Leases normally have to be created by deed. However, certain leases can be created under section 54(2) of the Law of Property Act 1925 without the need for any writing at all. For a lease to come within section 54(2), it must:
- be for a term not exceeding three years. Periodic tenancies (tenancies which are not for a fixed term, but run e.g. from week to week, month to month, or year to year) fall within this definition;
- take effect in possession. In other words, reversionary leases (where the term starts later than the date the lease is completed) are excluded from this section; and
- reserve the best rent reasonably obtainable without taking a fine. This means the market rent for the premises. Two cases earlier this year have considered what this means.
In Hutchison v B & DF Ltd, the tenant was unaware of the fact that it was possible for a lease to be created orally in this way. The tenant occupied a number of units on an industrial estate. In some units, it was holding over under the Landlord & Tenant Act 1954 after its existing leases had expired. In several others, it had gone into occupation after agreeing orally with the landlord that it would take new leases of those units, and had paid rent quarterly.
The tenant failed to obtain planning permission for a chimney which it needed in order to continue running its operations from the industrial estate. As a result, it gave the landlord three months' notice on all the units and vacated. The tenant argued that, in relation to the units where it was not holding over, it was merely occupying as a tenant at will.
The landlord claimed that it had an oral agreement with the tenant that it would take new three year leases of all the units which it occupied save for one, which was to be for five years. Such an agreement would normally need to be in writing to be enforceable (section 2 of the Law of Property (Miscellaneous Provisions) Act 1989). However, there is an exception for agreements to create short leases which fall within section 54(2) of the Law of Property Act 1925.
The court found in favour of the landlord. It held that it would not have made commercial sense for the landlord to have allowed the tenant into possession solely on the basis of a tenancy at will, since the landlord would have had a large number of units on the estate that would be occupied on a temporary basis only.
The result was that the tenant had binding leases of all the units except one. The agreement in relation to the unit which was to be leased for five years was void, because it did not come within the exception under section 54(2) of the 1925 Act. The landlord argued that the tenant was bound to take a lease of this unit by virtue of a proprietary estoppel. It claimed that it had acted to its detriment by allowing the tenant into possession of that unit even though the lease had not been executed.
The court ruled that this argument failed in the light of the recent decision in Yeoman's Row Management Ltd v Cobbe, in which the House of Lords expressed the view that proprietary estoppel could not be used as a mechanism to get around section 2 of the Law of Property (Miscellaneous Provisions) Act 1989. Instead, the court in the present case found that the tenant had a periodic tenancy of that unit by virtue of its regular payments of rent. The tenant's notice to determine that tenancy was invalid because it did not expire on a quarter day. Therefore, the periodic tenancy continued until validly determined by the tenant.
Things to consider
The tenant was clearly labouring under the misapprehension that it was not bound because nothing had been signed in writing. This is a dangerous approach for both sides to take. Landlords must be careful not to enter into binding agreements for short leases if that is not their intention and tenants should be wary of committing themselves before they are ready.
It was not necessary, in order to deliver judgment in Cobbe, to decide whether proprietary estoppel could be used in circumstances where section 2 had not been complied with. The fact that the House of Lords' view has now been followed makes for an interesting contrast with Herbert v Doyle, where the High Court found a way to distinguish Cobbe and establish a proprietary estoppel, despite the absence of a written agreement which complied with section 2. We therefore now have two High Court decisions adopting differing approaches. It seems that we must wait for the issue to come before a higher court again before the position can be clarified.