Unused or surplus space can be turned to financial advantage as a source of income generation, if leased. However, the courts in recent cases have highlighted some of the dangers that a landowner faces when granting a third party rights of occupation.
A RIGHT TO CUSTOMERS?
Earlier this year the court decided that London Underground had to pay damages to one of its tenants 1 . The tenant had been granted a lease of a kiosk at a tube station which was only accessible to passengers who were leaving the station. London Underground operated the station in such a way that most of the day the exit was shut, so very few passengers passed by the kiosk. The court decided that this action by the landlord was a "derogation from grant" as the tenant could not use the kiosk as it had intended.
Retail units at hospitals are often leased, for example to newsagents or florists. This case holds implications for such leases if the number of people who pass by such retail units decreases because of the landlord’s actions. Even an "innocent" act by the landlord, such as closing off an entrance at certain times of the day for security reasons, could lead to a claim.
If it is known that a particular entrance will be closed, the lease should expressly refer to this. If there were a re-development of a hospital, this could expose the landlord to an action if pedestrians would no longer be able to access the tenant’s unit. In either case the parties may wish to include a mutual break clause in the lease.
LEASE OR LICENCE?
One issue frequently before the courts is whether an occupier of premises has a lease or a licence. If a licence, then the occupier has no rights to renew the arrangement and the landowner is guaranteed vacant possession at the end of the term of occupation.
A lessee on the other hand may well have statutory rights, not only to remain in occupation at the contractual end of the lease, but also to have the lease renewed ("security of tenure"). The landlord can still obtain vacant possession on one or more designated statutory grounds. These include owner-occupation and re-development. However, this could be costly as the landlord may be forced to go to court to do so and may also have to pay the tenant compensation.
The courts have made it abundantly clear that just because a document is expressed to be a "licence" it does not mean that it will automatically be construed as such. The courts will look at the actual position 2 .
In fact, especially with commercial premises, it is very hard to create a licence as opposed to a lease. For instance, a lease can be created even if no rent is payable. It is most likely that if a third party is allowed into occupation of non-residential premises, a lease will have been granted.
Nevertheless, steps can be taken, if appropriate, to prevent a lessee from acquiring security of tenure, for example where:
- the lease is a tenancy at will. This must truly be an arrangement that can be ended at a moment’s notice.
- the lease is for less than six months. There are, though, anti-avoidance measures to prevent a series of six month leases being granted.
- the lease is "contracted out" (excluded) from the security of tenure and compensation provisions of Part II of the Landlord and Tenant Act 1954. Although contracting out requires an application to the court, this is straight forward. The judge’s "signature" is often simply rubber stamped onto the order, which can be obtained by postal application. The main disadvantage is that it can take some time to obtain an order (some courts are quicker than others). To be effective it is imperative that the order is obtained before the lease is granted. However, the disadvantage of delay is small when compared to the risks and uncertainty of litigation over whether or not an occupier has rights.
CONCLUSION
Careful thought is essential before allowing third parties to have occupation of premises. All necessary steps should be taken before such occupation commences to prevent the occupier gaining rights to renew an inadvertently granted lease. The terms of occupation should also be carefully considered, and recorded between the parties.
FOOTNOTES
1 Platt and Other v London Underground Ltd[2001] 20 EG 227
2 See Street v Mountford [1985] AC 509
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
