Contracted out leases – Landlords beware
A common situation which most landlords and property professionals will recognise is a case of a contracted out lease which comes to an end and yet the tenant remains in occupation continuing to pay rent. The case of Erimus Housing Ltd – v- Barclays Wealth Trustees (Jersey) Ltd and Wallbrook Properties Ltd (as trustees of the Centre Unit Trust) gives some useful guidance as to the consequences and possible pitfalls.
The facts are relatively simple in this case in that towards the end of the lease the parties had a meeting to discuss renewal terms. Proposals were put forward by the agent on behalf of the landlord and negotiations continued over a lengthy period. The negotiations did not progress quickly and in the words of the judge they were “desultory and lacking impetus”.
Nevertheless what is important in this case is that on the evidence it is clear that the negotiations were ongoing and contemplated a further contracted out tenancy. The tenancy itself was not signed and the issue in the case was to determine the status of the tenant during the period of occupation after expiry of the contacted out lease.
The tenant argued that they should have a yearly periodic tenancy because they had continued to pay the rent which was expressed to be a yearly rent, albeit payable on a quarterly basis. The landlord argued that the tenant should merely have a tenancy at will pending conclusion of the discussions for a new tenancy.
A basic, and crucial, distinction between the respective contentions of the landlord and the tenant is that a periodic tenancy would attract the protection of the Landlord and Tenant Act 1954 whereas a tenancy at will would not.
The reason this distinction turned out to be crucial is that the Court decided that interim status of the tenant should not be on a basis inconsistent with the ongoing negotiations between the parties. Consequently because a periodic tenancy would be protected by the Landlord and Tenant Act 1954 this was clearly inconsistent with negotiations for a contracted out tenancy.
This case turned out well for the landlord however there are also some words of caution. The Court accepted that there could be some circumstances were the decision would go the other way. Had the landlord merely left the tenant in occupation, collected the rent and not instigated any negotiations for a renewal the decision could have gone in favour of the tenant.
Whilst this case is generally a comforting one for landlords the lesson to take from it is that inaction is not an option.