REAL ESTATE

Our commercial tenant wants to be in the property before a lease is agreed - what should we do?

It is not an uncommon scenario – a landlord’s premises have been vacant for some time, a tenant found, legal work begins but the tenant is keen to be in, and start paying rent, before documents are agreed. As a landlord, should you agree to this?

We understand the main commercial drivers – rental and service charge payments and removing the burden of business rates. However, both commercially and legally, our advice to clients is always the same; do not allow the tenant into occupation, or to start carrying out its works, without the correct form of agreements in place to govern their occupation and/or works.

From a commercial perspective, use a tenant’s desire to be in the premises to drive a quick completion of the lease. The landlord can often agree more favourable terms and legal costs may be lower if the landlord avoids protracted negotiations.

If a landlord allows a tenant into occupation without a lease in place they often see their tenant lose interest in agreeing the lease. This may be deliberate, to avoid the commitment of a lease if they only intend a relatively short period of occupation, but more likely because their attentions are focused on making their new premises a success. Chasing a tenant and their solicitors to conclude lease negotiations can increase legal costs, but the landlord can also be in a weaker negotiating position than had it stood firm.

If the commercial reality is such that a tenant has to be allowed into occupation before the lease has been agreed and due diligence completed, so the tenant can start its fit-out works for example, there are short term solutions that can be used to grant temporary rights of occupation whilst avoiding the tenant from acquiring unintended rights. These can be a useful stop-gap measure, perhaps backed by a security deposit lodged with the landlord.

From a legal perspective, a landlord does not generally want a tenant to have exclusive occupation of premises without a signed lease in place and carrying on a business as it means the tenant can acquire a periodic tenancy. A periodic tenancy will acquire the protection of the Landlord and Tenant Act 1954 with the result that the periodic tenancy can only be terminated on one of the grounds set out in the Act. If none of the grounds apply, the landlord could be stuck with the tenant.  Even if one of the grounds does apply, the costs of obtaining possession can be high and therefore the scenario is best avoided if at all possible.

Without a lease a landlord may find it more difficult to object to unauthorised alterations, sub-letting or sharing of occupation (or any manner of other things a tenant may do without consent). It will also have limited control over the tenant’s use of the property and could have difficulty requiring the tenant to repair it. A landlord is not powerless but as above, an undocumented occupation can lead to various problems and with that, unnecessary legal costs in trying to remedy the situation.

A final warning – if your own occupation is under a lease, allowing a sub-tenant to occupy all or part of your premises without securing your landlord’s consent or documenting the sub-tenant’s occupation is likely to be a breach of your lease.

Our advice is clear – use the tenant’s keenness as the reason to agree the lease more quickly, and do not let your tenant into occupation on a handshake and promise to agree the lease next week.

About the authors


about the author img

Tom Watkins

Partner

Specialist in commercial real estate, landlord and tenant, investment and development and supported living sectors.
about the author img

James Picknell

Partner

Partner specialising in property litigation, acting for commercial and private clients across a range of landlord and tenant and property disputes

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