancy at will usually include an agreement for the payment of rent of a fixed amount. The landlord is entitled to distrain in the event of non-payment (at least until the remedy of distress has been abolished).
In the absence of an agreement for rent, the landlord is entitled to pursue a claim for damages for use and occupation, such damages to be calculated by reference to the rental value of the premises.
There is no right to distrain, so a claim would have to be pursued by proceedings. These will be more complex than for a simple debt claim because the landlord will have to establish the amount of the claim and expert valuation evidence may be required unless the court is prepared to award a sum based upon the rent previously payable. If the tenant is not prepared to make the payment, it may be more effective for the landlord to terminate the tenancy at will and require vacant possession.
Occupation without consent
A tenant that holds over without the landlords' consent is liable to pay damages for breach of the express or implied term to yield up or for trespass (known as mesne profits). The damages will include an amount equivalent to the fair letting value of the property, which may not necessarily be the same as the rent payable under the former lease.
The landlord can also use the ancient statutory remedy under section 1 of Landlord and Tenant Act 1730, entitling it to claim for double the yearly value of the premises against a tenant that holds over. However, the landlord must make a demand in writing for possession to be given. In most cases, the threat of the claim is often sufficient to persuade the tenant to leave. If the tenant has given notice to quit but then fails to deliver vacant possession, it will be liable to pay double rent under section 18 of the Distress for Rent Act 1737, which can prove useful in appropriate circumstances.
If the former tenant has allowed another party into occupation (a subtenant, for example), that party may also be liable for the payment of mesne profits during any period of holding over without the landlord's consent. This may be of use if the former tenant is insolvent or if it absconds. In contrast, a claim for rent or damages for use and occupation against a tenant that remains in occupation as a tenant at will can be made only against the former tenant.
The former tenant will remain liable to pay mesne profits for the period that it occupies without the landlord's consent. However, Jones v Merton London Borough Council  EWCA Civ 660;  25 EG 173 (CS) highlighted that a former tenant's liability ceases upon giving up possession, regardless of whether it returns the keys to the landlord or notifies the landlord that the property is vacant.
Landlords should be cautious about demanding and accepting rent following the expiry of a lease. However, if the situation is analysed correctly, this may be appropriate and the landlord will be depriving itself of rental income if it fails to do so.
While the parties are negotiating the terms of a new lease, it is likely that the former tenant's occupation will be that of a tenant at will. However, it is advisable for the parties expressly to agree this to be the case, so that there is no doubt as to the rights and liabilities of the parties.
This is preferable to attempting to create a licence. Licences may be viewed with suspicion by the courts and are more vulnerable to a challenge, with the risk of a periodic tenancy being created inadvertently.
Published in the Estates Gazette