Contracting out
Date: 11 December 2009
Authors: Philip Sissons
Issue: Vol 159, Issue 7397
Categories: Features, Landlord&tenant, Property
The operation of the Landlord and Tenant Act 1954 (LTA 1954) will be familiar to landlord and tenant practitioners. The Act affords security of tenure to business tenants so that a lease of commercial premises does not come to an end on the expiry of the contractual term but continues until terminated in accordance with the provisions of LTA 1954.
The effect of LTA 1954 can be excluded by agreement between the parties provided certain statutory requirements are met, and the decision in Newham v Van Staden [2008] EWCA Civ 1414, [2009] All ER (D) 131 (Apr) is of potentially wide-reaching effect in determining when an agreement which purports to exclude LTA 1954 will be effective.
Prior to amendments to LTA 1954 which came into force on 1 June 2004 (when a new s 38A was inserted into LTA 1954) it was necessary for the parties to apply to the court for an order authorising an agreement which excluded the security of tenure provided by LTA 1954, sub-s 38(4), now repealed. An agreement purporting to exclude the operation of LTA 1954 would otherwise be void by virtue of LTA 1954, s 38.
The new s 38A now makes it possible to exclude the provisions of ss 24–28 of LTA 1954 without any court order. The agreement to exclude LTA 1954 must be preceded by the service of a notice in a prescribed form and the tenant must also make a statutory declaration in the prescribed form before entering into the tenancy. Both the old sub-s 38 (4) and the new s 38A referred to an agreement or application made by: “…the persons who will be the landlord and the tenant in relation to a tenancy to be granted for a term of years certain which will be a tenancy to which this part of this Act applies.”
On the face of it, the requirement of a tenancy for a term of years certain might appear unnecessary as, of course, in order to be a valid tenancy at all an agreement for lease must provide for a term which can be ascertained at the outset.
However, it is suggested that the intention of including this wording was to ensure that the security of tenure of LTA 1954 cannot be excluded in relation to tenancies which are initially created as periodic tenancies.
Thus in Nicholls v Kinsey [1994] 1 EGLR 131, it was held that a term expressed to be for 12 months and thereafter from year to year was not a term of years certain. After some judicial disagreement, it appears now to be settled that the fact a lease includes a break clause does not prevent it from being a lease for a term of years certain within the meaning of these sections.
Newham v Van Staden
The facts of the Van Staden case were straightforward. Newham London Borough Council granted the appellant a lease of commercial premises on 9 January 2004. The term of the lease was from 1 January 2003 to 28 September 2004 and prior to the grant of the lease, which was made before the amendments to LTA 1954 described above came into force, the parties applied for and obtained an order from the county court excluding the provisions of LTA 1954.
Critical to the decision of the Court of Appeal was the wording of cl 1 of the lease which set out the term granted in the following way: “from and including 1 January 2003 to 28 September 2004 (hereinafter called “the term” which expression shall include any period of holding over or extension of it whether by statute or at common law or by agreement)…” Rimmer LJ, who gave the only substantive judgment in the case, referred to the words in brackets in this clause as “the words of extension”.
The appellant tenant remained in occupation of the property after the expiry of the lease on 28 September 2004. The council served a notice requiring possession of the property on 15 July 2005, purportedly pursuant to a clause in the lease entitling the landlord to terminate the lease at any time on giving 28 days’ prior written notice.
The tenant did not vacate and the council issued possession proceedings. At first instance, the tenant argued that following the expiry of the fixed term of the lease, she had continued to occupy the premises under a periodic tenancy which was protected by LTA 1954 and was not affected by the county court order which, if effective at all, applied only to the fixed term and not a periodic tenancy arising after the expiry of that term.
The judge at first instance made an order for possession and the tenant appealed. She was granted leave to appeal on the grounds that the judge had been wrong to conclude that in remaining in occupation and paying rent after the expiry of the fixed term, she did so under a tenancy excluded from protection under LTA 1954.
The Court of Appeal
The Court of Appeal allowed the tenant’s appeal on the apparently broad grounds that a lease could only be excluded from LTA 1954 if it was for a term of years certain and the words of extension in cl 1 of the lease in question, including any period of holding over or extension in the definition of “the term”, meant that the lease did not create a term of years certain. It followed that the purported contracting out (authorised by court order) was invalid in its entirety and the tenant had at all times enjoyed security of tenure.
At first instance, the tenant had, it appears, argued that a new periodic tenancy had come into existence following the expiry of the fixed term and that there had been no contracting out of the Act in respect of the new periodic tenancy.
