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Tenants at will, holding over and what this means for commercial property landlords and tenants

The Court of Appeal has recently handed down a judgment in another case arising as a result of falling rents. Increasingly seen, since the recession, the case of Barclays Wealth Trustees (Jersey) Limited v Erimus Housing Limited [2014] EWCA Civ 303, questioned whether the tenant was holding over under a tenancy of will or a periodic tenancy.

The facts

Erimus had a five-year lease of office premises in Middlesbrough (owned by Barclays), which was contracted out of the security of tenure provisions of the Landlord and Tenant Act 1954. This meant that Erimus did not have a statutory right to renew their lease at the end of the term, and the Landlord could refuse to grant a new lease for any reason.

Negotiations were not concluded by the time the lease expired in 2009 and Erimus, as is very common, simply stayed in occupation and continued to pay rent at the old rate. Negotiations did continue but were, as the Court of Appeal commented, "leisurely".

By 2012, with terms still not agreed, Erimus decided to move and served notice to terminate their lease at the end of August 2012. Barclays claimed that the notice given by Erimus was insufficient as a yearly periodic tenancy had arisen. These types of tenancy are restrictive in how they can be ended and in particular the notice given must expire at the end of a complete year of the tenancy.

The Court of Appeal case centred on what type of tenancy was in place and whether the notice given by Erimus was effective to end that tenancy. If the tenant was, as it claimed, holding over under a 'tenancy at will' (a flexible form of tenancy that allows either party to terminate the tenancy at any time - often used as an interim measure while the parties negotiate a lease), then the notice was effective. If there was indeed a yearly periodic tenancy then the notice was not effective and Barclays would therefore have an occupier for the property for a much longer period in a falling market.

When the court reviewed the facts they found it was clear that negotiations were slow. However there was no evidence to suggest that they had ever stopped. In addition, the new lease was also to be contracted out of the protection of the Landlord and Tenant Act 1954 and the court found that there was never a time when the parties ceased to contemplate entering into a new lease on that basis.

The court ruled that Erimus was a tenant at will and therefore their notice did end the tenancy and was effective.

What landlords and tenants need to know

This case serves as a warning as to the perils of allowing lease negotiations to trickle on without resolution. There is no substitute for clear documentation and agreement as to the position, on both sides, at all times. If negotiations do continue past the end of a lease the basis of the tenant's continuing occupation must be properly documented. If the intention is to negotiate a new lease, a formal tenancy at will should be used or a short-term tenancy agreement put in place to cover the discussion period. This ensures that, even if the negotiations do drift, the landlord won't find that the tenant has security of tenure under the 1954 Act and the tenant won't find that they are unable to leave when they wish to do so.

For more information on this or any other commercial property matters please speak to Heather Jones.