Landlords beware - the risks of allowing tenants to remain

Landlords of tenanted pub estates, restaurants or coffee shops often allow their tenants to remain in occupation after the expiry of their tenancy. This is often seen as the easier option where tenants remain in occupation, continue paying rent and complying with their repairing obligations. However, as a landlord you should note the considerable risks of this approach. The position will depend on whether your tenant has a “contracted out” or a protected tenancy.

Expiry of a ‘contracted out’ tenancy

If the expired business tenancy is contracted out of Part 2 of the Landlord and Tenant Act 1954 (“the 1954 Act”), the tenant will no longer have a legal right to occupy the premises. If you allow them to remain in occupation it will mean the tenant has either a periodic tenancy or a tenancy at will.

Tenancy at Will – this is not within the protections of the 1954 Act. It is terminable by either party at any time. This is the preferable option for landlords. 

Periodic tenancy - this is within the protections of the 1954 Act meaning that you would not be able to recover the premises without serving a section 25 notice, giving the tenant six to 12 months’ notice of termination. The usual rules would apply in relation to the section 25 notice which would clearly be a burden on you and you might not be able to recover possession.

Who decides which tenancy the tenant has following expiry of a contracted out tenancy?

It is for the court to infer which type of tenancy has been entered into when the lease ended. The court will primarily look at the ongoing negotiations between the parties (if any). If you are in the process of negotiating a new contracted-out tenancy, the court may infer that a tenancy at will is in place. In contrast, if the tenant remains in occupation and you are accepting rent without any renewal negotiations taking place, a periodic tenancy is likely to be inferred.

Practical tip - To protect your position you should enter into a simple Tenancy at Will with the tenant to document any interim occupation of the premises while you negotiate a new tenancy.

Expiry of a protected tenancy

If the expired tenancy was within the protections of the Landlord and Tenant Act 1954 and the tenant remains this gives rise to the statutory continuation of the tenancy under section 24.

The usual process then follows: (i) either the tenant issues a section 26 notice requesting a new tenancy, or (ii) the tenant issues a section 27 notice to terminate the tenancy, or (iii) you issue a section 25 notice setting out if you are opposed to the granting of a new tenancy, citing the relevant grounds.

If the tenant remains in occupation does it affect compensation?

Yes, it might well do. If the tenant remains in occupation without steps being made to terminate a protected tenancy, compensation entitlements under section 37 of the Act may be doubled when the Tenant does leave the premises. If the Landlord ends the tenancy on the basis of grounds (e), (f) or (g) of section 30(1) of the 1954 Act, the Tenant will be entitled to compensation based upon the rateable value of the holding. Compensation is doubled where the Tenant has occupied for 14 years prior to the date specified for termination. Therefore, allowing a Tenant to remain in occupation after expiry of the term, and potentially allowing the occupation to exceed 14 years, can result in increasing the compensation payments paid by Landlords to Tenants.

Minimising the risk of a rental void

If you allow a tenant to remain in occupation without negotiating a new tenancy, the tenant has the right, under section 27(2) of the 1954 Act, to give three months’ notice to terminate the statutory continuation.

If the tenant decides they do not want the tenancy to continue past the contracted end date, the tenant can simply cease to occupy the premises so that the tenancy ends by effluxion of time.

Both scenarios give the tenant the option to vacate the premises on short notice, leaving you at risk of a rental void. It is in your interest therefore to begin negotiations for a new tenancy at the earliest opportunity (noting that a section 25 notice cannot be served more than 12 months or less than six months before the contracted expiry of the tenancy).

Conclusion

The best approach is to document parties’ intentions, whether this be by way of an interim tenancy at will, or by issuing a section 25 notice as soon as practicable to begin negotiations.

This area of law is not new but is constantly developing and catches out Landlords of business tenancies on a regular basis.