Avoiding pitfalls: the importance of proper documentation for commercial property occupation

With the Christmas season approaching, both landlords and tenants often rush to occupy commercial properties, especially retail units. However, it's crucial to consider the implications of early occupation without formal documentation.

Clearly documenting how the occupation of a space will operate and end benefits both parties by preventing misunderstandings and reducing the likelihood of costly legal disputes. Additionally, it avoids other risks that both parties might overlook.

Risks for landlords

For landlords, the absence of formal documentation can lead to the tenant acquiring unintended rights. When a tenant occupies a property without a formal agreement, the landlord can inadvertently establish a "landlord and tenant" relationship under common law. The arrangement could amount to a periodic tenancy which would restrict the landlord in obtaining back its property as it would have to serve notice to terminate with an appropriate notice period. If the tenant remains in occupation for more than six months, then this is likely to become a protected tenancy under the Landlord and Tenant Act 1954. The landlord would then be bound by a statutory process to obtain possession and potentially have to pay compensation.

For an implied tenancy along the grounds above to occur, a tenant occupies the property without a formal lease but with the landlord’s knowledge and consent. So, should the tenant take occupation and start trading or paying rent, then this could amount to an implied tenancy.

If a tenant causes damage or neglects property upkeep, the landlord faces difficulties in claiming compensation without a written agreement. Proper documentation should outline the landlord's right to recover repair costs and clearly state the tenant's maintenance obligations and the condition in which the property should be returned.

In a scenario where the tenant fails to pay rent or other agreed sums such as utilities, the landlord could have a lack of recourse to recover those sums leaving it out of pocket and, potentially, with additional professional fees when seeking recompense.

Tenant's Perspective: Risks of Informality

Informal occupancy arrangements expose tenants to the risk of sudden eviction. Without a properly documented lease, the landlord is under no obligation to provide formal notice or allow the tenant to remain for a fixed term, leading to significant business disruption if the tenant is asked to vacate at short notice.

Additionally, from a tax perspective, a tenant risks being liable for Stamp Duty Land Tax (SDLT) under an implied "effective date" if the tenancy period exceeds certain thresholds. Even without formal documentation, the tenant may still be required to pay SDLT, and the effective date for tax purposes may be considered to be the date it first occupied the property, which can lead to unexpected financial consequences.

Legal Recourse and Recovering Damages

Landlords should ensure they have formal agreements in place to clearly define the terms under which tenants occupy the property. A written lease not only provides a basis for eviction if necessary but also allows landlords to recover costs for property damage or unpaid sums. Tenants, on the other hand, should seek documented assurances to protect their business from being displaced without proper notice or negotiation. Leases do not need to be long; pop-up agreements allow for shorter occupation but with the safety of clear terms for both parties.

Conclusion

Operating without proper documentation exposes both landlords and tenants to significant legal, financial, and practical risks. Securing proper documentation helps both parties avoid potential disputes, legal complications, and financial penalties.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, December 2024