by Delyth Williams
A question which is frequently overlooked at lease renewal, and which can sometimes repay the practitioner’s closest attention, is whether the Landlord and Tenant Act 1954 Pt II applies to the tenancy in question. It is clear that, if the 1954 Act does not apply, there will be no right to renew the tenancy unless an option to renew is exercisable. This article analyses the application of the 1954 Act and some of the various methods by which it can be excluded.
The essential requirements for security of tenure under the 1954 Act to apply are to be found in section 23, which provides that the Act applies to:
…any tenancy where the property comprised in the tenancy is or includes premises which are occupied by the tenant and are so occupied for the purposes of a business carried on by him or for those and other purposes.
It is clear from the definition in section 23 that there must be a tenancy.
While a discussion of the lease-licence distinction is outside the scope of this article (and has been dealt with in an article by the author entitled Lease or Licence? — a new recipe for disaster at [8] 36 EG 20), it is to be noted that the rule in Street v Mountford [1985] 1 EGLR 128 applies to business tenancies. In Dresden Estates Ltd v Collinson [1987] 1 EGLR 45, the respondent was held to occupy under a licence which contained the following decisive clause:
this Licence confers no exclusive right for the Licensees to use and occupy the Premises and the Licensors shall be entitled from time to time on giving the Required Notice to require the Licensees to transfer this occupation to other premises within the Licensor’s adjoining property.
The Court of Appeal held that, while exclusive possession was one of the more important factors, the decisive consideration was the intention of the parties.
Whether the occupiers of “shop space” had exclusive possession was one of the questions at issue in Smith v Northside Developments Ltd [7] 2 EGLR 151, where the appellants were initially co-occupiers, with a third party, of the shop space. After a time, the third party left and the appellants occupied the whole of the space (paying double the previous weekly amount), but there was no agreement in writing to this effect. The legal basis of the occupation became a critical issue when the appellants were given notice to leave. The appellants claimed that they had not merely taken over the space previously occupied by the third party but had obtained an exclusive right of occupation which was good against the whole world. The Court of Appeal held that there was no evidence indicating an agreement for exclusive possession, as there was merely an arrangement to have a replacement for the departed third party.
Premises must be occupied
In most cases, the premises occupied by the tenant will be clearly defined in the lease, but whether or not the tenant is “in occupation” may be revealed only by a site inspection or visit. The landlord may be able to defeat a tenant’s claim for a renewed lease by proving that the tenant no longer occupies the premises. In Hancock & Willis v GMS Syndicate Ltd (1983) 265 EG 473, the company was the freeholder of office premises which were let to H&W for the purpose of their business as solicitors. The solicitors also had premises in the same street; the demised property was required to permit them to expand. After the firm had occupied the premises, some of the partners left the firm, whereupon H&W no longer required the full use of the demised premises but believed they might do so in the future. A licence was negotiated successfully with a printing company whereby the printers could have occupation of most of the demised premises for six months and the use of office furniture left by H&W. The only part of the premises excepted from the licence was a wine cellar, but H&W also retained the right to use a room included in the licence for staff lunches held twice monthly. Files not in active use were also left at the premises, but no right of access to them was reserved in the licence. When H&W sought a new tenancy of the demised premises, the company claimed that H&W had given up occupation of the premises and were therefore not entitled to a new lease. The Court of Appeal held that the “thread of continuity” of occupation had, on the facts, been broken and therefore the tenants were not entitled to a new lease.
By way of contrast, in I & H Caplan v Caplan (No 2) (1963) 186 EG 971, the thread of continuity of business user was held to have been preserved even though the tenants had ceased to trade from the premises. In that case, the landlords opposed the tenants’ application for a new tenancy under section 30(1)(g) and, when the application was decided in the landlords’ favour, the tenants ceased to trade from the premises. When the tenants’ appeal was successful, they recommenced trading from the shop. Cross J (as he then was) held that the tenants continued to occupy the shop during that time although they had ceased trading.
