Documenting short-term occupation for commercial landlords
No commercial landlord wants their property empty. A vacant unit costs money in repair, insurance, and business rates, without producing any income; and it could be vulnerable to vandalism or squatters. Getting a short-term occupier into your property is a great way to keep it ‘alive’ and bring in rent while you look for a long-term tenant or line up a redevelopment project. Even for a short-term arrangement, you must get good legal advice, because if you do not get the documentation right, you could end up having to go to court to get an occupier to move out.
‘Anyone who carries on a business from your property can quickly acquire the right to stay there,’ warns Asha Ali, a solicitor in the Commercial Property team with Geoffrey Leaver Solicitors. ‘Fortunately, your solicitor can easily produce the right paperwork to protect you and make sure that you can get your property back when you need it.’
Which arrangement to choose
You will need to decide whether to grant a short lease, an occupational licence or a tenancy at will. Which you choose will depend on how long you expect the arrangement to last, so it is important to discuss this with your solicitor at the outset.
Short term lease
If your occupier plans to stay for six months or more, a lease that excludes the tenant’s legal right to stay on will be the best option. If you decide on this approach, your solicitor will prepare a short form lease and a set of formal notices and declarations as evidence that the tenant has agreed to give up the right to stay in the property at the end of the lease term. This approach will give you the best protection, but it may not be right if you are dealing with a much shorter period of occupation.
An occupational licence is often used for shorter arrangements. It is less formal than a lease and is a personal permission to the occupier to use the property, in return for a licence fee. As long as an occupational licence is managed carefully, it will not allow the occupier to acquire rights to stay on. Although a licence need not be in writing, your solicitor will always recommend that you have a written document, setting out clearly what you have agreed with your occupier. The licence fee can be paid in a lump sum or in regular instalments, typically monthly for a short-term licence.
There are two danger points for commercial property owners who grant occupational licences. The first is that the occupier must not have what the courts have described as ‘exclusive possession’ of the property, because that would make the arrangement a lease, not a licence. The courts will look at the facts of the arrangement, not the label you give it, so just calling something a licence is not enough. To avoid your occupier having exclusive possession, your solicitor will draft the licence to make it clear that the occupier cannot prevent you as landowner exercising your right to go into and control the property.
The second danger point is how long the occupier stays in the property. If they carry on their business for more than 12 months, they may be able to claim that the arrangement was in fact a business lease and that they have acquired a right to remain in the property. This is why your solicitor will want to know how long you expect any arrangement to continue. If you expect it will be longer than six months, a short-term lease excluding any right to security of tenure is a safer option.
Tenancies at will
The third possibility for documenting a short-term option is a ‘tenancy at will’. These can be very useful, particularly if the occupier has already been in the property for a while before you get your solicitor involved. In situations like that, you may not be sure whether the occupier has already been there long enough to acquire legal rights to stay on. A tenancy at will acts as a clean break, wiping out any rights the occupier may have acquired.
Like a licence, a tenancy at will is a personal arrangement between the landlord and the tenant. The key point about a tenancy at will is that it has no fixed term but continues at the ‘will’ of the parties, which means until one of them brings it to an end. Tenancies at will can be put in place very quickly but, as with licences, there are potential traps. The most significant is that a written tenancy at will must not include any notice period for either party to end the arrangement, because that would make it a periodic tenancy, under which the tenant might acquire rights to stay on. Getting your solicitor to draft your tenancy at will means you will avoid this mistake.
As well as advising you on how best to document your arrangement, your solicitor will be able to guide you through a number of practical issues. They will check whether you need consent from a landlord or mortgage lender; and make sure that your occupier’s proposed use is not in breach of your head lease if you have one or the current planning permission for the property.
The rent or licence fee for a short-term arrangement will often be a single figure that includes rates and utilities. If you are worried about being hit with higher utility bills than your inclusive figure anticipated, your solicitor can draft a mechanism for tracking these expenses and charging them back to the occupier. If you can provide plug-and-play broadband, you will avoid delays at the start of the arrangement but again, you will need to document how you will recover the cost from the occupier.
Finally, you will want to make sure you get the property back in good condition when the occupier moves out. One aspect of this is to make sure the lease or licence limits the occupier’s right to make alterations. The other thing to consider is whether you want to take a rent deposit as security against any costs you may incur putting the property into good condition at the end of the arrangement. You will need your solicitor to draft the rent deposit deed to set out clearly who is holding the money, when you are entitled to take some of it and what happens to the balance when the occupier leaves.
How we can help
Short-term occupation can give welcome flexibility to both landlords and tenants but getting it wrong could leave a landlord with a costly dispute about getting the property back. Our expert team will make sure you get the arrangement that suits you best, so you can keep income flowing from the property until you are ready to go ahead with your long-term plans.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.
Asha Ali | Solicitor