17 February 2020
Why accepting commercial rent could cost you dearly
The term of the tenant’s lease is coming to an end. The lease is contracted out of the Landlord and Tenant Act 1954 (“the 1954 Act”) and the tenant does not have permission to stay in occupation post the contractual term. As the landlord, you have a good relationship with the tenant – the tenant has paid its rent on time, not breached any covenants in the lease etc – and you are happy for the tenant to take a new lease. The contractual term comes to an end and the tenant remains in occupation. The landlord continues collecting the rent (on a weekly, monthly or quarterly basis) and the parties start to negotiate the terms of a new lease.
The lease negotiations become protracted, with the tenant happy to continue trading, seeing the negotiation as a chore outside of the usual course of its business and the landlord is happy to continue taking the rent, with no incentive to spend money on legal fees regularising the position. The situation arises all too often, but what happens if the relationship breaks down and the negotiations stop; what are the risks for the landlord?
Once the contractual term has come to an end, if the tenant stays in occupation post that date then it becomes a trespasser. The tenant has no right to a new lease and if the landlord has no intention of entering into a new lease and wants to secure vacant possession, if the tenant fails to leave, the landlord would have to issue court proceedings to secure possession.
Often, the landlord is happy for the tenant to stay in occupation and continues to demand and accept rent, maybe for an extended period of time, in some cases years. The position appears seamless, but in this situation, although the original lease was contracted out of the 1954 Act, by accepting rent, a periodic tenancy could arise and the tenant could obtain security of tenure, affording the tenant a significant protection that the landlord never intended the tenant to have. Landlords need to protect themselves in this situation, so what should a landlord do?
If negotiations commence and the tenant remains in occupation at the end of the term then it is generally accepted that the tenant remains in occupation as a “tenancy at will” which can be terminated at any time by the landlord. However, if the negotiations are sporadic, or they break down, or there are no negotiations at all, a periodic tenancy with 1954 Act protection could arise.
Ideally, if the landlord and tenant are considering entering into a new lease, the negotiations should be concluded before the expiry of the contractual term of the existing lease. This is often not feasible, and negotiations continue beyond the end of the contractual term. In this situation, the landlord needs to consider how to protect itself. The landlord should consider writing two letters to the tenant, one on an open basis and one on a without prejudice basis. In the open letter, the landlord should consider confirming the tenant is a trespasser post the end of the contractual term and demand the tenant provide vacant possession. In the without prejudice letter, the landlord should consider confirming that it is happy for the tenant to remain in occupation whilst the negotiations continue and set out the terms of the new lease. In addition, the landlord should consider putting a ‘rent-stop’ on the account, refusing to accept rent from the tenant during the period of negotiation.
The acceptance of rent can be one of the clearest indications that a periodic tenancy has arisen and by putting a rent-stop on the account, the landlord reserves its right to claim that the tenant is a trespasser should negotiations break down and the landlord demand possession. The landlord can still claim the rent for the tenant for this lost period, dealing with the payment as an initial lump sum payment under the provisions of the new lease. Not great for cash-flow, so the negotiations need to be quick, but the legal ramifications of getting this wrong can be a major problem for landlords.
Protecting yourself as a landlord is key in these periods of transition. Never assume that matters are going to proceed smoothly. If this resonates with you speak to us for legal advice at an early stage. This can often prevent expensive problems arising in the future. Our property team can assist with all matters relating to the renewal of leases, including removing unwanted tenants in situations where the negotiations break down.
For further information or advice please contact Elliott Brookes on firstname.lastname@example.org or 01753 278651.