Holding Over on a Lease Renewal – Landlords’ and Tenants’ Rights
On 22 February 2021, the Prime Minister announced the roadmap to end pandemic restrictions in England by 21 June 2021. This is a four-stage process contingent on meeting the government’s tests on vaccines, infection rates and new variants. Even though the timeline is not set in stone, this does give businesses a goal to work towards in relation to reopening and bringing employees back to work. This should also focus both landlords’ and tenants’ minds on ensuring that their lease arrangements are in place, as there have been instances of landlords and tenants putting off negotiating lease renewals until they have a clearer idea of the return to ‘normality’.
What happens when a tenant does not have a lease protected by the Landlord and Tenant Act 1954 and is in occupation by ‘holding over’?
What is Holding Over?
‘Holding over’ is what happens when a tenant stays in occupation of its premises on expiry of its lease, with the landlord’s permission/consent, but without having renewed its existing lease or entered into a new lease.
This is important, as the tenant will wish to continue operating their business from the premises whilst the lease negotiations continue, and the landlord will wish to continue receiving the rent during this period.
In such circumstances, it must be clear upon what basis the tenant continues to occupy the property whilst ‘holding over’, following the expiry of the existing lease. The two options are:
- A ‘periodic tenancy’ – a tenancy which will run for a period equal to the rent payment period (i.e., if the rent is paid quarterly, then the period will be three months, or if the rent is paid annually, then the period would be yearly). Should the negotiations for a new lease fail, then to end a ‘periodic tenancy’, either party must serve on the other a notice equal to the rental payment period (i.e., if the rent is paid quarterly, then a minimum of three months’ notice must be given, which must expire on the next quarter date).
- A ‘tenancy at will’ – a tenancy that is for an indefinite period. It is designed to be for a short term and in most respects is more like a licence than a lease. A ‘tenancy at will’ may be terminated by either party at any time.
The Risk of a Periodic Tenancy
The risk of a periodic tenancy is that it could become protected by the Landlord and Tenant Act 1954 (i.e., the automatic right to renew the lease on the same terms as their existing lease, subject to the rent being revised in accordance with market rent), where it continues for a period of more than six months.
To avoid a tenancy at will becoming classified as a periodic tenancy, the lease negotiations must be ongoing and these must not be prolonged.
Continue to Make Rental Payments to Avoid Breaches
Where the tenant is holding over whilst the negotiations for a new lease are agreed, the tenant should continue to pay the rent payable under their existing lease until the new lease is entered into. This will ensure that they are not in breach of the terms of the existing lease and will show good intent to the landlord.
On the flip side, there is no reason why the landlord cannot accept the payment of rent during the holding over period and indeed for cashflow purposes this may be essential. However, to ensure that the acceptance of rent does not create a periodic tenancy, written notice must be given to the tenant advising them that they are permitted to remain in occupation of the premises purely as a tenant at will, which may be terminated at will. Ideally, the parties will also enter into a formal tenancy at will.
Wherever possible, the parties should agree the terms of a new lease prior to the expiry of the existing lease. Where this is not possible, the tenant should remain in occupation as a tenant at will and the parties should take the necessary steps to conclude the lease negotiations promptly. This should prevent the tenant becoming protected by the 1954 Act.
Such lease negotiations between the parties are often strategically driven. To ensure your interests are protected throughout the process, our property team, who have extensive experience in this area, can assist you and advise you on all aspects of the letting.
If you have any questions, please contact your regular Armstrong Teasdale lawyer or the lawyers listed on this advisory.