31st August 2021
31st August 2021
This guide provides an outline of the key features of residential leases and commercial leases in England and Wales.
This guide uses some terms which are relevant to the possession, ownership and rights relating to land in England and Wales. Some definitions are provided below to help to explain the terms used:-
At the moment, when entity or individual in England or Wales occupies or uses a property without owning it, this will usually take the form of either:-
It is important to note at the outset of this guide that the Wales Act 2017 gave permission to the Welsh Parliament to legislate on subjects which are not specifically reserved to the United Kingdom government. This Welsh government can legislate on housing because of this.
The Renting Homes (Wales) Act 2016 has been created and has been approved by the government, but at the time of writing this guide the majority of the act is not yet in force. It is thought that the new rules contained in the 2016 Act will be introduced in springtime of 2022.
The key change which will be brought about by the Renting Homes (Wales) Act 2016 relates to the existence and formulation of leases and licences. Broadly speaking, the various types of residential leases and licences in Wales will be replaced with a new 'Occupation Contract'.
In summary, the Renting Homes (Wales) Act 2016 will replace the current residential tenancy and licence agreements in Wales with Occupation Contracts in the form of either:-
Occupation Contracts will require all residential landlords to issue a written statement in a specific format, containing some obligatory terms. One of the key purposes of the change is to provide greater security to those who rent their homes.
Although the use of Occupation Contracts has not yet commenced, it is important to consider this difference, as it illustrates the importance of a correctly drafted agreement, to ensure security for the prospective tenant and to ensure the landlord has included all required terms in the agreement.
A lease grants a right over the estate of land to exclusively possess the land or property for a specified period of time or term, either as a fixed term or periodic term.
A leasehold creates a legal estate (a leasehold estate) in land. It will grant:
These factors were set out in the case of Street v Mountford [1985] UKHL 4.
A person or entity has exclusive possession if it or they can exercise all the rights of the landowner. A person or entity in exclusive possession is able to exclude the owner of the land (save in the case of any reserved rights of the landowner to enter for repairs etc). This should not be confused with the term 'occupation'. A person or entity in exclusive possession can give occupation to another person, for example through a licence (see the section on licences below).
The payment of rent by a tenant is not described as a requirement in the statutory definition of a leasehold estate (s.205 (1) (xxvii) of the Law of Property Act 1925). However, rent will present as a feature of most leases and for leases of three years or less rent must be provided by the grantee in order to legally create this (s.54(2) of the Law of Property Act 1925).
Leases are capable of giving a security of tenure to tenants. Security of tenure is a form of right guaranteed to eligible tenants to remain in occupation of the property after the expiration of the lease. The position and nature of the security given varies between commercial leases and residential leases, which is explored further below.
In addition, the lease should be formed so that it is a legal contract. A tenant will therefore have contractual rights in addition to property rights.
Example: A landlord owns a freehold property. He grants an Assured Shorthold Tenancy (AST) to a tenant for a fixed period of twelve months, with monthly rent set out in the agreement as £800 per month. The landlord has granted the tenant the exclusive right to have possession of the property for the specific term of twelve months. The lease is for a period of three years or less, and the rent requirement has therefore been reached. This agreement is therefore a legal lease.
A tenancy at will is an informal/personal agreement which enables a person or entity to occupy a property. A tenancy at will can simply be terminated at any time, without any real formalities. The tenancy is terminated by the grantor taking up possession of the property (with reasonable notice) or by the tenant giving up the property.
A tenancy at will is usually used as a temporary or short-term measure, often in commercial agreements. It does not create legal estate in land for the grantee, rather it creates an interest in the land.
A tenancy at will, when created and drafted properly, will not provide security of tenure to the grantee.
The payment of rent can feature as part of a tenancy at will, although the Court can take this into account when determining whether the agreement was a periodic tenancy rather than a tenancy at will.
Tenancies at will are usually used where the parties are negotiating a fixed term lease and are used as a short-term measure to enable the tenant to remain in the property whilst the lease is finalised.
A licence simply provides personal permission to do something on the grantors property, or to occupy the property or part of the party. However, this does not have to be for a specified period of time and does not grant the right to exclusive possession the property. The grantees use or occupation of the property is much less secure than in the case of a lease.
The main distinguishing features of a licence are therefore:-
As a simple example, a lodger agreement can take the form of a licence. This provides a contractual legal licence with the temporary right to occupy the land. Another example could be considered where an organisation permits a sports club to use their land for their club activities via a licence. For example, the licence might permit the club to occupy the land each Sunday morning for set hours. Such an arrangement would not provide the club with the right to exclusive possession.
As we have now explored above, licences and tenancies at will are not capable of providing a security of tenure (explored further below in both a residential and commercial context). Leases are capable of providing security of tenure to tenants, and tenants are able to enjoy the right to exclusive possession of the property or land.
