Tenant in occupation but no lease: why a landlord should not take the risk

A commercial lease has significant implications for both the tenant, who is given certain statutory rights to remain in the property and for the landlord, who may not be able to recover the possession of the property and the end of the contractual term.

A landlord should be careful not to allow a tenant in occupation without a written agreement. To do so could permit certain rights implied by statute, which would affect the landlord’s position and the relationship in favour of the tenant.

Granting a lease

The formalities for the creation of a lease will vary depending on the length of term. If the agreement to grant a lease is over three years in duration, it must comply with the requirements under s.2 LP(MP)A 1989. 

The lease must be:

• In writing,
• Containing all expressly agreed terms;
• Signed by both parties

An area of concern is that some leases are created without following formalities. However, the absence of a written lease will be irrelevant and may not preclude the intervention of statute where a contract can be found if:

• The landlord has been accepting rent paid by the tenant, or
• The arrangement has been concluded orally – s.54(2) LPA – an oral lease of less than three years is a permissible legal interest for the tenant.

The Landlord and Tenant Act 1954 (“LTA”)

If a tenancy is a business tenancy and the tenant has been in occupation for more than a year they will have obtained what is known as ‘security of tenure’ within the meaning of the 1954 Act. 

The tenant therefore:

• Has security of tenure – a statutory right to be granted a new lease on the expiry of the existing lease
• At the end of the lease, a right subject to 7 grounds which the landlord must make a court action for to automatically renew a new lease under s.24

Importantly, the LTA provides a provision that provides the tenant with compensation if the landlord obtains possession. This can be excluded in a lease, but in the absence of a written lease is implied in an unwritten lease.

The terms of a business lease are freely negotiable. The parties may agree that the LTA will not apply to the lease, known as ‘contracting out.’

This means that:

• The tenancy will end on its contractual term date, with no statutory right to renew or to remain in property
• The tenant will have no right to compensation under the LTA

Practical issues: Compensation

If the landlord successfully opposes the grant of a new lease, the tenant may be entitled to statutory compensation under s.37

Compensation on vacating the excluded can be as much as twice the rateable value of the property

Can the landlord exclude the right to statutory compensation?

s.38(2) prohibits the exclusion of statutory compensation except as below.

Exceptions

An agreement to exclude or modify the right to statutory compensation will not be void if:

At the date of quitting, the tenant has been in occupation for the purpose of its business for less than five years

Calculating compensation

A multiplier is added to the rateable value of the property. The multiplier may be doubled if the tenant and any predecessor have been in occupation of the property for the purpose of the same business for 14 years or more.

• For LESS than 14 years of occupation, compensation will be calculated by the rateable value of property x the appropriate multiplier x 1
• For MORE than 14 years of occupation, compensation will be calculated by rateable value of the property x appropriate multiplier

Conclusion

A landlord should not just let a tenant into occupation without a properly drawn lease, considering whether the tenant may have security of tenure and, therefore, a right to occupation or not. 

By accepting rent without a written lease, after a year, a tenant will be entitled to security of tenure and compensation if the landlord recovers possession. 

A landlord would be ill advised to allow a tenant into occupation without considering these points as the compensation amount could be several thousand pounds even for a small high street shop.

Expert legal advice on commercial property matters

SO Legal has offices across the South East. Our team of commercial property solicitors in London, Brighton, Eastbourne, Hastings and Uckfield can help you understand your options.