The tenants were held not to be in occupation for the purposes of section 23 in Cristina v Seear [5] 2 EGLR 128, where the lease in question provided for a term of 21 years to run from September 29 1962 and was made between the landlord and the tenants’ predecessor in title from whom eventually the appellants received an assignment of the lease. In February 1983, a limited company was formed for the purpose of conducting the business at the premises which was previously conducted by the tenants in partnership in their own name. In December 1983, that company went into liquidation and was succeeded by another. The tenants owned all the shares in the company and therefore controlled it. The tenants contended that the company (which they controlled) was a mere vehicle or alter ego through which the business was carried on by them, but the Court of Appeal held that the tenants were not entitled to apply for a new tenancy as they were not in occupation.
A similar decision was reached in Nozari-Zadeh v Pearl Assurance plc (1987) 283 EG 457, where the premises in question were a restaurant and had been occupied as a restaurant by a series of companies which had been incorporated and, after a short time, wound up. The tenant himself took only a minor part in the running of the restaurant although holding shares. The Court of Appeal rejected the argument that at least the last two companies were the alter ego of the tenant and held that the tenant did not fulfil the fundamental condition of section 23(1). This is a very important aspect to consider with businesses which are run by a company of which the only or main shareholder is the tenant.
In some cases, representative occupation may be sufficient so that a tenant may “occupy” the premises without being physically present thereon at all material times. In Cafeteria (Keighley) Ltd v Harrison (1956) 168 EG 668, the Court of Appeal held that the 1954 Act did not require that the tenant should establish an intention to occupy premises personally in order to show that he intended to carry on a business at the premises as the premises could be occupied by an agent or manager. However, the courts are wary of the agreement to occupy through the person of a manager being an agreement without substance, as was the case in Teasdale v Walker (1958) 172 EG 297, where the tenant of a shop (T) entered into an agreement with G under which G was expressed to be the “manager” of the shop, had full authority to conduct the business in whatever manner he thought fit.
Carrying on a “business”?
The protection under the 1954 Act is available only where the tenant occupies the premises for the purposes of a business carried on by him or for those and other purposes. In the majority of cases, this question will not pose any problems for the practitioner, but it can do so in some circumstances; for example, where the tenant is subletting the premises as a business. In Bagettes Ltd v G P Estates Ltd (1956) 167 EG 249, the tenant sublet the premises as unfurnished flats and claimed to be carrying on a business. Although the Court of Appeal was willing to accept that subletting the premises could amount to a business, the fact that the tenants had sublet 10 of the flats meant that they failed to satisfy the occupation condition.
A different view was taken in Lee Verhulst (Investments) Ltd v Harwood Trust (1972) 225 EG 793, where the tenant carrying on the business of letting furnished service rooms was held to occupy the whole premises for the purposes of a business and was therefore entitled to a renewed lease. The important factor which distinguished the instant case from Bagettes was that the tenants exercised a greater degree of control over the sublet parts and provided services for the subtenants.
In William Boyer & Sons Ltd v Adams (1975) 32 P & CR 89, subletting industrial units was held to be a business and it was held that the holding was occupied by the tenant within the meaning of section 23. Finally, In Trans-Britannia Properties Ltd v Darby Properties Ltd [6] 1 EGLR 151, the Court of Appeal held that the tenants did not, for the purposes of the 1954 Act, occupy the holding which they used for carrying on the business of proprietors of lock-up garages. While the tenants were in rateable occupation of the whole premises, each subtenant had exclusive possession of his own garage. In holding that the tenants were not protected by the 1954 Act, the Court of Appeal had regard to the following:
(a) there was no office or living accommodation on the site;
(b) there was no water or electricity;
(c) no security guard was provided and the site was visited only once per fortnight by the tenant’s staff.
