Mixed use leases

Author: Roy Perrott

Let’s imagine that a tenant of yours is taking a lease of premises which are partly commercial and partly residential, or you are buying the freehold (or a reversionary leasehold) of property which is partly commercial and partly residential. The most common situation where this arises is where the tenant operates a business on the ground floor of a building and the tenant (or another occupier) lives in a flat on the upper floor. For convenience, this arrangement is often documented in a single lease.

There have been a couple of legal developments recently which have made mixed use leases like this much less attractive. Firstly, there was a court case last year (Pirabakaran v Patel) which has made it much more difficult for a landlord to forfeit a mixed use lease. It has long been the law that, where someone is living in the property, the landlord cannot physically recover possession without a court order. However, it was assumed that commercial premises where the tenant “lives above the shop” were not subject to the same restrictions and that the landlord could peaceably re-enter the commercial part (but not the residential element) and change the locks. Unfortunately, the Pirabakaran case decided otherwise. The landlord now needs to apply for a court order to recover possession where any part of the premises is occupied as a residence. This causes significant time delays and increased costs.

There is also another legal development worth mentioning. For many centuries, landlords have been able to put pressure on defaulting tenants by using a remedy called “distress”. In everyday language, this means “sending the bailiffs in”. This remedy has, for some time, been restricted in the residential sector, insomuch as distress cannot be used in the case of assured shorthold or Rent Act tenants. It has, however, been possible to distrain where the premises are mixed commercial/residential. A law which has just been passed (the Tribunals, Courts and Enforcement Act 2007) will change this. It will no longer be possible to distrain where the premises are residential or mixed commercial/residential. Admittedly, it will take a while (perhaps two years or more) for this law to come into force but, when it does, it will further reduce the remedies available to landlords.

These legal changes make mixed commercial/residential leases problematic from the landlord’s point of view. The best way to avoid these difficulties is to have two separate leases, one for the commercial part and one for the residential element. That way, you will still be able to forfeit the lease, or seize the tenant’s goods, in respect of the commercial (but not the residential) premises. Of course, this does involve a bit more legal work, and increased management time, but the end result may warrant the extra effort.

Roy Perrott, Professional Support Lawyer, Fladgate LLP (rperrott@fladgate.com)

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