Occupation of business premises pending completion

Wednesday 07 October 1987

This article will consider the position of potential purchasers or tenants who are allowed into occupation pending the conclusion of negotiations.

In particular it will consider the status of a prospective business tenant allowed into occupation of business premises on the basis that the landlord and the tenant will jointly apply for an order excluding security of tenure under the Landlord and Tenant Act 1954, pt II.
Contracting out
In relation to business premises the parties have been able, since 1969, to apply to the court before the grant of the lease for an order sanctioning the grant of a lease excluding the security of tenure provisions under s.

38(4) of the Landlord and Tenant Act 1954.

It is usual to apply to the county court.

The original intention was apparently that the court should exercise a positive discretion to permit contracting out (see Law Com no.

17 para 33); but in practice it seems that a joint application by both parties is invariably sanctioned.
There can be no doubt that practitioners are experiencing increasing pressure for arrangements to be made so that tenants can be allowed into occupation pending the completion of legal formalities.

Frequently this is to avoid the delay entailed in obtaining an order excluding the protection of the 1954 Act.
There is no risk in permitting a tenant to take occupation before the execution of the legal lease, provided that the court order has been made.

This is because it was held by Lawson J in Tottenham Hotspur Football & Athletic Co Ltd v Princegrove Publishers Ltd [1974] 1 WLR 113 that the principle in Walsh v Lonsdale (1882) 21 ChD 9 then applies, so that the tenant's occupation is on the terms of the agreement embodied in the court order, including the term removing security of tenure.
The same is not true where the terms are agreed, but the agreement is dependent upon successful application to the court, where the application is not yet made or is being processed by the court.

The doctrine of Walsh v Lonsdale cannot be applied where the agreement is subject to a pre-condition, such as the obtaining of a court order, so that specific performance is not yet available.

If the tenant is to be allowed occupation in the interim period, some device must be employed to protect the landlord's position.

The terms of the agreement must also be spelt out clearly.

It is particularly important to prevent the tenant sharing or parting with possession.

For a suitable precedent, see The Encyclopaedia of Forms and Precedents (5th edition) vol 22, form 7.
It is an even riskier business for the landlord to allow occupation before terms are agreed.

Prevarication by the tenant is almost inevitable and a claim for an estoppel based on expenditure by the tenant a distinct possibility.

The overwhelming advice must be that the landlord's solicitor must resist pressure to allow the tenant into possession before terms are finally agreed.

See, for example, the excellent discussion in the Encyclopaedia paras 239-245.

However, if such arrangements are to be made, the practitioner needs to weigh carefully the benefits and disadvantages of the various possible methods.

The landlord's solicitor needs to be especially careful to ensure that the intended tenant does not acquire security of tenure under the Landlord and Tenant Act 1954 even as application is being made to exclude such security.

The possible methods that are likely to be considered are (1) the granting of a tenancy at will, (2) allowing the prospective tenant to occupy as a licensee, and (3) the granting of a short term lease pending the court application.

Before these methods are examined individually it is necessary to consider the general approach of the courts to business tenancies after Street v Mountford [1985] AC 809.
Business tenancies
No security of tenure will accrue to a licensee of business premises, provided always that the licence is genuine.

But, of course, it is no longer enough simply to draft an occupational agreement in licence terms and assume that the courts will accept it at face value.

The House of Lords decided in Street v Mountford that a grant of the right to exclusive occupation of residential premises for a term at a rent will normally create a lease and not a licence.
How should the courts approach a corresponding case affecting business property? Superficially the issue, whether the occupier is a licensee without protection or a tenant enjoying the protection of the legislation, is similar.

Principle suggests that the lease/licence distinction should be approached in the same way irrespective of the nature of the property.

And dicta are emerging that suggest that Street v Mountford applies equally to business tenancies.

'Self-contained business offices stand in just the same case as do residential properties', said Judge Paul Baker QC in London & Associated Investment Trust plc v Calow (1987) 53 P&CR 340, 352.

Yet there are distinctions to be drawn between the two codes of protection.

They are discussed in detail elsewhere in this article, but in summary they are as follows.

First, a tenancy at will of business premises does not attract the protection of the Landlord and Tenant Act 1954; on the other hand a tenancy at will can, apparently, be protected under the Rent Acts.

Hence the reassignment of a business occupancy from the licence category to the tenancy category is not decisive: it might still be viewed as a tenancy at will.

Secondly, short term business tenancies, for six months or less, escape protection, whereas the Rent Acts catch even the shortest tenancy of residential property.

And thirdly, contracting out of the security of tenure provisions of the business tenancies legislation is a possibility.

This is in sharp contrast to the position under the Rent Acts.
Hence the underlying policy issue in Street v Mountford -- should landlords be permitted to evade the legislation by sharp drafting? -- is not directly transferable.

It is clear that the drift of judicial decisions has been towards a strong affirmation of the principle of Street v Mountford, that exclusive occupation of a property at a rent for a term creates a tenancy.

See, for example, the discuss ion by Bridge at [1986] Conv 344.

