Risky negotiations: contracted out leases

Author: Alison Mould

A recent case has highlighted some very serious issues for, perhaps, both landlords and tenants when a tenant remains in occupation after a lease which has been contracted out of the Landlord and Tenant Act 1954 expires.

Normally when a contracted out lease expires, if a tenant were to remain in occupation without consent he would be a trespasser.

However, what frequently happens is that the landlord and tenant are negotiating, subject to contract, prior to the end of the contracted out lease, the terms of a new lease. Those negotiations, frequently, have not concluded when the lease ends and therefore continue after the contracted out lease ends.

Often landlords continue to demand rent and tenants continue to pay rent at the old rate due under the old, now expired, lease. This arrangement can go on for months/years.

Courts are reluctant to formalise such arrangements and, therefore, often imply tenancies at will where the parties continue to negotiate. These are terminable forthwith upon notice and are consequently often unsatisfactory for both parties.

However, as frequently happens, parties continue to negotiate and then, gradually, one party ceases to negotiate. Rent continues to be demanded and accepted, and the status quo maintained. The situation simply drifts. In these cases the law will imply a periodic tenancy which is protected by the terms of the 1954 Act.

This was highlighted in a recent case.

The down side for a landlord is, of course, that the tenant now has 1954 Act protection, which it did not under the expired lease, and for a tenant that it may have to give over a year’s notice to determine a tenancy if it is deemed to be an annual periodic tenancy.

The lesson to be learnt is that the parties should ensure that the basis of occupation after the contractual termination date of a contracted out lease is certain and documented. The risks for either or both parties are only too obvious.

Alison Mould, Partner, Fladgate LLP (amould@fladgate.com)

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