Tenancy at will
A tenancy at will is outside the protection of the 1954 Act. In Wheeler v Mercer (1956) 168 EG 520, W was the freeholder of premises the ground floor of which was let to M in 1936 for retail purposes. M’s lease expired in 1943 but she continued in possession as a quarterly tenant until her tenancy was terminated by a notice to quit which took effect in September 1953. M continued in possession, claiming a new lease (or alternatively compensation) under the Landlord and Tenant Act 1927, and also attempted to negotiate a new lease. The negotiations were unsuccessful but the application under the 1927 Act was not capable of being pursued owing to the coming into force of the 1954 Act. In 1955, W demanded possession and commenced an action for possession and mesne profits. The House of Lords held that a tenancy at will was not protected by the 1954 Act.
A similar conclusion was reached with regard to express tenancies at will in Manfield & Sons Ltd v Botchin [0] 2 QB 612 and in Hagee (London) Ltd v A B Erikson & Larson (1975) 236 EG 479, where H Ltd were lessees of a property under a lease which prevented them from subletting without the landlord’s consent. In 1971, they agreed with E & L that the firm could occupy part of the premises as tenants at will at a rate of £5,000 per annum payable quarterly in advance. The tenancy at will was terminated in 1973, but the occupants refused to give up possession and claimed the benefit of the 1954 Act. H Ltd then brought an action for possession. The Court of Appeal held that the question was covered by the decisions in the Wheeler and Manfield cases.
Agricultural holdings
A tenancy of an agricultural holding protected by the Agricultural Holdings Act 1986 is not protected by the 1954 Act: section 43(1)(a). In this context, “agricultural holding” has the same meaning as that ascribed to it in section 1(1) of the Agricultural Holdings Act 1986, namely:
…the aggregate of the land (whether agricultural land or not) comprised in a contract of tenancy which is a contract for an agricultural tenancy, not being a contract under which the said land is let to the tenant during his continuance in any office, appointment or employment held under the landlord.
In the recent case of Short v Greeves [8] 08 EG 109; [1988] 1 EGLR 1, the demised property consisted of 6.2 acres of land and a garden centre let on a yearly tenancy which, at the commencement of the tenancy, was protected by the Agricultural Holdings Act 1948. Most of the sales made at the garden centre were of produce grown on the land. In recent years, however, the tenant sold produce and equipment from the centre which had been bought-in from elsewhere, to a point whereby sales of produce grown on the land had been exceeded by sales of bought-in goods in a ratio found by the county court judge of 40%:60%.
The landlord served a notice under section 25 of the 1954 Act and the tenant applied for a new tenancy without prejudice to his contention that the tenancy was still an agricultural holding. The county court judge held that the 1954 Act did not apply. The Court of Appeal held that the nature of a tenancy can change by increasing the sales of bought-in goods, even if sales of home-grown plants remain a substantial part of the business. Turnover figures are not conclusive to the issue but merely serve as an indication of whether the nature of the tenancy has changed. The court should not be quick to conclude that the tenancy was no longer an agricultural one. Finally, the business was still, in large part, based on the home-grown produce and was outside the Act.
Whether or not a lease of land for the purposes of carrying on the business of a riding school is under the protection of the 1954 Act or the 1986 Act is open to some debate. In Bracey v Reed (1962) 183 EG 773 the facts of the case were that in 1957 B entered into an agreement in writing with R, a trainer of racehorses, whereby B would “let on lease … the right to train and exercise racehorses on … gallops”. The agreement recited the rent that would be payable, that solicitors had been instructed to prepare a lease, that it should run for three years from January 1 1957 and thereafter on a yearly tenancy, and that it was subject to and with the benefit of a licence granted in 1948 so far as this licence still subsisted. No lease was ever prepared. In 1961, B’s agents served notice to quit on R, such notice being sufficient to terminate R’s interest if he had only a licence to use the land, but being insufficient to terminate his interest if R’s interest was as a tenant of business premises, since it was not in the form required by the 1954 Act.
