For a long time we have been mindful of the dangers for landlords of allowing tenants to remain in occupation at the expiry of contracted out leases. However, the decision in Barclays Wealth Trustees (Jersey) Ltd v Erimus Housing Ltd  EWHC 2699 has highlighted the potential risks to tenants in staying in occupation and allowing negotiations of a new lease to drift.
The contracted-out lease expired in October 2009 and there was initially some movement to negotiate a new lease with an acceptance that the tenant was holding over on the terms of the expired lease. The tenant continued to pay and the landlord accepted the rent. It took approximately 20 months for heads of terms to be eventually agreed, but no new lease was ever signed. It became common knowledge that the tenant required larger premises and in August 2011, the tenant’s agent suggested that it should continue to hold over to March 2012 when the new premises would be ready. The landlord’s agent did not reply. Finally the tenant’s new premises were ready and the tenant purported to give three months’ notice to take effect on 28 September 2012. The landlord applied to court for a declaration that the tenant had an annual periodic yearly tenancy and that it was entitled to six months’ notice to determine the tenancy which would expire at the end of the relevant yearly period. If this was correct then the tenant would not have served sufficient notice and the rent, service charge and insurance rent would be due for a further 13 months (to 31 October 2013). The tenant’s argument was that it had a tenancy at will which could be determined at any time or at most a periodic tenancy on the basis that the rent was paid quarterly.
The principal issue decided by the judge was whether (1) the tenant’s notice giving three months’ notice was valid and binding as it occupied under a tenancy at will or (2) an annual period tenancy existed and the tenant needed to give at least six months’ notice, to expire on the anniversary of the term.
The judge concluded that any intention to agree terms and complete a lease had evaporated at an early stage after the expiry of the original lease. As such, the tenant was not occupying under a tenancy at will. Additionally, given the time that had expired since the end of the lease, the landlord would have had to have given notice to terminate the tenant’s occupation and thus the tenant could not claim that a tenancy at will existed. As a result, a periodic tenancy had arisen with the judge ruling that it was an annual period tenancy and the tenant should be responsible for the rent up to 31 October 2013 (an additional 13 months). The additional rent payable by the tenant was over £170,000 plus service charge and insurance rent. SDLT would also be payable on the annual rent although this was not mentioned in the ruling.
This highlights the danger to tenants in simply remaining in occupation following the expiry of a lease on the belief that they can simply serve notice when they wish to vacate. Although this is a rare ruling in favour of a landlord, both landlords and tenants should deal with the position when a contracted out lease expires or face the consequences.