It is therefore essential that any agreement is carefully drafted in the correct format, to ensure that there is no ambiguity in respect of whether an agreement is a licence, tenancy at will or lease.
Example: in the case of AG Securities v Vaughan [1990] 1 AC 417, four individuals were sharing a flat. Each individual was granted a separate agreement to occupy a room in the property, with each agreement containing different terms. The Court held that the agreements were four separate licences rather than a joint-lease because each individual did not have exclusive possession of the property. The four individuals could not be afforded any of the protections which would have been available to lease tenants.
We will now take a look at the key features of residential leases/tenancies. Since the introduction of the Housing Act 1996, the majority of residential tenancies will take the form of an Assured Shorthold Tenancy (AST).
The default position is that a tenancy will be an AST if it is granted on or after 28 February 1997 and:-
In some cases, the landlord may be a leaseholder of the property, and in those cases the tenancy will be a Residential Sublease, which will also usually take the form of an AST. It is vital for any sub-landlord to have permission from their own landlord prior to the creation of any subletting agreement and care should be taken to check whether their own lease prohibits them from underletting the property.
Here are some key features of Assured Shorthold Tenancies:-
One of the most important matters to consider is the security of tenure provided by a residential lease.
After the end of a fixed term AST finishes, it automatically transforms into a statutory periodic tenancy (s.5(2) of the Housing Act 1988). The period of the tenancy will largely depend upon how rent was paid under the previous term.
An AST can be terminated by the landlord by the service of a notice requiring possession under section 8 of the Housing Act 1988. In serving such a notice, the landlord has to have a reason. The reasons which a landlord must rely upon are set out in Schedule 2 of the Housing Act 1988. A common reason for the service of a section 8 notice would be where a tenant fails to pay rent and is in arrears. The full list of reasons are beyond the scope of this guide. There are different lengths to section 8 notice periods, depending upon which reason is relied upon, ranging from 2 weeks to 6 months.
An AST can also be terminated by the landlord serving a section 21 notice under s.21 of the Housing Act 1988, without having any specific reason for reclaiming possession of the property. For example, if a landlord simply wishes to sell the property or wishes to move back in, a section 21 notice could be used. The section 21 method method can be used to terminate a fixed term AST after the fixed term has expired. It can also be used at for periodic tenancies. A section 21 notice can only be used for tenancies that started more than four months ago. The minimum notice period given to a tenant to vacate a property under a section 21 has been adjusted due to the Covid-19 pandemic however will range between six and four months.
An AST does not provide a great deal of security of tenure as there is a wide scope for the tenancy to be terminated under the section 21 procedure. It is however important to note in the context of residential tenancies that a tenant cannot be evicted without a possession order of the Court (even after the service of a statutory notice and the elapsing of the notice period). This protection is provided under s.3 of the Protection from Eviction Act 1977.
We have now looked at residential leases in context, so we will turn to look at commercial leases.
A commercial lease, or a business lease, is a lease of a property which will be used for the purposes of a business carried out by the tenant. Examples of places which will use a business lease are:-
The law describes a business tenancy as a tenancy relating to a premises which will be occupied by a tenant for the purpose of a business which is carried on by the tenant (s.23 of the Landlord and Tenant Act 1954). Different rules apply to certain forms of leases, such as agricultural leases and mining leases, which are set out at as exclusions under s.43 of the Landlord and Tenant Act 1954 and will not be explored further in this guide.
In a similar way to residential leases, commercial leases can take the form of a fixed term tenancy or a periodic tenancy. In a commercial context some fixed term leases can be lengthy in duration, and can be for a term of a number of years.
Here are some key features of business leases:-
Business tenancies will not automatically expire after the contractual term (s.24 of the Landlord and Tenant Act 1954) and the tenant will therefore retain the right to remain in the property and to obtain a new lease. This will not apply to tenancies granted for six months or less (unless the tenant has been in occupation for more than twelve months or unless the tenancy contains a specific provision regarding the renewal of the lease).
Unless specifically contracted out, the following will apply to the renewal or termination of leases:-
One of the most important things to note is that landlords and tenants to agree to contract out the section 24 to section 28 provisions in respect of fixed term contracts, which must be done in a prescribed format in order to make sure the contracting out provisions are valid. In contracting out, a tenant would not have a right to remain in the property or to a new lease unless they are offered a new one by the landlord.
We have seen above that commercial leases take a different format to residential leases. The responsibilities of a commercial landlord will rest heavily upon the contents of the lease where the obligations of each party will usually be clearly defined. A business lease therefore must be carefully created to ensure those matters are clarified.
In addition, it is vital to consider the provisions of section 24 to section 28 of the Landlord and Tenant Act 1954. Failing to do so may result in a lease lasting for longer than intended and thought should therefore always be given to the contracting out of those provisions.