Commercial Property Focus - February 2009
Enforceability of short term oral tenancy agreements
Landlords increasingly face problems caused by
oral three year tenancy agreements. Three cases this year,
two of which were decided in the Court of Appeal, have tackled the
issues and provide much needed clarification. With landlords facing
the current recession and its consequential financial restraints,
there are likely to be many similar cases and it is easy to see
why.
A three year agreement can be utilised by
landlords as a useful gap filler since it enables the occupation of
empty space until something more suitable comes along. It
also provides a tenant with the necessary means to trade whilst
they consider longer term options which may include sourcing
alternative premises. Also, the absence of any written
agreement facilitates a prompt and inexpensive
transaction.
However, parties must remain alert to
inevitable expensive litigation when disputes arise based on the
lack of any written tenancy agreement as the following cases
highlight. In each case the focal point to be determined was
whether the absence of writing to evidence the tenancy agreements
defeated their validity. In summary, each tenancy had a three
year term and was dependent upon an oral agreement that was certain
as to its terms.
In the first case, Fitzkriston LLP –v- Panayi
[2008] EWCA Civ 283, the landlord contended that the tenancy was
not binding. However, in the second case, Looe Fuels –v- Looe
Harbour Commissioners [2008] EWCA Civ 414, the Landlord asserted to
the contrary that the tenancy was binding. By contrast
in the third case Hutchinson –v- B&DF Limited [2008] EWHC 2286,
the tenant was the party seeking to uphold the agreement. It
is evident from these cases that the implications can be of benefit
to either party.
In Fitzkriston, the Court held the agreement
was not binding, but in the other two cases the Court decided
otherwise. It therefore engages the question, how can the
Courts decide differently on what appears to be the same
facts? To answer this, the following must be
contemplated;
For an agreement to create an interest in land
(a tenancy), it will be void unless in writing and signed,
irrespective of the parties intentions that the agreement be
binding - Section 2 of the Law of Property (Miscellaneous
Provisions) Act 1989. The exception to this being Section
2(5), if a resulting, implied or constructive trust could be
established. However, Lord Scott in Cobbe –v- Yeomans Row
Management Limited [2008] UKHL 55, severely prohibited the
application of estoppel as a route to advance any such exception
arguments.
If the agreement itself creates a tenancy,
instead of it being an agreement that a tenancy will be created at
some time in the future, Section 2 of the above Act will not apply
and the agreement will not need to be in writing. The
exception to that being, if the tenancy is for a term of more than
three years, it must not only be in writing but also be made by
deed - Section 52 of the Law of Property Act 1925. Finally,
tenancies of three years or less require written agreements if they
do not comply with certain requirements - Section 54(2) of the 1925
Act (the “best rent” principle).
These cases concerned agreements for terms of
three years or less, thus overcoming the first three
considerations. The difference in outcome is therefore
explained by the final consideration of “best rent”. Section
54(2) requires the tenancy should take effect in possession (so
reversionary leases where the term begins later than the date the
lease is completed, are excluded) and that it should be at the best
rent that can be reasonably obtained for those premises.
In Firtzkriston, the Court held, albeit with
only limited valuation evidence, the rent payable was not the best
rent for the property and the agreement was therefore unenforceable
in those circumstances. Conversely, without any real
reference to market valuation in the judgements, in the other two
cases the rent payable was held to be the best rent reasonably
available and so created enforceable agreements.
Where the prescribed requirements are not
observed, landlords looking to argue that informal arrangements
have not given rise to a periodic tenancy which has security of
tenure should gather evidence of market rents in the area. It
will be easier for the landlord to make its case where the "rent"
being paid by the occupier is nominal only.
Those involved in such transactions should be
alert to the legal consequences attached to agreements for short
terms. Although lack of formality obviously has its
advantages, it is no good if the failure to observe the
ground rules allows one party to the transaction being able to
escape its obligations altogether.
Ian Larkins, Solicitor
Ian.larkins@weightmans.com