It would be most unfortunate if this attitude were to spill over into provisional business leases, where the underlying objective of preventing evasion of the Rent Acts is not in point.

Some decisions of the Court of Appeal, most notably Dresden Estates Ltd v Collinson (1987) 281 EG 1321 (see PF Smith [1987] Conv 220) suggest that a restrictive view of Street v Mountford is being taken so far as business tenancies are concerned.
Tenancy at will
It is now necessary to consider in turn the various devices available where a business tenancy is to be contracted out of the protection of the Landlord and Tenant Act 1954, but where the tenant is to be allowed into occupation before the order is made.

The first technique available to the prospective landlord is to allow his intended tenant to occupy as a tenant at will.

The tenancy at will cannot be used as a device to evade the Rent Acts, but the position of the business tenant under the Landlord and Tenant Act 1954 is different.

The protection applies neither to an implied tenant at will (Wheeler v Mercer [1957] AC 416 HL) nor to an express tenant at will (Hagee (London) Ltd v A B Erikson & Larson [1976] QB 209 CA).
Recent authority suggests that the tenancy at will is a useful device where an existing business tenancy expires and renewal is dependent upon an application for contracting out of the security provisions.

This is shown by Cardiothoracic Institute v Shrewdcast Ltd [1986] 1 WLR 368.

In that case the landlord had the prospect of redeveloping its business premises.

Accordingly the landlord granted a succession of short term tenancies, which were contracted out of the business tenancies legislation after joint application to the county court.

Immediately before the expiration of the third such short tenancy, the landlord and tenant negotiated for a further application to the county court for a renewed lease, but the tenant never agreed to the county court application.

The tenant remained in occupation for two further years, paying an agreed rent.

When the agreed extensions for the occupation expired, the tenant claimed the protection of the Landlord and Tenant Act 1954.
Holding over and holding over pending a negotiation were said to be classic examples of a tenancy at will by Scarman LJ in Hagee (London) Ltd v A B Erikson & Larson (supra, at p.217) Knox J applied this principle in the Cardiothoracic Institute case, but with this notable extension: the tenants at will were paying an agreed rent during their occupation, yet were still, on the facts, tenants at will.

To the same effect is Longrigg & Trounson v Smith (1979) 251 EG 847.

Knox J did not specifically consider whether this earlier case still stood after Street v Mountford.

Although in each case the landlord won, they highlight the danger of the device of the tenancy at will from the landlord's point of view.

The normal consequence of the payment and acceptance of rent would to be create a periodic tenancy which would be protected.

Contracting out is not then permissible (Re Land and Premises at Liss, Hants [1971] Ch 986).
An express tenancy at will created afresh rather than by way of holding over may also escape the protection of the Landlord and Tenant Act 1954, as in BRB v Bodywright (1971) 220 EG 651.

But the court must scrutinise the transaction to see if it truly creates a tenancy at will.

'Parties cannot impose upon an agreement by a choice of label a nature or character which upon its proper construction it does not possess', according to Scarman LJ in the Hagee case (at 217).

So it is vital to create a genuine tenancy at will.

For a discussion of the appropriate terms for a tenancy at will see Lewison, Drafting Business Leases (2nd edition) pp.37-39.

Again, a reformed transaction would create a periodic tenancy, which would inevitably be protected.
Licences
Supposing that the landlord eschews the use of the tenancy at will, the next question is whether he should use a licence.

Is it permitted to allow a potential tenant to occupy business premises as a licensee pending application to the court to exclude security of tenure? Following Street v Mountford (supra) the grant of a right to exclusive occupation of land for a term at a rent will normally create a lease and not a licence.

Exclusive possession will not create a tenancy if there was no intention to contract at all or if there was some other relationship between the parties, for example where the parties are vendor and purchaser.

The question is whether or not the courts are prepared to expand the special categories where exclusive occupation is consistent with a licence.Generally the courts seem to have adopted a restrictive attitude, while recognising the possibility that additional special relationships beyond those specified by Lord Templeman might exist.

An example is a dictum by Millett J in Dellneed Ltd v Chin (1987) 53 P & CR 172, 187.

The issue is therefore whether these special categories can be expanded to include not only vendor-purchaser relationships but also the relationships of a prospective vendor and a prospective purchaser or an intending landlord and an intending tenant under 'subject to contract' agreements.
The position of a prospective purchaser of freehold land is unclear.

The Rent Acts were held to apply to a prospective purchaser of a dwellinghouse by the Court of Appeal in Bretherton v Paton (1986) 278 EG 615 (see Marriott [1986] Gazette, 30 July, 2393).

The owner of a house, a Mr Bretherton, allowed a Miss Paton to occupy the house with a view to putting it in good order and purchasing the house once it was in a mortgageable state.

Miss Paton paid £1.20 per week in respect of insurance premiums.

Some of the repairs were carried out, but most were not.

The parties were ultimately unable to agree a price.

There was no doubt that the owner of a house had allowed the occupier into exclusive possession of a property.

The Court of Appeal held that the occupier was a tenant and thus protected by the Rent Acts.

