Property law abounds with traps for the unwary. In particular, numerous disputes have arisen because parties have failed to observe the formalities when contracting to sell or let land. A recent Court of Appeal decision highlights the attention to detail that is required when dealing with leases.
As a general rule, leases of land must be made by deed: see section 52(1) of the Law of Property Act 1925. Failure to comply with this requirement means that the tenant will not acquire a legal estate in land. However, leases granted for a term of up to three years need not comply with this formality if the tenant’s lease takes effect in possession and reserves the best rent that can reasonably be obtained without taking a fine or premium: see section 54(2).
Leases that fall within section 54(2) – including periodic tenancies, which can be weekly, monthly, quarterly or even yearly – will be valid, even if made orally. Consequently, landlords and tenants can dispense with deeds when entering into short-term leases or periodic tenancies.
In Fitzkriston LLP v Panayi [2008] PLSCS 54, which has not yet been fully reported, the Court of Appeal had to decide whether an occupier enjoyed security of tenure under Part II of the Landlord and Tenant Act 1954. The occupier relied upon a 1998 document that purported to grant a tenancy of business premises for an initial term of a year. The document was not executed, but the occupier was allowed into, and remained in possession of, the premises. The issue, therefore, was whether the occupier had an oral periodic tenancy that fell within the Act.
Periodic tenants that occupy business premises are protected by the 1954 Act. However, the landowner argued that the tenancy was not protected by the Act because it was not within the confines of section 54(2). The landowner also argued that it was not bound by the lease because, as the new proprietor of the property, its title took precedence over all prior interests unless they constituted overriding interests under the Land Registration Act 2002.
The Court of Appeal found in favour of the landowner. Their Lordships accepted that the rent reserved by the lease was not the best rent that could reasonably have been obtained when the lease was granted, as is required by section 54(2). Consequently, they upheld the landowner’s claim that the lease did not give rise to a continuing periodic tenancy that fell within the ambit of Part II of the 1954 Act.
Practitioners will await publication of a full transcript of the decision with interest. In the meantime, the decision demonstrates the importance of analysing each of the requirements set out in section 54(2). It is all too easy to concentrate on the length of the lease without also considering the requirements that the lease must take effect in possession, and reserve the best rent that can reasonably be obtained without taking a fine or premium.
Allyson Colby is a property law consultant
