How to deal with a remaining tenant after the expiry of a contracted-out lease?

Contracting out

Commercial leases are often referred to as being either “inside the Act” or “outside the Act”, the Act referred to being the Landlord and Tenant Act 1954.  If a lease is inside the Act (or in other words if the tenant has “security of tenure”), then the tenant has the right (under the Landlord and Tenant Act 1954) to a new lease, on similar terms, when their lease expires.  In these cases, the landlord is able to refuse to grant a new lease but only in limited circumstances (for example if the landlord requires the premises for their own use, or for redevelopment, or if the tenant has committed serious breaches of the terms of the lease, to name a few).

Prior to entering into a business lease, the landlord and tenant can agree to exclude the statutory rights under the Landlord and Tenant Act 1954, this is known as “contracting out” and means the lease is outside the Act and the tenant will not have security of tenure. Excluding the rights under the Landlord and Tenant Act 1954 means that the tenant will not have an automatic right to renew their lease at the end of the lease term and, if they want a new lease, they will have to negotiate this with the landlord.  

Status of a tenant that remains in occupation

Where a tenant with a contracted out lease remains in occupation of a property following the expiry of their lease, the status of the tenant can be difficult to determine. Depending on the facts, the tenant can take on the legal status of a trespasser, tenant on sufferance, a tenant at will or a periodic tenant. As a consequence, the tenant may gain the rights that were originally excluded from the lease under the Landlord and Tenant Act 1954, giving the tenant an automatic right to renew the tenancy.  

In other words, staying in occupation after expiry might give the tenant the security of tenure, even though the landlord and tenant did not intend that to happen when they initially entered into the lease.  This is something that landlords in particular should be wary of because they could find they are forced to grant a new lease to a tenant that they did not want to remain in the premises.

It is of course not ideal for either the landlord or the tenant to have uncertainty as to the status of the tenant and so it is best to avoid this situation altogether where possible. 

How to avoid a tenant remaining in occupation? 

Here are some key practical tips: 

• Ensure that you have systems in place to review your property portfolios with reminders and upcoming deadlines.
• Put in place an exit strategy at least 12 months prior to the lease expiry, in order to smoothly remove a tenant at the end of the lease term or agree a new lease.
• Communicate with the tenant throughout the lease term to understand their intentions post expiry of the lease – do they expect that they will want to renew their tenancy? 
• Take advice from a lettings surveyor and/or solicitor to understand the best way to protect your position and conduct your negotiations.

Summary 

Allowing a tenant to remain in occupation after the lease term has expired, especially under a lease that is contracted out of the Landlord and Tenant Act 1954, presents various challenges. It is essential for both landlords and tenants to seek legal advice to navigate the complexities and reach mutually beneficial agreements. Clear communication, careful negotiation, and an understanding of the legal implications are key to managing the risks associated with such situations.

The Commercial Property team at DPM Legal are familiar with advising clients on these issues and would be happy to discuss your requirements with you.

Although every effort has been made to ensure that the information provided in this article is accurate and correct, the information provided does not constitute any form of advice.