- 8 minute read
- Last updated: 12 August 2019
Ordinarily, commercial property landlords and business tenants should sign a written tenancy agreement setting out the terms of the lease. This provides certainty of both parties’ rights, obligations and clarity of how to resolve any disputes that may arise.
It is not generally advisable to lease a commercial property without a written agreement. Issues typically arise when the landlord is looking to sell or take possession of the property and evict the tenant.
Without a formal document in place, business tenants may only be able to rely on the limited rights and protections conferred by statute rather than potentially more advantageous terms if a formal written lease agreement were in place.
This article covers:
- Can a lease exist without documentation?
- Business tenants’ rights without a written lease
- Can business tenants be evicted if there is no written agreement?
- Why seek legal advice
Under section 2 of the Law of Property (Miscellaneous Provisions) Act 1989, commercial leases lasting longer than 3 years must be created by a deed. This means the lease has to be committed to writing and the document must specify all express terms of the arrangement and it must be signed by both the landlord and the tenant.
Section 54(2) of the Law of Property Act (LPA), however, creates an exception. It states commercial leases can be created orally, and without any formal documentation, provided the duration of the lease is less than 3 years, that the lease took effect as soon as the tenant took occupation of the property and that the rent is set is at the prevailing market rate and is not nominal. If these circumstances all apply, the business tenant has a permissible legal interest.
Note that periodic tenancies can also fall within the LPA exemption.
Part 2 of the Landlord and Tenant Act 1954 applies to any tenancy where the property “is or includes premises which are occupied by the tenant and are so occupied for the purposes of a business carried on by him or for those and other purposes”.
Under the Act, business tenants that have been in occupation for more than 12 months, and where the landlord has accepted payment of rent, obtain ‘security of tenure’. This is a statutory right of the business tenant to be granted a new lease on the expiry of the existing lease.
To qualify for security of tenure, an unwritten agreement not made by deed must qualify as a lease further to the requirements under section 54(2) of the Law of Property Act.
In addition, section 37 of the LTA allows the tenant to claim for compensation if the landlord obtains possession.
(For guidance on commercial rent reviews see our article: Rent Reviews in Commercial Lease (A Guide!))
While these statutory provisions can be ‘contracted out’ of as part of a signed written agreement, without a formal document, the statutory rights to renew at the end of the term and to claim compensation where the landlord assumes possession are implied in favour of the business tenant.
If a qualifying tenancy is established, a commercial landlord has to follow strict legal procedure to lawfully retake possession of a property at the end of the tenancy term. This involves serving notice on the tenant as prescribed under section 25 of the Landlord and Tenant Act 1954, stating which of the seven grounds of opposition they are relying on to oppose a new tenancy.
The seven grounds of opposition as set out in section 30(1) of the LTA are:
(a) the tenant has obligations in relation to repair and maintenance under the current lease and the property is in disrepair;
(b) there has been a persistent delay in the payment of rent;
(c) the tenant has been/is in breaches of other terms of the existing lease;
(d) the landlord is able to provide suitable alternative accommodation;
(e) the tenancy was created by a sub-letting;
(f) the landlord intends to demolish or reconstruct the property and it is not possible without the landlord recovering possession;
(g) the landlord intends to occupy the property or part of the property for the purposes of its own business or as its residence.
The landlord is under a duty to serve a section 25 notice in writing to the tenant no more than 12 and no less than six months before the termination date specified advising of opposition to the tenancy renewal.
The notice must specify a date when the lease is to be terminated, which must be after the existing agreement period ends, and it must state the grounds for opposing the renewal.
Where the tenant has requested the grant of a new lease under section 26 of the LTA, the landlord can serve a counter-notice informing of the grounds for non-renewal.
Where the landlord retakes possession, the business tenant may be able to claim compensation under the LTA provisions.
The lack of security and potential for costly disputes mean unwritten lease agreements are rarely an advisable option for commercial tenants or landlords. Rather, they are an avoidable source of business risk.
If you are concerned about your legal status or rights as a business tenant without a written lease document, or if your landlord is taking action to assume possession of the property, take legal advice on your options to ensure your rights and interests are protected.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.