Does an excluded business tenancy become a protected tenancy if they remain in occupation after the expiry of the lease?

This article was first published in Lexis PSL Property.

If the landlord and tenant have agreed to exclude the tenancy from the LTA 1954 protections, but the tenant remains in occupation after the expiry of the original lease what is the status of the tenancy—will the lease become a protected tenancy? Does it make a difference if they remain in occupation for over a year?

Does an excluded business tenancy become a protected tenancy if they remain in occupation after the expiry of the lease?

Section 38A of the Landlord Tenancy Act 1954 (LTA 1954) sets out the statutory procedure which must be followed by parties to a business tenancy prior to the grant of the lease if they wish to exclude the right to renew afforded to business tenancies under sections 24 to 28 of LTA 1954.

The question therefore arises as to what happens when the tenant holds over after the expiry of the contractual lease, in particular whether the tenancy continues as a protected periodic lease (as a periodic yearly tenancy if it was a tenancy at a yearly rent) or as a tenant at will.

The law will imply from what was agreed and all the surrounding circumstances, the terms that the parties are to be taken to have intended to apply. Without more, the occupation by a tenant of premises at a monthly rent or the permission by the landlord to a tenant to remain in occupation after the expiry of a lease, gives rise to the conclusion that the parties intended that there should be a monthly lease.

The reason that any new tenancy which arises would be a protected periodic tenancy is that the parties would not have carried out the statutory procedure for contracting out of the LTA 1954 prior into entry of the new tenancy. It is, therefore, relevant to the question of the nature of the type of tenancy which has arisen that any new periodic tenancy which arises in this situation would carry with it the protection under LTA 1954. The former tenant under an excluded tenancy would therefore acquire a tenancy which had security of tenure.

In Javad v Aqil, the tenant continued to occupy premises and pay rent pending agreement on the terms of a proposed lease for ten years. The court gave guidance on when in circumstances where the tenant holds over pending the negotiation of a new lease, the court should infer the creation of a periodic tenancy as opposed to a tenancy at will. The court held that where parties are 'in the throes of negotiating larger terms' the payment of rent or carrying out of repairs should not be taken to mean that the parties have agreed to more than a licence determinable at any time or a tenancy at will.

In Barclays Wealth Trustees (Jersey) Ltd v Erimus Housing Ltd, the Court of Appeal considered what was meant by "throes of negotiating larger terms" and whether a periodic tenancy arises if negotiations stall. In that case, the question was whether a new yearly periodic tenancy had arisen after a tenant continued to occupy premises and to pay the rent reserved under the former lease for some 18 months, including a period after the parties’ negotiations for a new lease broke down. The court described the negotiation as "painfully slow, but never abandoned". The court held that where a party held over after the end of the term of a lease, he did so, without more, as a tenant on sufferance until the landlord consented to his possession. If the landlord consented to his possession, he then became a tenant at will even if the rent reserved from the former lease was an annual lease. The payment of rent did not give rise to a periodic tenancy. The parties’ contractual intentions were to be determined by looking objectively at all relevant circumstances. Where the parties were in negotiations for the grant of a new lease it was more likely than not that the parties did not intend to enter into an intermediate contractual relationship. A more likely inference was that the tenant was a tenant at will pending the execution of a new lease. The courts will be reluctant to find that a party has agreed to a periodic tenancy with LTA 1954 protection, whilst negotiating for a new lease, particularly one which they intended to be contracted out of the LTA 1954.

A new protected periodic tenancy will be taken to have arisen where the landlord permits the tenant to remain in occupation after the end of his former tenancy, unless the parties are in negotiations for a new former lease and/or the circumstances in which the tenant holds over can be explained by something other than the grant of a new tenancy.

For further information, see Practice Note: 1954 Act—surrender of business tenancies.