Subletting property to your own company and the difficulty of proving security of tenure exists

28 Mar 2018 | Comment


A commercial tenant which is considering managing a property / portfolio of properties by subletting to a company under its control should carefully consider the content of their existing lease(s), and take heed of the decision in Smyth-Tyrell v Bowden when considering the construction of any new sublease. The recent case highlighted the fact that it will not always be straight forward to argue that the head lease should be subject to security of tenure, if no express security is provided for.

A party using premises for its business will often seek to agree a lease which is subject to the Landlord and Tenant Act 1954. This offers the protection of knowing it is entitled to request a new lease at the expiry of the existing term, commonly known as ‘security of tenure’. When there is no express confirmation as to whether a form of occupation has the protection of the 1954 Act, it is often left for the landlord and tenant to argue over, and a court determine, whether the tenancy has security of tenure. The question asked when determining this is posed by section 23(1) of the 1954 Act: is the property comprised in the tenancy, premises (or does it include premises), which are occupied by the tenant and are so occupied for the purposes of a business carried on by him or for those and other purposes?

Often a tenant will easily satisfy the test under section 23 by evidencing its occupation and the running of a business from the premises. However, the recent case of Smyth-Tyrrell v Bowden [2018] EWHC 106 (Ch) was a reminder that all is not straightforward when sub-tenancies and tenant companies are involved.

Background                                                                                       

In Smyth-Tyrell v Bowden the defendant farmers let a parcel of land, on which the buildings were derelict and the land overgrown, to neighbouring farmers (the claimants) who had proposed clearing the land, renovating the buildings and using it for holiday lettings. The defendant also ran holiday lettings. The defendant’s father (who had previously famed the land) entered into an agreement with the claimant which was stated to be for a 15 year lease.

At the end of the 15 year term, the claimants continued to pay rent. Having cleared the land and renovated the buildings, the claimants sub-let the house to a company which ran the holiday rental business. The company was controlled by the claimants.

Some years later, the defendant served notices to quit on the basis that he wished to carry on the holiday rental business on the land. In opposition to this, the claimants said that they believed they would be able to stay on the land beyond the 15 year term and ultimately be able to buy the land.

Decision

The court was asked by the claimants to grant a declaration that the claimants were entitled to remain on the one or more of three grounds:

  1. Their argument that the land was an agricultural holding under the Agricultural Holdings Act 1986 s.1 failed.
  2. Similarly, their argument that they were entitled to an interest in the land because of proprietary estoppel failed.
  3. Finally, the claimants argued that they were entitled to a new tenancy under s.25 of the Landlord and Tenant Act 1954.

To their mind, they satisfied section 23(1) as the land was occupied for the purposes of a business carried on by him or for those and other purposes. The court rejected this argument, in doing so looking in greater detail at section 23 (1A), which was inserted into the Act in 2004.

In doing so the court asked:

  • Was the occupation or the carrying on of a business “by a company in which the tenant has a controlling interest?” Whilst the claimant could be treated as carrying on a business in his premises when in fact the business is being carried out by a company in which he has a controlling interest, in this case, the company controlled by the claimants didn’t carry out the business in the claimants’ premises, but indeed due to the existence of the sublease, it was in the company’s own premises (due to the sublease).
  • Was the occupation or the carrying on of a business “where the tenant is a company, by a person with a controlling interest in the company?” Whilst the tenant was allowed be treated as occupying premises where he is carrying on business, when in fact those premises are being occupied by a company in which he has a controlling interest. However, it did not enable the tenant to be treated as occupying the premises where the company is carrying on the business.

Smyth-Tyrell v Bowden serves as a reminder to tenants wishing to sublet business property between individuals, and companies over which the individuals have control, for commercial (or other) reasons: Although the companies are within their control, it does not follow that the original tenant and controlled company will be treated as one and the same. This is particularly relevant when there is no express security of tenure and a tenant is faced with proving that the tenancy should have the protection of the 1954 Act.

Commercial tenants who are considering ‘dividing up’ business property may wish to seek advice on the impact of this decision on their proposed plans.
If you would like to discuss this, please contact a member of the Property Dispute Resolution team who will be happy to give you advice on your specific circumstances.

 

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