Early access for tenants: grant or deny?
Wednesday, 11th January 2017
Commercial landowners looking to agree the terms of a lease with prospective tenants will often be faced with the question of whether they will allow the tenant to take occupation of the property prior to formal completion of the lease. This can be for any number of reasons, but principally might include the tenant wishing to carry out some minor works to the property before the granting of the lease or simply wanting to get in and begin trading without delay - the idea being that the lawyers work on the details and draft the documents in the background. This can seem appealing, especially to landlords who have a good rapport with their tenants and see no immediate risk in allowing them early access. Indeed, the sooner they are in, the sooner they will start paying rent and contributing towards any service charge or other outgoings.
Landlords should not take the decision to allow tenants to occupy the property lightly, as it can have far-reaching ramifications. Under the Landlord and Tenant Act 1954 (the "Act"), a tenant occupying a property with exclusive possession for business purposes will be granted statutory protection under its security of tenure provisions. This means that, at the expiry of the term of the lease, the tenant will be automatically entitled to renew its lease on the same or similar terms. If the landlord disagrees and wishes to oppose the renewal, a lengthy process must be followed, which may involve the landlord paying compensation to the tenant if it is refused a lease renewal through no fault of its own.
It is clear then that landlords will want to carefully assess whether they want to give rise to such a situation, most being of the view that they wish to remain in control of their tenancies and ensure tenants are not granted any greater rights than those specifically agreed and set out under the lease. So are there any ways of allowing the tenant early access whilst avoiding them receiving protection under the security of tenure provisions? Clearly there would be advantages if this was possible. Two of the main options are set out below.
Licence to occupy
One option is to grant a licence to occupy to the tenant, pending completion of their new lease. Such a licence will allow the landlord to make explicitly clear the terms of the occupation, such as the time period, purpose for which the licence is granted and any fees involved. Crucially, occupying under a licence will not be caught by the Act and the tenant will not gain the statutory protection.
However, simply labelling a document a licence doesn’t necessarily make it so. If the effect of the licence is to grant exclusive possession for a fixed term for business purposes, it is possible that the courts will in fact deem it to be a tenancy. Landlords will need to ensure that the hallmarks of "exclusive possession" are not satisfied, perhaps by retaining a set of keys and regularly entering the property to check on the licensee, or by requesting the keys be returned at the end of each day.
Tenancy at will
A tenancy at will is distinguished from a licence to occupy in that it can be terminated immediately by either party. Tenancies at will fall outside the security of tenure provisions of the Act and so are attractive for this reason. Although tenancies at will can be implied, it is advisable to enter into an express tenancy at will to ensure certainty. Due to the agreement being capable of immediate termination by either party, this option may be impractical or undesirable for a prospective tenant who, having incurred expenditure fitting out the property in anticipation of a lease being granted, could find that negotiations have broken down, the tenancy at will has been terminated and that they are out of pocket with no recourse. The same applies equally to landlords, who will want to avoid a situation where a tenant occupies for a period and then can simply walk away.
The issue of landlords avoiding the pitfalls of inadvertently granting protected tenancies is as prevalent and significant today as it was when the Act was first introduced. It is prudent for prospective landlords to always take legal advice each and every time a situation like this arises. A key point to remember is that whichever method is used, early-access documentation should always be completed prior to allowing any occupation of the premises.