Cross J held that it was the intention of the parties that the lease would be not a lease of the gallops but a lease of the right to train and exercise racehorses on the gallops. Nevertheless, it was the case that R had paid the rent and was in possession of the gallops and he therefore had a tenancy and not a mere licence. Further, the word “premises” in section 23(1) of the Landlord and Tenant Act 1954 was not limited to buildings but included open land. Since there was no dispute that R was carrying on a business he had the benefit of the 1954 Act and B’s notice to quit was therefore ineffective. However, in the earlier case of Rutherford v Maurer (1961) 179 EG 153, agricultural land used as a riding school was held to be protected by the Agricultural Holdings Act 1948.
Mining leases
As a result of section 43(1)(b), mining leases are excluded from the provisions of the 1954 Act. In O’Callaghan v Elliott (1965) 194 EG 817, a six-and-a-half-year lease for the extraction of sand and gravel was held by the Court of Appeal to be excluded by section 43(1)(b) from the operation of the 1954 Act. A definition of “mining lease” is to be found in section 25(1) of the Landlord and Tenant Act 1927 as being:
…a lease for any mining purpose or purposes connected therewith, and “mining purposes” include the sinking and searching for, winning, working, getting, making merchantable, smelting or otherwise converting or working for the purposes of any manufacture, carrying away, and disposing of mines and minerals, in or under land, and the erection of buildings, and the execution of engineering and other works suitable for those purposes.
Licensed premises
A tenancy of premises licensed for the sale of intoxicating liquor for consumption on the premises is outside the protection of the 1954 Act under section 43(1)(d), but the exclusion of licensed premises from protection does not apply to hotels or restaurants where a substantial proportion of the business consists of transactions other than the sale of intoxicating liquor: section 43(1)(d). In Grant v Gresham (1979) 252 EG 55; [9] EGD 190, the main question before the Court of Appeal was whether a substantial proportion of the business consisted of transactions other than the sale of intoxicating liquor. The figure was 17% to 18% and the Court of Appeal held that, although it was impossible to lay down any precise figure as a test of substantiality, 17% to 18% was not a substantial proportion. It is to be noted that the exclusion from protection of the 1954 Act does not apply in the case of premises of a registered members’ club. Thus, in Lansley v Adda Properties Ltd [1982] CLY 284, a members’ club (which did not require a justices’ on-licence under the Licensing Act 1964) was not treated as “licensed” for the purposes of section 43(1)(d), even though the club supplied intoxicating liquor to its members.
Several interesting factors were considered in the recent case of Ye Olde Cheshire Cheese Ltd v Daily Telegraph plc [8] 39 EG 88, where the plaintiff tenant occupied a public house with additional dining facilities. They held the main part of the public house under one lease and two cellars under the adjoining Daily Telegraph building were held under a separate 21-year lease granted in 1958. One cellar was used for the storage of bottles and the other as a private dining-room as part of the tenants’ considerable restaurant business. The cellars could not be used independently of the main public house.
The defendant landlord served a section 25 notice on the tenants calling for the termination of the lease but without prejudice to their contention that the lease of the cellars did not enjoy the protection of the 1954 Act. The landlord argued that the tenancy of the cellars was excluded by section 43(1)(d) of the Act, as the tenancy was of premises licensed for the sale of liquor for consumption on the premises. The tenants contended that the cellars fell to be considered under section 43(1)(d)(i), which leaves within the protection of the 1954 Act licensed premises structurally adapted for a restaurant business. Sir Nicolas Browne-Wilkinson V-C held that, for the lease of the cellars to be protected by the saving provision in section 43(1)(d)(i) of the 1954 Act, there must be a tenancy of premises licensed for liquor and the premises must be structurally adapted to be used as a restaurant business and a substantial proportion of the business is other than the sale of liquor. Where only part of the restaurant business is the subject of the demise, the question arises as to whether the reference in the section to “premises” is a reference to “demised premises” or a reference to the premises subject to the licence. Further, the question of premises being within the saving provision was to be determined by the court. In this case the demised premises, the two cellars, were smaller in extent than the licensed premises but the demised premises were adapted to a restaurant use which was substantial. On that basis, they fell within the saving provision and were protected by the 1954 Act.
