How to manage the risk when a UK commercial tenant is 'holding over' at lease expiry

In the current difficult economic climate, tensions between commercial landlords and tenants can escalate quickly. As this can result in mounting legal costs, it is important to regularise the position between parties to mitigate risk around lease expiry.

Holding over refers to the situation where a tenant remains in occupation of a premises past the contractual expiry date of a lease which does not benefit from security of tenure under the Landlord and Tenant Act 1954.

There are inherent risks for both parties where a tenant holds over and the parties are not in active negotiations. The parties could inadvertently create an implied periodic tenancy – with adverse consequences for both parties. If they do not intend for the tenant to acquire rights under the 1954 Act then they need to be clear that the tenant should occupy the premises as a tenant at will.

What is a tenancy at will?

It is a tenancy that allows a tenant to occupy a premises indefinitely and which either the landlord or tenant can terminate at any time.

Tenancies at will are not capable of enjoying protection under the 1954 Act which means that tenants have no statutory right to remain at the premises past the expiry of the contractual term. This is particularly beneficial to landlords who want to retain flexibility over their property (as they can evict a tenant on no notice) and it tends to only be suitable for temporary, short term use.

Tenancies at will can be agreed between parties in written form (for example to allow a tenant to occupy a property before a formal lease is granted), however they can also be impliedly created when a tenant continues to occupy a property after the expiry of the contractual term of a lease without it being formally documented. The latter is inherently riskier: because it is not recorded in writing, it therefore runs the risk that, in certain circumstances after a period of time, a periodic tenancy could be deemed to have come into existence.

What is a periodic tenancy?

If the parties have created an implied periodic tenancy this means the tenant has a rolling tenancy with no fixed end date, which benefits from security of tenure under the 1954 Act and so the tenant has a statutory right to remain past the expiry date of the letting.

This can arise even where the parties contracted out the original lease from the Act. An implied periodic tenancy is often distinguished from a tenancy at will based on the conduct between the parties and if there are any negotiations for a new lease (which supports a tenancy at will argument).

Recent case law (Valley View v NHS Property Services Ltd (2022)) has established that it does not matter whether there have been very little negotiations in the first few years of occupation past contractual expiry, or if there have been lengthy pauses in later years. In this case the judge held that if the parties' intention remains consistent that the tenant is in due course to take a lease, it is to be regarded as a tenant at will.

The principle that a pause in negotiation does not necessarily create an implied periodic tenancy is supported from a previous case (Barclays Wealth Trustees (Jersey) Ltd v Erimus Housing Ltd (2014)), but the Valley View case is considered more remarkable as the tenants had been in occupation for 14 years and negotiations for a formal lease has "paused" for years at a time.

Claims for occupation past expiry date

Where a tenant has occupied a property without a fixed agreement in place, or after contractual expiry of a tenancy, a landlord may bring a damages claim for the reasonable rent for the land occupied. This claim is based on the tenant occupying with the landlord's permission (implied or express contract) and the level of compensation will be the rent previously payable under the tenancy.

If a landlord has not granted permission to the tenant's occupation past contractual expiry, the landlord can bring a claim for "mesne profits" which is the same as damages for trespass. If no actual loss has been suffered by the landlord, they may recover mesne profits as to the letting value of the premises at the date of the "trespass". There is usually strong evidence that this is the rent under any expired tenancy, however a tenant may argue otherwise and the court will asset the rental value on the basis of a hypothetical negotiation.

A landlord may claim double the yearly rental value if they have given notice in writing demanding possession (most commonly a notice to quit) and the tenant wilfully continues to occupy the premises. Entitlement to double value begins from the date the notice is given, and not from the date on which the tenancy contractually expired.

Osborne Clarke comment

Even in circumstances where there is a good relationship between landlord and tenant, care should be taken to document the nature of a tenant's occupation in circumstances where they are allowed to hold over following the expiry of a contracted-out lease.

Changes in circumstance or property ownership could result in business disruption or delay to redevelopment, if this is not managed in good time.

This topic was explored as part of our commercial landlord and tenant focused webinar. You can view the recording for more on mitigating risk around lease expiry.