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Can a Commercial Tenant Stay After a Contracted-Out Lease Expires? The Risks Commercial Landlords Need to Know
Andrew Koffman
Head of Litigation
This is the second article in our series examining common commercial landlord and tenant pitfalls. In our previous article, we explored the risks of allowing a commercial tenant to move into premises before a lease is formally completed. You can read that article here.
Why Allowing a Tenant to Stay After a Contracted Out Lease Expires Can Create Legal Risks
Many commercial landlords make use of the procedure by which a lease can be contracted out of the security of tenure provisions of the Landlord and Tenant Act 1954. Once this has been properly done, the tenant must vacate when the contractual term ends.
However, problems can arise when a tenant remains in occupation after a contracted-out lease expires, particularly where both parties are negotiating a renewal and rent continues to be paid and accepted. While the landlord may view the arrangement as temporary, the legal position can quickly become more complicated.
Allowing a tenant to stay without documenting the basis of their continued occupation can create uncertainty over the tenant’s rights, the landlord’s ability to recover possession, and whether a new tenancy has arisen. In some circumstances, disputes can develop over security of tenure, repair obligations, service charges, rent reviews, break rights and other key lease terms.
This article explains the risks of permitting a tenant to remain in occupation following the expiry of a contracted-out commercial lease and why landlords should ensure any interim arrangements are properly documented.
What Happens When a Contracted-Out Commercial Lease Expires?
The Landlord and Tenant Act 1954 provides most business tenants with security of tenure, meaning landlords must follow specific procedures to terminate a tenancy and tenants may have a statutory right to a lease renewal.
Landlords and tenants can, however, agree to exclude these protections by following the statutory contracting-out procedure before the lease is granted.
Where a lease has been validly contracted out, the tenant will generally have no automatic right to remain in occupation once the contractual term ends. In practice, though, many parties enter into negotiations for a replacement lease before expiry, often intending for the new lease to be contracted out as well.
The difficulty arises when those negotiations are still ongoing when the existing lease expires.
Can a New Tenancy Be Created If the Tenant Stays After the Lease Ends?
Potentially, yes.
If a tenant remains in occupation after the expiry date and the landlord continues accepting rent, the law may imply a new tenancy from the parties’ conduct.
The precise nature of that arrangement will depend on the facts of the case. It may not reflect the terms of the expired lease and may create uncertainty regarding the landlord’s and tenant’s respective rights and obligations.
Significantly, it may not be clear whether any newly created tenancy benefits from security of tenure under the Landlord and Tenant Act 1954.
Why Is Informal Occupation After Lease Expiry Risky for Commercial Landlords?
Allowing a tenant to remain in occupation without documenting the arrangement can lead to a range of legal and practical difficulties.
Questions may arise over:
- Whether a new tenancy has been created
- Which terms of the previous lease continue to apply
- Responsibility for repairs and maintenance
- Service charge obligations
- Insurance obligations
- Rent review provisions
- Break rights
- Compliance with legal and regulatory requirements
The longer the occupation continues without documentation, the greater the potential for disputes.
How Can Holding Over Affect a Landlord’s Future Plans?
Informal occupation can create particular difficulties where a landlord intends to:
- Redevelop the property
- Sell the premises
- Re-let to a new tenant
- Recover possession for another commercial purpose
What may have started as a temporary arrangement can become more complicated if the tenant argues that the landlord’s conduct demonstrated an intention to permit ongoing occupation.
Landlords may also find themselves involved in disputes about how rent payments should be treated and whether other obligations from the previous lease remain enforceable.
Does Accepting Rent Mean a Tenant Has Security of Tenure?
Not necessarily.
While accepting rent after lease expiry can be an important factor, the legal position depends on all of the surrounding circumstances.
Each case will turn on its own facts, including:
- The nature of any lease renewal negotiations
- The communications between the parties
- The length of the continued occupation
- How rent is demanded and accepted
- Whether any temporary arrangements were documented
This is why landlords should avoid assumptions and seek legal advice as soon as it becomes clear that a tenant will remain in occupation beyond the lease expiry date.
What Did the Court Decide in Erimus Housing Ltd v Barclays Wealth Trustees?
The Court of Appeal considered this issue in Erimus Housing Limited v Barclays Wealth Trustees (Jersey) Limited [2014] EWCA Civ 303.
Following the expiry of a contracted-out fixed-term tenancy, Erimus remained in occupation while negotiations for a new lease were ongoing.
At first instance, the trial judge concluded that an annual tenancy had been created, which would have afforded the tenant greater protection.
However, the Court of Appeal reached a different conclusion. It held that the occupation took place against the backdrop of continuing lease negotiations and that the arrangement was a tenancy at will, rather than an annual tenancy.
This outcome was favourable to the landlord, but the case also highlights the uncertainty that can arise when parties fail to properly document a tenant’s continued occupation.
What Is the Best Way to Protect Your Position When a Tenant Remains in Occupation?
If a new lease will not be completed before the existing lease expires, landlords should document the basis on which the tenant is permitted to remain.
Depending on the circumstances, an interim arrangement may take the form of:
- A tenancy at will
- A licence to occupy
- Another suitable short-term agreement
The appropriate solution will depend on the parties’ objectives and the specific circumstances of the property and proposed new tenancy.
What is important is that the arrangement is documented promptly so there is clarity regarding the tenant’s status and both parties understand their rights and obligations.
Key Takeaway for Commercial Landlords
A contracted-out lease does not eliminate risk if the contractual term is allowed to expire. Allowing a tenant to remain in occupation while lease renewal negotiations continue can create uncertainty and may lead to disputes about possession, lease terms and statutory protection.
Commercial landlords should ensure that any post-expiry occupation is carefully documented and supported by appropriate legal advice. Taking action early can help avoid costly disputes and preserve flexibility for future plans involving the property.
Speak to Bermans’ Litigation Team
If your tenant remains in occupation after a contracted-out lease has expired, or you are negotiating a lease renewal and need advice on the most appropriate interim arrangement, Bermans’ Litigation team can help.
Our team advises commercial landlords across Liverpool, Manchester and throughout the UK on issues including security of tenure, tenancy at will agreements, possession disputes, lease renewals and contested landlord and tenant matters.
To discuss your situation, contact Andrew Koffman, Partner and Head of Litigation.