The High Court decision has now been overturned on appeal. The Court of Appeal’s decision in Erimus Housing Limited -V- Barclays Wealth Trustees (Jersey) Limited and Ors [2014] EWCA Civ 303 contains important guidance as to the status of a commercial tenant who has remained in occupation during negotiations for the grant of a new lease.

The Facts

The tenant occupied the property under a contracted out lease. Following the expiry of that lease the tenant remained in occupation for an additional two years and carried on paying the rent and complying with the terms of the lease. Sporadic negotiations took place during this period. Before those negotiations could be concluded and a new lease granted the tenant found alternative premises and the tenant purported to serve three months notice to vacate the property. The landlord didn’t accept that the tenant was entitled to do this and sought to argue that the tenant occupied the premises under a periodic tenancy pursuant to which the tenant was required to give six months notice expiring at the end of a period of the original tenancy.

The key issue in dispute was whether or not the tenant had been occupying the premises under a tenancy at will (TAW) or whether or not a periodic tenancy had been created. If the answer was that the tenant had been occupying under a TAW then the tenant’s notice would have been sufficient. Alternatively if it had been occupying the premises under a periodic tenancy then its notice would have been ineffective and it would have been left liable to pay an additional 13 months rent totalling £185,000.00.

The Court of Appeal Decision

The High Court had decided that a periodic tenancy had been created. The Court of Appeal overturned the High Court’s decision and decided that there was a TAW. It reached this conclusion on the basis that:-

The payment of rent did not lead to an immediate assumption that there was a periodic tenancy. The nature of the negotiations between the parties suggested that they did not intend to enter into any intermediate contractual arrangement. The fact that those negotiations were sporadic didn’t make any difference. As long as the negotiations were continuing then it is likely parties did not intend to create a periodic tenancy. In circumstances however where negotiations broke down or came to an end but the tenant remained in occupation and continued paying the rent then the correct inference might be that the parties have chosen to regulate their legal relationship by something other than the grant of a long lease and a periodic tenancy might then be implied.

Practical Implications

It is often the case that a landlord will allow a tenant to remain in occupation following the expiry of the contractual lease particularly in circumstances where the market rental value of the premises have fallen and the landlord is keen to retain the tenant. In circumstances however where the original tenancy was contracted out the landlord runs the risk that if it continues to accept rent then the tenant may gain protection under the Act. Accordingly in this situation the landlord should at the very least stop issuing rent demands and not accept any rent until the basis of the tenant’s occupation has been properly documented.

From the tenant’s prospective they run the risk that they may end up inadvertently creating a periodic tenancy and become liable to pay a lot more rent than which they had bargained for. Whilst the tenant in the Erimus case was ultimately able to demonstrate that only a TAW was presumed to exist (and thereby get away with serving only three months notice) there will be other situations where the Court will infer that a periodic tenancy was created.

It is important to note that the position is quite different where the original lease was protected by the 1954 Act. In those circumstances the tenant will automatically continue to hold over under the terms of the old lease or be entitled to vacate upon giving three months notice to terminate (by serving a Section 27 Notice).

##Caught up in a dispute with your landlord or tenant? We can help you. Call Matthew Fletcher now on 01482 324252 or email mdf@gosschalks.co.uk.