Do I need to bother with a new commercial lease?

I am often asked by clients whether or not they need to bother with a new commercial lease when they are simply allowing an existing tenant to remain in occupation, or only letting commercial premises for a short period of time.  There are, of course, very good reasons why a proper lease should be put in place and you should not be persuaded not to do so by those landlords who have survived DIY arrangements without a disaster.

When an existing commercial tenancy continues under the Landlord & Tenant Act 1954 (“the 1954 Act”) after the expiry of the contractual term, that is one thing, and the terms of such occupancy are regulated by statute.  However, where a tenant does not enjoy security of tenure under the Landlord & Tenant Act 1954, accepting rent after the expiry of the contractual lease term can create a new tenancy where security of tenure under the 1954 Act may be acquired by the tenant, whether that is what you, as the landlord, intended or not.  This is particularly so where the rent or other material terms change.  If the tenant uses the premises for the purposes of a business, has exclusive occupation, is effectively granted a term of 6 months or continues in occupation for more than 12 months, such security of tenure is likely to arise to the tenant’s benefit.  This could have unfortunate consequences for a landlord and particularly so if the landlord wishes to get the premises back either for their own use or for redevelopment.

Where security of tenure under the 1954 Act does not apply, there can be some significant debate as to what are the respective obligations of the landlord and tenant in relation to the premises.  Whilst the existence of a lease would regulate these, the absence of one is likely to create uncertainty and disputes when a problem arises, and particularly so if this is the first letting between the landlord and tenant where no previous lease exists.

There is great scope for problems where a landlord lets a new tenant into occupation for the first time without a lease being in place.  That occupancy may be a tenancy at will where either party can bring the lease to an end by giving notice to the other or, more likely, would create a periodic tenancy which, in turn, may gain security of tenure under the 1954 Act.  The absence of a lease will leave uncertainty as to many obligations, unless these are otherwise properly documented, such as who is to repair the building both internally and externally, who is to insure, whether or not the tenant can make alterations or changes of use etc.  These are only a few examples of the potential issues that could arise between landlord and tenant.  If the tenant remains in occupation for some time, these issues may be forgotten about until a problem arises.  Destruction of the premises raises a whole raft of legal issues, such as:

1. Are the premises insured and is that insurance voidable because the occupation of the tenant was not disclosed?
2. Who is to reinstate the premises and at who’s cost?
3. Does the tenancy come to an end or is the rent still payable and, if so, for how long?
4. If the tenancy has not been determined, who can determine it and how?

It is surprising how many landlords forget to tell their insurers that they have let the premises, which in turn may enable insurers to avoid payment under a claim or they may also fail to take out appropriate tenant related insurance, for example loss of rent if the premises are damaged or destroyed, or third party liability.

A decent commercial lease would regulate these matters and prompt the person responsible for arranging insurance to put proper cover in place.

Most landlords do not have a detailed knowledge of the underlying law relating to landlord and tenant obligations and, therefore, when a dispute arises they have to consult solicitors and often spend vastly more fees in sorting out a problem or dispute than they would in granting a properly documented formal lease in the first place.

In short, it is not worth taking the risk.  Always have a proper lease, make sure it is the right kind of lease for your particular circumstances, with particular regard to whether or not the security of tenure provisions of the 1954 Act should apply or be excluded. If these provisions are to be validly excluded, there is a particular process to be followed to the letter.  Always consider insurance aspects and make sure the lease addresses all important terms.  Proceeding any other way is likely to be a false economy and is potentially fraught with legal difficulties.

For advice in connection with commercial leases, contact Mike Stone at Colemans:    email michael.stone@colemans.huntersserver.co.uk or telephone 01628 631051.

Categorised in: Commercial Property

This post was written by Colemans Solicitors LLP