A fixed term lease comes to an end. There is no security of tenure under the Landlord and Tenant Act 1954 (in the case of commercial premises). The landlord is content to discuss terms with the tenant for a new lease and the tenant wants a new lease. The tenant continues paying rent. What is the tenant’s status pending the completion of a new lease?

Without more, the payment and acceptance of a periodic rent will create a periodic tenancy. Moreover, where the payments of rent are the same as the rent payable under an expired lease, the periods of that periodic tenancy will be referable to the periods for which the rent was reserved under the lease. So, if an annual rent was reserved, the periodic tenancy will be an annual tenancy, even if the tenant covenanted to pay the annual rent quarterly (or by reference to some other period shorter than a year): Richardson v Langridge (1811) 4 Taunt 128,131, Ladies Hosiery & Underwear Ltd v Parker [1930] 1 Ch. 304, Adler v Blackman [1953] 1 KB 146.

In order to terminate an annual tenancy, the tenant must give at  least six months’ notice to terminate on an anniversary of the tenancy. The implied annual tenancy will be subject to Part II of the Landlord and Tenant Act 1954, if the premises are commercial and the tenant occupies for business purposes (because, since it arises by implication, there will be no agreement to exclude the security of tenure and there will have been no formalities as required by section 38 of the 1954 Act). Therefore, if the landlord wishes to terminate the tenancy, he will have to comply with the statutory procedures of the 1954 Act.

Since the inflexibility which a protected periodic tenancy brings rarely reflects the reality of the parties’ actual intentions, the law will be slow to draw the inference from the payment and acceptance of rent that this is what the parties intended. All the more so where the parties are negotiating terms for some other type of tenancy. The modern approach is explained with clarity in the judgment of Nicholls L.J. in Javad v Aqil [1991] 1 WLR 1007, as follows:

“As with other consensually based arrangements, parties frequently proceed with an arrangement whereby one person takes possession of another’s land for payment without having agreed or directed their minds to one or more fundamental aspects of their transaction. In such cases the law, where appropriate, has to step in and fill the gaps in a way which is sensible and reasonable. The law will imply, from what was agreed and all the surrounding circumstances, the terms the parties are to be taken to have intended to apply. Thus if one party permits another to go into possession of his land on payment of a rent of so much per week or month, failing more the inference sensibly and reasonably to be drawn is that the parties intended that there should be a weekly or monthly tenancy. Likewise, if one party permits another to remain in possession after the expiration of his tenancy. But I emphasise the qualification ‘failing more’. Frequently there will be more. Indeed, nowadays there normally will be other material surrounding circumstances. The simple situation is unlikely to arise often, not least because of the extent to which statute has intervened in landlord-tenant relationships. Where there is more than the simple situation, the inference sensibly and reasonably to be drawn will depend upon a fair consideration of all the circumstances, of which the  payment of rent on a periodical basis is only one, albeit a very important one. This is so however large or small may be the amount of the payment.

To this I add one observation, having in mind the facts of the present case. Where parties are negotiating the terms of a proposed lease, and the prospective tenant is let into possession or permitted to remain in possession in advance of, and in anticipation of, terms being agreed, the fact that the parties have not yet agreed terms will be a factor to be taken into account in ascertaining their intention. It will often be a  weighty factor. Frequently in such cases a sum called ‘rent’ is paid at once in accordance with the terms  of the proposed lease: for example, quarterly in advance. But, depending on all the circumstances, parties are not to be supposed thereby to have agreed that the prospective tenant shall be a quarterly tenant. They cannot sensibly be taken to have agreed that he shall have a periodic tenancy, with all the consequences flowing from that, at a time when they are still not agreed about the terms on which the prospective tenant shall have possession under the proposed lease and when he has been permitted to go into possession or remain in possession merely as an interim measure in the expectation that all will be regulated and regularised in due course when  terms are agreed and a formal lease granted.

Of course, when one party permits another to enter or remain upon his land on payment of a sum of money, and that other has no statutory entitlement to be there, almost inevitably there will be some consensual relationship between them. It may be no more than a licence determinable at any time or a tenancy at will. But when and so  long as such parties are in the throes of negotiating larger terms, caution must be exercised before inferring or imputing to the parties an intention to give to the occupant more than a very limited interest, be it licence or tenancy. Otherwise the court would be in danger of inferring or imputing from conduct, such as payment of rent and the carrying out of repairs, whose explanation lies in the parties’ expectation that they will be able to reach agreement on the larger terms, an intention to grant a lesser interest, such as a periodic tenancy, which  the parties never had in contemplation at all.”

