Understanding when you have security of tenure is not always an easy task


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Understanding when you have security of tenure is not always an easy task

Security of tenure for a commercial business tenant brings with it a lot of additional rights, so understanding when a tenant has security of tenure is important but cannot always be established just by looking at a situation head on. Sometime a little deeper digging is required.

Recently we had a situation where a tenant brought to us a licence that he was trying to negotiate with his landlord. The landlord who had recently bought the premises was in fact trying to get the upper hand in the negotiations and the tenant got cold feet before signing and brought the document to us as the landlord was getting aggressive about signature and the tenant got frightened that he may lose its premises.

On first examination, it became apparent that the proposed licence could in fact be considered a lease instead. There are several crucial differences between licences and leases, most noticeably in this instance being that in order for tenancy agreement to be classed as a lease, the occupier will enjoy exclusive possession of the premises in question, and that a regular ‘rent’ will be paid for a specific length of time.

The documentation presented to us stated that the tenant did not have exclusive possession of the premises. However, on further questioning of the situation, it became apparent that as the tenant had its own entrance to the premises, none of the rights reserved in favour of the landlord were capable of being exercised (and had not, in fact, ever been exercised by the landlord), so the tenant did indeed have exclusive possession of the premises.

With this in mind, we then had to establish whether the tenant had security of tenure, which is afforded under a lease , or was only occupying under a licence agreement which offers no such protection. We looked at how long the tenant had been in occupation of the premises, which is often an area that clients overlook, particularly at times of high stress, but is usually a vital piece of information in such situations. This is where we struck gold.

Backed by the conclusion regarding exclusive possession, the tenant was able to also confirm that it had already been occupying the premises for a period more than six months so had already acquired ‘security of tenure’ as per a lease agreement, rather than a licence. The tenant was relieved, and we could see the stress melting away from him.

What is security of tenure?

Security of tenure, as outlined in the Landlord and Tenant Act 1954, grants tenants the automatic right to remain in leasehold business premises after a lease expires and to call for a lease on the same terms as the existing lease (apart from rent) It applies solely to tenants occupying space for business purposes and where a tenancy has a duration longer than six months.

The protection offered by security of tenure can only be circumvented if the landlord issues a notice to quit using particular grounds under the Landlord and Tenant Act 1954 .

For landlords desiring automatic re-possession for future redevelopment or change in use, excluding the security of tenure at the lease’s outset is crucial, as it removes the tenant’s right to stay post-lease without the landlord’s consent. Conversely, businesses, particularly in manufacturing or retail, may require security of tenure to protect their investments in the premises or maintain their trading address for goodwill purposes. Consequently, leases including security of tenure provisions are essential and more valuable for such businesses.

In this instance, we advised our client not to sign the proposed licence agreement as they were in fact entitled to a commercial lease of the premises. This had great value to the tenant, who was in the process of building its business from the premises. It was not good news for the landlord, however, who was considering a redevelopment of the premises and was hoping to get the tenant signed up on a licence to secure its future position.

Staying up to date with regulations

The bad news for the landlord did not stop here. When our client instructed Newmanor Law on the new commercial lease, we found that the landlord was trying to complete the letting with an Energy Performance Certificate (EPC) rating of F, which is below the legal lettable standard for commercial properties.

Currently, all leased commercial properties must maintain an EPC rating of E or above according to government guidelines. Landlords and property owners’ risk severe penalties if they don’t fulfil these criteria as per the Minimum Energy Efficiency regulations (MEES).

It was clear from the recommendation report that a lot of work was required to bring the premises up to the required E rating. At first the landlord tried to push through the issue, but eventually accepted that the situation had to be put right.

We advised the tenant that until the premises are brought up to standard no further payments of rent should be made. Clearly, this is less than ideal for the landlord, but legally speaking, a landlord is not allowed to profit from a breach of the regulations, so had no choice but to get on and seek quotes for the works to be done.

This then delayed the grant of the new lease and has continued to keep the landlord out of its rent. It has also given the tenant the upper hand in the lease negotiations as the tenant is already in occupation and now knows there is no real threat that the landlord can easily get him out of the premises.

The importance of seeking specialist legal advice

Arguments over whether a licence is in fact a commercial lease are common in commercial property tenancy negotiations, so it’s always best to avoid the headache when it comes to such matters and enlist specialist legal advice to ensure all agreements are fit for purpose, binding, and protect the best interests of all concerned parties. As a landlord, if it’s what you need, spend the money upfront and get an excluded lease drafted so there can be no debate at the end of the term.

If both parties agree to exclude the security of tenure provisions of the 1954 Act when negotiating the terms of the lease, any renewal after the contractual expiry of the lease will be subject to new negotiations (this is referred to as ‘contracting out’). Without it, the landlord’s negotiating power will be restricted.

This case teaches us several other valuable lessons, however, and it’s crucial that commercial landlords and tenants alike take note when entering into a tenancy agreement:

  • Never sign a document you are not sure of.
  • Always seek specialist property advice.
  • Explore your situation thoroughly, with skilled and specialist lawyers.
  • Never accept a situation which does not feel right to you.
  • Invest in good advice as often oversights or omissions can cost a lot to fix.
  • Be very wary of licences.
  • Be sure of the EPC position before completing on any letting of premises.

As a niche law firm with a specific focus on commercial property, the team at Newmanor Law are ideally placed to ensure even the most complex tenancy negotiations are managed with precision, clarity and real legal insight, earned through our many years of supporting our commercial clients with their property related endeavours.

Should you wish to discuss your requirements, or would benefit from our expertise, contact us for independent, impartial advice.