Don't count on holding on to your rent, landlords

In Barclays Wealth Trustees (Jersey) Ltd v Erimus Housing Ltd [2013] EWHC 2699 (Ch), the High Court ruled that the tenant of office premises
was held to have become an implied annual tenant when it remained in possession while only desultorily negotiating terms for a new lease with the landlord, Barclays Wealth Trustees. That decision has now been reversed by the Court of Appeal which held that the tenants were tenants at will.

Erimus Housing was the tenant of premises owned by BWT under a five-year tenancy contracted out from security of tenure under the Landlord and Tenant Act 1954. When the fixed term expired on 31 October 2009, EHT remained in occupation of the premises and continued to pay rent in accordance with the terms of the original lease.

Negotiations between the parties for a new lease had
begun prior to the expiry of
the fixed term and continued intermittently. There were lengthy periods of silence; heads of terms for a new lease (also to be contracted out) were not agreed until June 2011.

A new lease was never actually executed. EHT decided to move to new offices, and told BWT that it would vacate the premises in March 2012. In June 2012, EHT wrote giving three months’
notice to terminate its tenancy
on 28 September 2012 and vacated on 25 September 2012.

Implied tenant

BWT claimed a declaration that EHT had an implied periodic annual tenancy. If so, the tenancy would not have terminated until October 2013 entitling BWT to additional rent.

In the High Court, the judge accepted that EHT had initially held over as a tenant at will
but found that it later became
a periodic tenant. The judge described the negotiations between the parties for a
new lease as “desultory”, and considered it relevant that EHT had indicated a desire to remain in the premises until a particular future date. Those were the main factors that led him to infer an intention that EHT should become a periodic tenant.

The Court of Appeal disagreed. Patten LJ, applying Javad v Aqil [1991] 1 WLR 1007, observed
that where a tenant holds over and negotiates over the terms
of a new lease, the almost overwhelming inference will
be that the tenant remains in occupation as a tenant at will.

The inference is even stronger where the proposed new lease is to be contracted out like the old lease. Although the negotiations between EHT and BWT were protracted and intermittent, at
all relevant times, the parties
were negotiating towards a
new, contracted-out lease. So,
EHT remained a tenant at will.

Lessons to be learned

Crucially, security of tenure under the 1954 Act applies to periodic tenancies (unless contracted out) but not to tenancies at will. A tenant holding over is very likely to
be regarded as a tenant at
will while the parties are negotiating the new lease –
even negotiating desultorily.

However, if negotiations
come to an end and the tenant remains, paying rent, a different inference may be drawn: the tenant may be held to be a periodic tenant.

More often than not, a landlord will not want a tenant holding over at the end of a fixed-term lease to be classed as a periodic tenant, with statutory protection for his periodic tenancy. A tenant holding over may want to retain the freedom to vacate at short notice provided by a tenancy
at will. Therefore, to avoid a periodic tenancy arising inadvertently, it is important not to allow negotiations over the new lease to break down for so long that the court may infer that they have ceased altogether.

Where negotiations are likely to drag on, consideration might even be given to entering into a written tenancy at will or short fixed-term tenancy to govern the situation temporarily. However, Erimus shows that the court will not lightly infer the grant of a periodic tenancy to a tenant holding over pending grant of a new lease. SJ

Daniel Gatty and Caoimhe McKearney are both barristers practising from Hardwicke