Can a Commercial Tenant Move in Before the Lease Is Signed? The Risks Every Landlord Should Know

Andrew Koffman
Head of Litigation

If you are a commercial landlord, you may have a potential tenant who is very keen to go into occupation. Terms may have been agreed with them and it may seem a certainty that a lease will be completed shortly. It can be tempting to allow the tenant to take occupation and start paying rent before the legal paperwork is completed, in anticipation of imminent completion.

However, doing this can create significant legal and practical risks for landlords.

Can a Commercial Tenant Acquire Rights Before a Lease Is Formally Completed?

In such situations, it is not unusual for the parties never to complete the transaction formally. Sometimes they just never get round to it. On other occasions the non-completion may arise from the premeditated actions of the tenant.

Once a tenant has moved in and rent is being paid and accepted, the law may well recognise a tenancy even though the formal lease has never been signed and even if the landlord was not intending to create one, pending formal completion. In some circumstances, a court may conclude that a binding tenancy has been created through the parties’ conduct alone.

Sometimes the tenancy that has been created is on different terms to those on which the landlord had been expecting to let the property.

This can be a particular problem where lease negotiations were not fully concluded. Important provisions (e.g. relating to repair obligations, service charges, break rights, controls on assigning or subletting, and costs recovery) may never have been properly documented. As a result, the landlord may not have the protections it expected to have.

What Are the Risks of Allowing a Commercial Tenant Into Occupation Before a Lease Is Signed?

There is also a risk that the occupier acquires a periodic tenancy rather than the fixed-term lease originally intended. This can affect both parties’ rights and may make it more difficult for the landlord to recover possession when required; or, conversely, it can make it easier for the tenant to exit when it chooses, which may not be convenient for the landlord.

It can also be a slow and uncertain process if the landlord wishes to recover possession on the grounds of breaches by the occupier/tenant, or more accurately, on the grounds of acts or defaults that would have amounted to a breach if there had been a written lease in place.

Disputes can also arise over rent, deposits, insurance contributions, service charges and other financial arrangements. In addition, once a tenant is in occupation, a landlord’s negotiating leverage can diminish significantly.

In some cases, tenants may even argue that they relied on representations made by the landlord when deciding to take occupation, creating further legal complications.

How Can Occupation Affect Security of Tenure Under the Landlord and Tenant Act 1954?

Particular care is needed where the proposed lease is intended to be excluded from the security of tenure provisions of the Landlord and Tenant Act 1954. If the statutory contracting-out process has not been completed before occupation begins, the tenant may acquire security of tenure and potentially a right to a new lease as and when it requests one.

The law is not always clear, or easy to predict on a case-by-case basis.

What Do the Courts Say About Tenants Occupying Without a Formal Lease?

In Walji v Mount Cook Land Ltd [2000] EWCA Civ 356, the Court of Appeal found that there was a quarterly periodic tenancy (as the tenant contended) rather than a tenancy at will (as the landlord argued for). This case is also relevant to a future article in this series which deals with cases where the landlord allows someone other than the named tenant to go into occupation.

The claimants were not the named tenant, which was a company which had been struck off, as their immediate landlord knew. The terms of a proposed tenancy to the claimants had been agreed in principle, without a lease being formally completed, and the landlord accepted rent from the claimants. There had been no further negotiations and neither party had pressed for the grant of the lease.

The tenant therefore had security of tenure under the 1954 Act, no doubt to the landlord’s annoyance.

The landlord received better news in Javad v Aqil [1991] 1 WLR 1007. The parties had been negotiating for a 10-year lease while the tenant was already in occupation, paying rent on a quarterly basis. The negotiations broke down and the tenant claimed to have a quarterly lease with security of tenure.

The Court of Appeal, agreeing with the trial judge, found that the tenancy was merely a tenancy at will, which the landlord could terminate at any time. Of course, a result such as this may actually favour the tenant when the letting market is weaker.

What Is the Safest Approach for Commercial Landlords?

For landlords, the safest approach is simple. Do not hand over possession until the lease, any security documentation and any required statutory procedures have been fully completed; and be sure to take, and act on, legal advice.

Need Advice on a Commercial Property Dispute?

Whether you are dealing with an occupier who moved into premises before a lease was signed, a dispute over tenancy rights, or issues relating to possession and security of tenure, obtaining legal advice at an early stage can help protect your position and minimise risk.

Bermans’ Litigation team advises commercial landlords across the North West and beyond on property disputes, tenancy issues and business-critical litigation. To find out how we can help, get in touch with Bermans Head of Litigation, Andrew Koffman.