High Court decision is a reminder of the dangers of a lengthy holding over period following on lease expiry, says expert

Out-Law News | 18 Oct 2013 | 9:49 am | 3 min. read

A recent High Court decision should act as a reminder to both landlords and tenants that the frequent practice of the tenant continuing in occupation of commercial premises (holding over) after the expiry of some leases can lead to unexpected consequences, an expert has said.

The High Court ruled that Erimus Housing Ltd had effectively created a new annual periodic tenancy by continuing to occupy the property for almost three years after the lease had expired. This meant that the company had to pay its landlord, the Centre Unit Trust, an additional 13 months rent for the period after it thought it had terminated its tenancy, but had in fact failed to do so.

Property litigation expert Theresa Adamson of Pinsent Masons, the law firm behind Out-Law.com, said that although the decision in this case went in favour of the landlord, the same principle could also lead to a tenant acquiring security of tenure where they had contracted out of the security of tenure provisions of the Landlord and Tenant Act 1954. "The case is a reminder to landlords that allowing a tenant to remain in occupation post lease expiry can be construed as a periodic tenancy, unless there is clear evidence of ongoing negotiations for a new lease throughout the period of occupation," she said. "They therefore run the risk of the tenant acquiring security of tenure for the periodic tenancy under the Landlord and Tenant Act. Landlords should give consideration to entering into a written form of Tenancy at Will to cover the position."

"It is also a reminder to tenants remaining in occupation after lease expiry, other than for a short period during negotiations for a new lease, that they should be wary of remaining in occupation once negotiations cease and no lease has been entered into. This could be construed as a periodic tenancy, and notice of termination expiring on the anniversary of the commencement date may be required to terminate it," she said.

Erimus had entered into a fixed term tenancy agreement with the landlord in November 2004, which expired on 31 October 2009. The rent was for £170,209 a year plus service charges, insurance charges and applicable taxes. After the lease expired the tenant remained on the premises for a further three years, conducting occasional negotiations with the landlord but not signing a new lease.

In June 2012, Erimus found new premises and gave three months' notice that it intended to vacate the property. However, the landlord said that by remaining in the property, Ennis had created a new periodic tenancy and therefore could not terminate the lease other than by giving notice to expire on an anniversary of the tenancy, namely 31 October 2013. The tenant argued that the arrangement had in fact become a tenancy at will on expiry of the fixed term, meaning that it could be terminated at any time by either party without notice.

The judge, John Jarvis QC, said that whether the tenancy was a periodic tenancy or a tenancy at will depended on the intentions of the parties. When making its judgment, the court had to consider their conduct after the expiry of the original fixed term tenancy. In this case, the parties could not be said to be "in the throes of a negotiation" because of the length of time that had passed since the expiry of the lease and the "desultory" nature of what negotiations there had been.

"I draw the clear inference that the landlord was content for the tenant to remain in occupation and pay the rent and was perfectly happy that it would in due course reach some kind of arrangement with the tenant," he said. "But, no real application appears to have been given to negotiation. The matter ceased to be a matter of sticking plaster relief, but much more of a permanent arrangement."

He added that, from the tenant's perspective, it was clear that Erimus "expected to have some protection ... that it would not be turned out on its ear". This strongly implied that the tenancy had become a periodic tenancy, he said. The premises were "its principle offices, with substantial equipment and were essential for the way in which its business was operated". The company "could not have taken the risk that it could have been evicted at a moment's notice", he said.

It was also relevant to consider what would have happened if the landlord had asked the tenant to immediately vacate the property the day after being told that Erimus had found new business premises, as it would have been entitled to do in the case of a tenancy at will, the judge said. Had this happened, the tenant would have undoubtedly claimed that a periodic tenancy had arisen, he said.