New periodic tenancy was not automatically created when lease held over, says English Court of Appeal

Out-Law News | 24 Mar 2014 | 2:27 pm | 3 min. read

A new annual periodic tenancy was not automatically created when a tenant continued to occupy commercial premises after the original lease expired, the Court of Appeal in England has ruled.

Overturning a decision by the High Court in October, the Court of Appeal said that Erimus Housing Ltd was only occupying the premises under a tenancy at will agreement after its original fixed-term tenancy agreement expired. This meant that when Erimus decided to leave the premises after negotiations towards a new lease broke down, it did not have to give over a year's notice before doing so, the Court of Appeal said.

The High Court had previously ruled that Erimus staying on in the property had created a new periodic tenancy. This would have given the tenant additional legal protections, but would have prevented it from terminating the lease other than by giving notice to expire on an anniversary of the tenancy.

"The payment of rent gives rise to no presumption of a periodic tenancy," said Lord Justice Patten in his judgment. "Rather, the parties' contractual intentions fall to be determined by looking objectively at all relevant circumstances."

"The most obvious and most significant circumstance in the present case was the fact that the parties were in negotiation for the grant of a new formal lease. In these circumstances, as in any other subject to contract negotiations, the obvious and almost overwhelming interference will be that the parties did not intend to enter into any intermediate contractual arrangement inconsistent with remaining parties to ongoing negotiations. In the landlord and tenant context that will in most cases lead to the conclusion that the occupier remained a tenant at will pending the execution of the new lease," he said.

Erimus 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, and the parties contracted out of the security of tenure provisions contained in the 1954 Landlord and Tenant Act. After the lease expired the firm remained on the premises for a further three years, conducting occasional negotiations with landlord Barclays Wealth Trustees (BWT) 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, Erimus had created a new periodic tenancy and could not terminate the lease other than by giving notice to expire on an anniversary of the tenancy, the next one of which would have been 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.

Although the High Court judge ruled in favour of the landlord, Lord Justice Patten said that it was "far from clear as to when in his view the yearly tenancy came into existence".

"Although the judge was clearly right to regard the progress of negotiations as slow and lacking any urgency, there was no evidence before him that the negotiations had ceased or been abandoned by the parties because of an inability to agree terms," he said. "In fact, as the judge records, agreement was eventually reached on 15 June 2011 for a new contracted-out lease."

"The negotiations did not extend beyond 15 June 2011 and the desire (if it existed) for security of tenure up to March 2012 did not become a factor until after 26 August 2011. There is nothing before then from which one can derive any agreement or understanding about [Erimus] having security of tenure for a specific period of time. The parties were simply negotiating for a new lease and [Erimus] remained in possession in anticipation of that event. In commercial terms, the rent was acceptable to both parties and BWT had no reason to seek possession of the premises. Continued possession was a given so long as the negotiations for a new lease were in progress," he said.

Property litigation expert Siobhan Cross of Pinsent Masons, the law firm behind Out-Law.com, said that although the decision in this case went in the tenant's favour it would be landlords in particular that would benefit from the court's ruling.

"Landlords in particular will be relieved that drawn-out holding over arrangements while possibly sporadic negotiations for a new lease take place will not after all create protected periodic tenancies in the case of business premises," she said. "However, in the absence of sufficient evidence of ongoing negotiations for a new lease if unprotected business tenants are permitted to hold over, there remains a risk of this and landlords should take care to manage lease expiries to avoid this risk."