The pitfalls of accepting rent with no written agreement in place

 In commercial property transactions, speed and flexibility can sometimes tempt landlords to accept rent from a new occupier without a formal written agreement in place. While this approach may seem straightforward, it carries significant risk.

Accepting rent in the absence of a formal written agreement can:

1. Give rise to unintended rights on the part of the tenant
2. Complicate the process of bringing the tenancy to an end
3. Increase uncertainty, often leading to costly legal disputes.

Legal position of accepting rent with no written agreement in place

The general rule is that for a lease to take effect at law it must be executed as a deed. However, in certain cases a lease may be deemed to take effect where the following criteria are met:

1. The lease takes effect ‘in possession’
2. The lease is granted for a term not exceeding three years
3. The lease is granted at a premium.

A landlord and tenant relationship may be deemed to arise by way of informal verbal or written agreement and may be implied to exist in the circumstances outlined above.

As above, a key indicator that a tenancy exists will be where the occupier is in exclusive occupation of the property and is making payments to the landlord that are deemed to be ‘rent’. In this instance, a periodic tenancy may be implied. This will provide the occupier with rights and protections that may not have been anticipated or intended by the landlord.

An implied periodic tenancy may be deemed to arise where:

1. Rent is paid by the occupier on a regular basis (e.g. monthly or quarterly)
2. The occupier has exclusive possession of the premises
3. Both parties intend the occupation to be ongoing rather than temporary.

Risks for landlords of accepting rent with no written agreement

Where the occupier is occupying premises for the purposes of carrying on business, the implied  periodic tenancy may be deemed to be a business tenancy for the purposes of the Landlord and Tenant Act 1954 (LTA 1954).

In this circumstance, the occupier will benefit from the statutory protections available under the LTA 1954, including security of tenure. Security of tenure provides business tenants with the right to remain in occupation of the premises. The protections of the LTA 1954 will also require the landlord to use the procedure under the LTA 1954 if they wish to bring the tenancy to an end, which will give rise to lengthy periods of notice and potentially require the landlord to pay compensation.

Where parties enter into a formal lease, it is possible for the landlord to seek to negotiate that the lease is ‘contracted out’ of the LTA 1954, meaning that the tenant will not benefit from the protections. It is not possible for a periodic tenancy to be contracted out of the LTA 1954, meaning that any occupier who is deemed to be a business tenant will benefit from the protections.

Legal rights and obligations

Where no formal lease is in place, both parties lack clarity regarding key rights and obligations, as well as the details of the tenant’s occupation; including the rent payable, the term of the lease and the premises demised within the lease. From a landlord’s perspective, this reduces their ability to place clear obligations on the occupier, relating to matters such as payment of service charge, permitted use, condition and repair and break rights.

In particular:

1. Landlords will be unable to rely on rent review provisions where these have not been expressly agreed
2. Occupiers may use the premises for purposes that the landlord did not intend or consent to
3. It is unclear who is responsible for undertaking repair or maintenance works to various parts of the premises.

In the absence of express provision, certain terms may be implied into the tenancy. This term will be implied into all tenancies. Unsurprisingly, the absence of a clear, documented framework to which both parties can refer often gives rise to legal disputes, often regarding matters such as the condition of the premises or payment of rent.

In particular, it is often unclear in the absence of a formal written agreement, who is responsible for repairs and landlords may find themselves covering costs they never intended to bear. These disputes commonly lead to deterioration of the property, impacting its long-term value.

Conclusion

In summary, landlords should avoid allowing occupiers to occupy commercial premises without a formal agreement in place. A written lease will assist in protecting landlords against unintended rights arising on the part of the tenant, provide a basis for eviction and assists in clearly documenting the rights and obligations of both parties. Proper legal documentation will assist in avoiding costly, legal disputes. If you have any questions about the topics raised in this article, please get in touch.