Against this statement of principle, the decision of John Jarvis QC, sitting as a Deputy Judge of the Chancery Division in Barclays Wealth Trustees v Erimus Housing Limited [2013] EWHC 2699 (Ch) caused a stir in the world of commercial landlord and tenants. Erimus  Housing Limited held a lease of office premises in Middlesbrough which expired on 31 October 2009. It was contracted out of the Landlord and Tenant Act 1954. Before the lease had ended, the landlord and tenant had discussed terms for a new fixed-term lease. The tenant made it clear that it wanted to review its office requirements and might move elsewhere. To that end, it wanted to secure a number of opportunities in the new lease to exercise a break clause. However, it was clear that it wanted a new fixed term. The landlord was agreeable, subject to reaching agreement about the length of term, rent, and other terms. The lease ended without terms being agreed and Erimus remained in possession of the office premises paying the same rent as under the expired lease.

It seemed that the landlord was content to continue to receive the rent for the premises and Erimus was content to remain in occupation as before. It was accepted that there was no great impetus in the negotiations. The Judge described them as “desultory”. However, when he came to apply the principles of Nicholls LJ set out above, he concluded that the parties were not in the “throes of negotiations” and therefore that the payment and acceptance of rent must have given rise to a periodic tenancy.

The parties eventually reached agreement as to the heads of terms for a new three-year fixed term lease, in June 2011. However, in August 2011 Erimus changed its mind and decided not to proceed with the new lease because it had found alternative accommodation elsewhere. However, it was not ready to vacate and it seems that the landlord was in no hurry to obtain possession. During this second period, as it was described by the Deputy Judge, after Erimus had indicated that it intended to vacate, the Judge considered that the loose agreement between the parties that Erimus would give some period of notice (although it was not agreed what period of notice would be required) was also inconsistent with a tenancy at will. He therefore concluded that Erimus had become an annual tenant by the time it sought to vacate (in September 2012). The practical effect of that decision was that Erimus was required to pay an additional 13 months’ rent after it vacated in September 2012, before the annual tenancy could be terminated by six months’ notice to quit to expire on  an anniversary (31 October 2013).

A number of commentators expressed surprise at this decision. So did Vos LJ when he granted permission to Erimus to appeal. The possible impact of the decision on tenants whose fixed term leases expire was rather drastic. How actively must they negotiate to keep themselves in “the throes of negotiation” and avoid falling into the trap of a periodic tenancy (which, in most cases following a fixed term tenancy will be an annual one)? In a different market, the decision might well sound alarm-bells ringing for landlords, too who could be faced with the inflexibility of a protected annual tenant when they want the ability to withdraw from a negotiation to pursue a better deal.

These possible difficulties have now been averted by the decision of the Court of Appeal, which has allowed the tenant’s appeal and reversed the decision of the Deputy Judge. The Court of Appeal concluded that Erimus was, indeed, a tenant at will throughout the period in which it remained in possession after the expiry of its lease. Although the negotiations were “desultory”, according to Patten LJ (with whom Longmore and Christopher Clarke LJJ. agreed), the payment and acceptance of rent continued to be underpinned by a state of negotiation. This was evidenced by the fact that although there were periods of silence, the parties did, indeed, agree heads of terms in June 2011. Therefore, this was not a case (such as Walji v Mount Cook Land Limited [2002] 1 P&CR 13, on which the Deputy Judge relied) where the negotiations had been concluded and the tenant remained in possession after the negotiations  had ended paying rent for a prolonged period.

A further point which, according to Patten LJ, the Deputy Judge did not weigh sufficiently, is the fact that any periodic tenancy would attract the protection of the Landlord and Tenant Act 1954. Where both the expired lease was contracted out of the Act and the heads of terms agreed between the parties were for a new contracted out lease, this, too would be a surprising result. As was made clear by Knox J. in Cardiothoracic Institute v Shrewdcrest Ltd. [1986] 1 WLR 368, the statutory protection afforded to a tenant under a periodic tenancy is an important factor to take into consideration. In Walji, where it was said, in support of the trial judge’s finding that there was a periodic tenancy, that the landlord was not concerned about the statutory protection, the circumstances were different because neither the expired lease nor the terms agreed for a new lease were contracted out of the Act.

In London Baggage Co Ltd v Railtrack Plc [2000] L & TR 439, Pumfrey J., in setting out five “legal considerations” which apply where the court is deciding whether to impute to the parties an intention to create a periodic tenancy, said that a tenant holding over during negotiations for a new lease is a “classic case” where the court will infer a tenancy at will. The decision of the Court of Appeal in Erimus reaffirms this principle.

It is anticipated that the decision of the Court of Appeal in Erimus will be welcomed by commercial landlords and tenants alike, as bringing some clarity to the rather vexed question of the status of the parties during the “limbo period” which so often arises after the expiry of a fixed term lease while the tenant remains in possession. Whether, as in Erimus, it is the tenant who seeks to argue that he was no more than a tenant or will, or, as in the majority of the earlier reported cases, it is the landlord running that argument, in support of a claim to recover possession from the tenant, at least the position is now a little clearer than it was before the Court of Appeal’s decision.