The tenant had remained in occupation paying rent on a monthly basis for nearly 18 months after the fixed term expired and before the council commenced possession proceedings.
The judge, however, rejected the contention that a new tenancy had been created on the facts and held that the tenant was simply holding over on the same terms.
On the appeal, the tenant changed tack and argued that a holding over clause is inconsistent with the provisions enabling contracting out of LTA 1954.
The council argued that if there had been no new tenancy after the expiration of the contractual term, the tenant was holding over as a tenant at will, a form of tenancy which could not attract the protection of LTA 1954.
Rimmer LJ summed up his reasoning at para 23 of his judgment saying: “…I favour the view that [the words of extension] had the effect of defining the term as including any period of holding-over or extension…The lease created a tenancy for a term of years certain until 28 September 2004 plus, by the words of extension, any further period of holding-over or extension of it on one or other of the bases referred to…I cannot see how a term of that nature can be regarded as a tenancy for a ‘term of years certain’.
"The consequence was that the term created by the lease was not contracted out of sections 24 to 28.
"That being so, the appellant’s tenancy continued after 28 September 2004 under section 24, and it has not been determined by Newham by a notice served under section 25.”
The effect of the decision
The scope of this decision is potentially significant. The wording of the lease referred to as the words of extension is by no means an uncommon form of words. Many leases define the term granted to include any period of holding over or statutory continuation. Obviously, whether or not a lease has effectively been contracted out of LTA 1954 will turn on the precise wording of the lease and how the term is defined. It is likely, however, that there will be many cases in which the wording is at least similar to that employed in the Van Staden case.
The decision also produces a rather surprising result. As Rimmer LJ noted at para 19, there is no doubt that both parties entered into the original lease on the basis that the provisions of LTA 1954 were excluded. The parties both intended to exclude LTA 1954, but the result meant that they had inadvertently created a tenancy which provided the tenant with security of tenure. The construction of the lease adopted therefore produced a result which both parties had intended to avoid.
Rimmer LJ considered, at para 21, the alternative view that as at the date of the grant of the lease any purported extension was a matter of uncertainty and that the lease should be read as a grant of a term of years certain with the tenant entitled to vacate as of right on the expiry of that term.
His lordship stated that this left the question as to the basis on which the tenant occupied the premises after 28 September, but does not appear to have given further consideration to the council’s contention that the tenant was no more than a tenant at will.
It is respectfully suggested that a better analysis of the case may have been that after 28 September the tenant did indeed become a tenant at will holding over after the expiry of a fixed term and the “words of extension” in cl 1 did no more than specify the terms of that tenancy at will. This, it seems, would have produced a result much more in keeping with the intentions of the parties.
There is some difficulty in reconciling the decision in Van Staden with that in Receiver for the Metropolitan Police District v Palacegate Properties Limited [2000] 3 WLR 519, [2000] 3 All ER 663 which does not appear to have been cited in Van Staden. In the Palacegate case, a lease was granted: “...for the term of five years commencing on 23rd day of April one thousand and ninety three (“the Term”) and thereafter determinable by six months prior written notice on the part of the landlord taking effect at any time after 1st June 1995 as hereinafter provided …”
This lease was held to be validly excluded from the provisions of the 1954 Act. There is of course a difference on the wording of the relevant clauses in that in Palacegate, the term was defined as a five-year term with a right to serve six months notice at any time thereafter. In Van Staden the term was expressly defined to include any period of holding over. However, it is difficult to see how such a dramatic difference in effect can be justified on such a slight difference in drafting.
The period of the tenant’s entitlement to remain in occupation was no more certain at the commencement of the tenancy in Palacegate than it was in Van Staden. It seems likely that the courts will interpret the decision in Van Staden as being one of strict construction of the precise terms of the lease in question and particularly the definition of the term.
Nevertheless, it may well prove difficult to distinguish many leases where this wording, or similar, is employed and there is a distinct possibility of a significant number of cases where parties who thought they had excluded the effect of LTA 1954 have not achieved that aim.
Those involved in negotiating and drafting commercial leases which are intended to be excluded from LTA 1954 should therefore avoid using any words of extension in defining the term of the Lease. This can be achieved relatively easily.
The term can be defined to be, for example, five years, and if it is thought desirable to ensure that if the tenant holds over they will do so on the same terms as the lease, a separate clause can be included to that effect. In short, following the Van Staden decision, care must be taken to ensure there is no suggestion that the term continues beyond the fixed contractual date.
Philip Sissons, Falcon Chambers.
Website: www.falcon-chambers.co.uk
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