Short leases and service tenancies
It is possible to exclude the operation of the 1954 Act by granting a term certain not exceeding six months: section 43(3). There is always the practical problem of persuading a tenant to accept a demise not exceeding six months in duration, but it may be that a footloose business might accept a tenancy for that period. The exclusion does not apply if: (i) the lease contains a provision for renewing the term or for extending it beyond six months from the beginning; or (ii), the tenant has been in occupation for a period which, together with any period during which any predecessor in the carrying on of the business carried on by the tenant was in occupation, exceeds 12 months. The latter exclusion involves the practitioner in ascertaining whether the existing tenant is carrying on the same business as the assignor of the lease.
It is to be noted that the section 43(3) exclusion applies even where the tenant’s predecessor in business was a freeholder and where the present tenant was also the previous freeholder.
A tenancy granted by reason of the tenant’s being the holder of an office, appointment or employment from the landlord, and terminable by the landlord on the tenant’s ceasing to hold the office, appointment or employment or which comes to an end by reference to a time fixed by such cesser, is excluded from the provisions of the 1954 Act under section 43(2).
Exempt landlords
There are provisions in the 1954 Act for modification of the normal rights granted to a tenant on the grounds of public interest in section 57(1), (2). Where the interest of the landlord or any superior landlord belongs to, or is held for, the purposes of a government department or is held by a local authority, statutory undertaker, development corporation, area health authority, special health authority or the National Trust, the minister in charge may certify that it is requisite for the purposes of any of the above bodies or departments that the use or the occupation of the property (or any part thereof) is changed by a specified date. The following is a summary of the main provisions of section 57:
(a) if the section 25 notice, together with the certificate, has been served, the tenant cannot apply for a new tenancy;
(b) if the section 25 notice specifies a date which is earlier than the date specified in the certificate, the court may grant a new tenancy to terminate on the date specified in the certificate and such a tenancy carries no right of renewal;
(c) if a tenant has served a section 26 request, the landlord may reply that no new tenancy will be granted and enclose a copy of the certificate;
(d) if the section 26 request specifies a date earlier than the date specified in the certificate, the court may grant a new tenancy to terminate on the date specified in the certificate;
(e) upon an application to the court for a new tenancy, the minister may certify that it is in the public interest that, if the landlord makes an application to that effect, a break clause be inserted in the new lease with a six-month notice provision.
There are also provisions in section 58 for the curtailment of the tenant’s rights to the protection of the 1954 Act when the minister certifies that, for reasons of national security, it is necessary that the use or occupation of the property should be discontinued or changed. It should be noted that these provisions contained in sections 57 and 58 will be operative only on very rare occasions and the practitioner should be aware that the above is no more than a summary.
Excluding the 1954 Act by order
The parties may lawfully exclude the operation of the 1954 Act by making a joint application to the court which may authorise an agreement excluding the operation of sections 24-28 of the 1954 Act in relation to that tenancy. These provisions are contained in section 38(4) of the 1954 Act and their operation was considered in the recent case of Essexcrest Ltd v Evenlex Ltd [8] 1 EGLR 69; [1988] 01 EG 56. In this case, the parties to a tenancy of business premises made a joint application to the court under section 38(4) of the Landlord and Tenant Act 1954 in order to exclude the provisions of sections 24-28 of the Act. The tenancy had already been executed prior to the application to the court. The application was, nevertheless, successful and a memorandum of the registrar’s order was endorsed on the lease. In due course, the tenant company made a request for a new tenancy under section 26 of the 1954 Act. The landlord company sought to have the application struck out on the basis that the protection of the 1954 Act had been excluded. The Court of Appeal held that the language of section 38(4) was such that it was clear that it applied only to a tenancy to be granted in the future and hence the registrar’s order was ineffective. The order made under section 38(4) would be effective only if: (i) it could be shown that the tenancy was granted conditionally upon the order being obtained; or (ii) that the parties had re-executed the lease or it had been endorsed in such a way that it was agreed that the provisions of the 1954 Act were excluded in terms which would have constituted a new tenancy.
