Cathryn Pernstich, senior associate solicitor in our commercial property team takes a look at the implications that can arise through a third party occupying a property without that occupation being documented by a formal lease or licence.
The Scene
L owns the freehold of a property. Part of that property is occupied by T – T runs a business from the property. T has been in occupation of the property for a number of years and pays rent on an ad hoc basis – more often than not paying the rent late or not paying rent at all. T has carried out substantial alterations to the property. The alternations have been done without the landlord’s permission. There is no lease or licence to occupy in place.
Issues
There are any number of issues that can arise in this situation, but some for immediate consideration are:
With no lease or licence in place there are no rules and regulations governing T’s occupation of the property. T effectively, can do what it wants to at the property potentially damaging it, rendering it difficult to sell and re-let should the possibility ever arise.
With no formal document regulating occupation, by accepting rent that is paid, L is potentially acknowledging that a tenancy exists. This could lead to T gaining security of tenure rights making it difficult for L to remove T from the property. Even potentially meaning that L could be compelled by the Court to grant T a lease of the property on the terms that the Court decides are appropriate.
If the right to a lease does arise, then on what terms should that lease be granted? How long should it be granted for? At what level of rent? Should there be a break clause or a rent review?
As there is nothing written down which would give a basis on which to start, the parties (and the Court) would need to look at what had been happening in practice and then go from there. This could potentially mean provisions more favourable to T than L in terms of what can and cannot be done at the property.
There might be some balancing provisions that could be argued, but T does not start off negotiations on a strong footing.
The alterations made by T could be detrimental to L’s interest in the property or make the property unsafe. Although it could be argued that T would not want to do anything to the property that would put its occupation and business use in the middle of a health and safety issue, this can (and does) happen.
A formal lease usually contains provisions limiting what a tenant can and cannot do at the property – no structural alterations, only putting in internal partitioning, obtaining consent to any works being done, obtaining all necessary planning and other consents by way of example. With provisions of this nature, a landlord can control what happens at its property and protect its investment.
A landlord can also incorporate provisions stating that the property needs to be put back in its original condition at the end of the lease term. This then means that the landlord is not out of pocket in making the property useable for any new tenant going in.
Outcome
Without a formal lease or licence in place, it is arguable that the occupier has carte blanche to do what it wants with the property with little or no recourse for those actions from the owner. This leaves the future use and possible sale of the property potentially in limbo. Whilst the impact is possibly greater on the owner, there are also disadvantages to the occupier in not having a formal lease or licence in place.
The lack of lease or licence could impact on the sale/investment value of the property and make it difficult to let out in the future whether T vacates voluntarily or otherwise. If taken back, the property could be in such state of condition and disrepair that L has to spend time and money putting it into a condition where it could be let you. Alternatively, L lets it out to a new occupier at a lesser rent or with a rent free period to take into consideration works that might need to be done. Both scenarios eating into L’s cash flow and profits.
It is not all plain sailing for T either. If T runs a business and wants to sell on that business in the future, then not having a lease or licence giving a formal right to occupy a property is not necessarily going to be attractive to any future buyer of the business.
Trying to resolve the many issues that arise out of a scenario such as this takes time and can incur high legal costs. Whilst instructing solicitors to put a formal lease or licence in place does incur costs and take time, it is probably more beneficial and cost effective in the long run for both parties.