Documenting occupation of commercial property

It can be tempting for a landlord to cut corners when dealing with a new occupier of a commercial building, particularly when there is so much pressure to reduce costs and to generate income as soon as possible once a new tenant is found. However, there are traps for the un-wary. The law distinguishes between leases, licences and tenancies at will. Each has its own characteristics. One of the key elements of a lease is exclusive possession this excludes the landlord from the premises (other than specific reserved rights). Possession is not the same as a right of occupation, possession includes the right to receive rents from the property.  In contrast, a licence is a personal right to occupy. It does not create an interest in land. There have been numerous cases taken to court to determine whether a person has a lease or a licence, if the former, the landlord could find himself in great difficulty recovering his premises. Under Part II of the LTA 1954, a tenant occupying premises for the purposes of its business generally has a statutory right to renew its tenancy at the end of the term. The landlord can only oppose renewal on certain limited grounds. There are exceptions but this is the general rule. A six month tenancy falls outside the secure business provisions under the Act, but if the tenant has, in fact 12 months occupation (which could be through a predecessor running the business) , the tenancy falls back under the Act. For this reason, licences and tenancies at will are attractive options where an occupier is seeking a short term arrangement. Tenancies at will are arrangements where either landlord or tenant can determine the tenancy at any time. Properly prepared, these tenancies can be useful for landlords because, they can be used during negotiations for a lease to allow early access. However, long term they are not acceptable to either party because they offer no security at all and as soon as the parties add notice periods, or a minimum period before the tenancy can be determined, they are likely to be deemed periodic tenancies and fall back under Part II of the 1954 Act.

Also, simply calling an arrangement a licence rather than a tenancy or lease will not ‘save’ the arrangements form being a lease (the leading case is Street v Mountford [1985] in which the House of Lords held that the court should look at the substance as well as the form of the agreement in deciding whether an agreement is a licence or a tenancy). Therefore, letting an occupier into commercial property on a handshake, or a DIY licence can be very short sighted. A landlord could inadvertently grant an interest in land which could bind the property for many years to come, we recommend that legal advice is always taken to ensure that whatever arrangements are proposed, these reflect what the parties actually intend and do not deliver unintended rights of security.

For more advice on commercial property, please contact Clare Magill on 01752 292354 or email cmagill@wolferstans.com