What do home businesses mean for landlords?

Entrepreneurs and small businesses were seen
as the engines of future economic growth under the last coalition government.
The 'Business in You' campaign was specifically launched with the aim of boosting the number of UK entrepreneurs and small businesses. To facilitate this aim, one of the last acts of the coalition government was to introduce the Small Business, Enterprise and Employment Act 2015.

Sections 35 and 36 of the 2015 Act came into force on
1 October 2015 and deal with 'home businesses' run from tenanted dwelling-houses.
The provisions confer a symbiotic benefit on landlords and tenants by encouraging landlords to permit tenants to set up home businesses while ensuring, for landlords, that such businesses do not attract renewal protection rights under part 2 of the Landlord and Tenant Act 1954.

Section 23 of the 1954 Act governs when business tenancy renewal protection under part 2 applies. Such protection arises when the property comprised
in the tenancy 'is or includes' property which is occupied by the tenant for business purposes. In respect of mixed-use premises, it is therefore possible for a tenancy to inadvertently drift into part 2 protection, contrary to a landlord's intention. The serious ramifications of this are the statutory continuation of the tenancy, coupled with the right to a new tenancy.

The solution favoured by landlords to avoid the above problem has been to insert an appropriate prohibitory clause in the lease: section 23(4) of the 1954 Act prevents a tenant who carries on a business in breach of an express prohibition in the lease from relying on that business use to acquire part 2 protection.

Even then, however, a danger would remain for a landlord because section 23(4) provides that where a landlord has 'consented to' or 'acquiesced in' a breach of a user covenant
(i.e. effectively gone along with the business use), that use can count when ascertaining whether part 2 renewal protection is acquired. Whether a landlord has consented to or acquiesced in the tenant's use can be a heavily fact-sensitive and uncertain question.

The effect of these
provisions was to create a
trap for landlords in relation
to renewal protection arising inadvertently, and cause landlords to be extremely wary of allowing any business use of residential premises - thereby stifling the opportunity for tenants to set up home businesses.

Sections 35 and 36 of the 2015 Act seek to address the problem by introducing sections 23(5) and 43ZA into
the 1954 Act. Central to both sections is the concept of the home business, defined somewhat circularly as 'a business of a kind which might reasonably be carried on at home'. Subsection 43ZA(5) makes clear that a business concerning the supply of alcohol is not a home business, and subsection 43ZA(6) enables regulations to be made to prescribe which cases are, and are not, home businesses.

No such regulations have been made as yet. In the meantime, if in any doubt as to whether a business is one which might reasonably be carried on at home, it would be prudent for landlords to continue to err on the side of caution, rather than become embroiled in what looks like a fertile area for case development.

Under the new section 23(5), where a tenant's breach of a prohibition against use of the premises for business purposes consists 'solely' of carrying on a home business, the tenancy will not attract part 2 renewal protection. This remains the case even if the landlord consents to or acquiesces in the prohibited use. So, providing the business is a home business, renewal protection will no longer be a danger in such a case.

Section 43ZA contains further exclusions regarding home business tenancies. Such a tenancy is one under which:

• A dwelling-house is let as a separate dwelling;

• The tenant, or each where there are joint tenants, is an individual; and

• The terms of the tenancy (i) require the tenant - or one of them if joint tenants - to occupy the dwelling-house as a home (whether or not as a principal home); (ii) permit a home business to be carried on, or permit the landlord to consent to such business being carried on; and (iii) do not permit a business other than a home business to be carried on.

Although there has been some commentary on the 2015 Act questioning whether the provisions apply to flats,
the view of the writers is that 'dwelling-house' will be likely
to bear the meaning it has in
the Housing Act and Rent Act and, therefore, include flats; it
is certainly difficult at first blush to identify any reason in policy to draw a distinction. SJ

Elizabeth Dwomoh and Richard Hayes are barristers practising from Lamb Chambers

@LambChambers