Some of the problems that can arise if the exclusion of the 1954 Act is not documented properly are illustrated in Cardiothoracic Institute v Shrewdcrest Ltd [6] 1 WLR 368; [1986] 2 EGLR 57, where the tenant conducted the business of providing students with hostel accommodation in a former convent. At all material times, there was a prospect of the landlord’s becoming able to redevelop the convent for its own purposes at some more or less uncertain time in the future. From June 1980 onwards, three successive joint applications were made to the county court by the landlord and tenant and orders were made, pursuant to section 38 of the 1954 Act, enabling the parties to enter into tenancy agreements excluding sections 24-28 of the 1954 Act. In October 1983, prior to the expiry of the third tenancy, negotiations took place for another application to exclude sections 24-28 from a proposed new tenancy to commence when the third tenancy expired on October 31 1983. As the negotiations proceeded, several short extensions were agreed until September 1985 and, during that time, the tenant continued to occupy the premises and made agreed monthly payments of rent. No agreement was ever reached and the tenant claimed to be protected by the 1954 Act. Knox J held that each extension was negotiated subject to a condition that the extension should be subject to a tenancy agreement approved by the county court under section 38 of the 1954 Act. Both parties clearly intended that there would be no legally binding tenancy agreement between them until the approval of the county court was obtained. In such circumstances, each party could resile from the negotiations even though the rubric “subject to contract” was not used. Further, the giving and acceptance of rent during the holding-over period pending negotiations for a new tenancy did not create a periodic tenancy, so that, in the circumstances, the landlord was entitled to recover possession of the premises.
Finally, in Tottenham Hotspur Football & Athletic Co Ltd v Princegrove Publishers Ltd [4] 2 QB 17, an order was made pursuant to section 38(4) but no formal lease was executed and the tenants continued to occupy the premises. Lawton J held that the tenants who were in possession of the premises in pursuance of the agreement embodied in the court order were to be treated as if an instrument giving effect to the new tenancy on the agreed terms had been executed. It is clear that any such agreement authorised by the court will bind assignees of the parties or their successors in title. In Hagee (London) Ltd v A B Erikson & Larson (1975) 236 EG 479, Lord Denning MR conceded that on very rare occasions only would the courts disallow a joint application under section 38(4), especially where both parties had obtained legal advice.
User in breach of covenant
The 1954 Act does not apply to a tenancy where the tenant is carrying on a business, in all or any part of the property comprised in the tenancy, in breach of a prohibition (howsoever expressed) of use for business purposes contained in the tenancy. Such a prohibition must extend to the whole of the property and applies however the prohibition is expressed in the terms of the tenancy. In general, three common forms of restriction or prohibition on user are usually found in leases. First, a prohibition by excluding other uses; for example, “use only as a shop”. Second, a prohibition on other uses by confining the use of the premises to use within the Town and Country Planning (Use Classes) Order. Third, excluding all other uses by confining the use of the premises to one particular use; for example, “use only as a consulting engineer’s office”.
In contrast with the above common forms of restriction or prohibition on user, section 23(4) provides that a prohibition of use for business purposes does not include a prohibition of use for the purposes of a specified business (for example, not to use as a shop) or of use for purposes of any but a specified business (for example, not to use the premises for any purpose other than as a shop). A prohibition of use for business purposes does include a prohibition of use for the purposes of a trade, profession or employment. It is submitted that the following illustrative examples briefly summarise the operation of section 23(4). The premises are used by a client (the tenant) as a grocery shop. If the client has covenanted “not to use or permit the use of the demised premises as a shop” he will still have the protection of the 1954 Act. If, on the other hand, he has covenanted “not to use or permit the use of the premises for the purposes of a trade, profession or employment” he cannot have the protection of the 1954 Act. Finally, if he has covenanted “not to use or permit the use of … the premises except as a restaurant” he will still be within the statutory umbrella.