The circumstances did not, said the court, exclude the prima facie presumption that a grant of exclusive possession created a tenancy.

However it is difficult, it is submitted, to reconcile this case with an earlier Privy Council decision (approved by the House of Lords in Street v Mountford), the case of Isaac v Hotel de Paris Ltd [1960] 1 WLR 239.

In that case it was decided that where occupation was taken under an unconcluded contract the relationship of the prospective vendor and the prospective purchaser was that of licensor and licensee.
It is true that these cases concerned freehold land, and older authority suggests that a person who enters with a view to future tenancy is a tenant at will.

Nevertheless it is anomalous and unsatisfactory if the position of an occupier under a subject to contract agreement to take leasehold land is different from a corresponding occupier intending to buy freehold land.
It is not clear what approach the courts are adopting to busin ess tenancies.

It could be argued that the tenant in the Cardiothoracic Institute case was holding over under a subject to contract negotiation for a new lease.

What impact Bretherton v Paton (supra) might have on the decision is difficult to gauge because Street v Mountford was wholly ignored.

Another more recent case which has discussed precisely this issue, London & Associated Investment Trust plc v Calow (supra) is equivocal, but at least Street v Mountford was considered.

The essence of the rather complicated facts is that there was an informal business relationship in which the intending tenants of some business premises allowed the defendants to occupy part of those premises from January 1980 while they were negotiating for the grant to the defendants of a sub-underlease which was to be contracted out of the business tenancies legislation.

The actual issue in the case was the liability of the sub-tenants on the covenants in the sub-lease, and this was decided on the basis that a true lease had been created at some time before the sub-tenants left the property.

More interesting from our point of view is the position of the prospective sub-tenants when they originally took occupation.

The judge seemed to assume that the future tenants had originally entered as licensees of the head landlords.

However, he did say (at supra p.353) that it could be argued even at that time that they were tenants if they had paid rent; equally formidable arguments could be raised against that conclusion.

So the status of a prospective tenant who is allowed into occupation pending an application to the court for an order excluding the Landlord and Tenant Act 1954 security was left undecided.
Whatever the academic merits of the decision in Bretherton v Paton, the case has effectively nailed the use of a licence agreement to cover occupation during pre-contract negotiations: there is a substantial risk that the occupational licence will be construed as a tenancy and will therefore attract security of tenure.
The use of the licence is only safe where the circumstances are such that Street v Mountford cannot apply, so that there is no risk of the licence being construed as a protected lease.

It will not apply where the right to exclusive occupation is not provided, both de facto and on construction of the occupation agreement.

The genuine non-exclusive licence will still escape the clutches of the business tenancies legislation: see Dresden Estates Ltd v Collinson (1987) 281 EG 1321.

Access for measuring up and so forth should be safe.

Repair is more dangerous, although this is a situation in which licences are much used in practice, for it must be remembered that repair was a major objective of the occupation in Bretherton v Paton.
Short term lease
One cast-iron safe method of avoiding the business tenancies legislation, if it is available, is the use of the short term lease.

The protection afforded by pt II of the Landlord and Tenant Act 1954 does not, by virtue of s.43(3) as amended, apply to 'a tenancy granted for a term certain not exceeding six months'.

The lease must not contain provisions for renewal or extension beyond six months.

It is most important to note that this provision will not exempt a periodic tenancy, however short the period, from the full rigour of the statutory code of protection.

If in doubt, it is best to grant a fixed term lease, for the alternative is a tenancy at will that might run the risk of reform as a periodic tenancy.
It is possible to grant a successi on of short term tenancies, each excluded from protection, but great care must be taken to comply to the letter with s.

43(3)(b) of the Landlord and Tenant Act 1954.

A short lease will not escape protection if 'the tenant has been in occupation for a period which .

.

.

exceeds twelve months'.

In calculating the twelve months, any period during which any predecessor, in the carrying on of the business carried on by the tenant, was in occupation is added to the occupation of the tenant.
Hence the short lease provision will not often be of use where a tenant holds over after the expiration of a protected lease, nor if an existing business has been taken over by the tenant.

It is of use primarily on the initial grant of a business tenancy to a new business tenant.

The precise form of the lease must be carefully thought out.

The fixed term lease of, say, three months must provide for termination or surrender when the new lease takes effect, either on the granting of the court order excluding security of tenure or on the execution of the subsequent legal lease.
Conclusion
Allowing occupation under a provisional agreement for a business lease must be dangerous.

The wise practitioner, when acting for the landlord, will continue to insist that terms are agreed and formalities completed before the proposed tenant crosses the threshold.

It will be better to call in aid the Practice Direction ([1973] 1 All ER 796), that directs urgent consideration of applications for contracting out, than to allow provisional occupation to be taken.

If the client insists on allowing the gun to be jumped, then the device to be employed depends on the circumstances.

The tenancy at will should be safe to cover cases of holding over.

Short term tenancies can be used for the case of a new tenant, whose occupation does not infringe the twelve month rule.

Licenses are best avoided, unless the occupation of the licensee is clearly not exclusive.