When a landlord comes to terminate a lease, it needs to know which (if any) security of tenure scheme applies. This is something which its solicitor should have advised it on when the lease was granted, but two recent cases illustrate the possibility that, during the life of the lease, it could have moved out of one regime and into another.

The question is most likely to arise when letting mixed residential and business premises to tenants, most commonly where the premises consist of a ground-floor shop with residential accommodation on the upper floor. Tenancies of business premises are of course governed by Part II of the Landlord and Tenant Act 1954, while private sector residential tenancies, with very few exceptions, fall within either the Rent Act 1977 or (more usually) the Housing Act 1988.

Of key importance to the landlord is the ability to recover possession upon termination. Under the 1954 Act, while this ability is circumscribed, a landlord can realistically anticipate recovering possession so long as it can prove that it has a statutory ground to do so. The 1988 Act presents more difficulties, although they pale into insignificance beside the problems of recovering possession under the 1977 Act. As one of the authors’ university teachers used to observe to his lecture-hall:

If you have a Rent Act tenant, the only reliable way to get them out is to kill them. And because of the statutory succession rights, you have to kill the next two generations of their family as well.

Which scheme applies?

When deciding which legislation will apply to a particular tenancy, the first consideration is whether the tenant occupies the residential and the business premises under one lease or under separate tenancies. If the residential part of the premises is not held under the same tenancy as the business premises, then the 1954 Act may apply to the business use and the 1977 or 1988 Act to the residential use.

However, where the business and residential parts are held under the same tenancy the matter is more complicated.

The relevant qualifying condition for residential protection is that the property must be ‘let as a separate dwelling’. This wording has a long pedigree in the residential legislation, going back as far as 1915. As we will see, though, the meaning has changed in the course of that period.

To qualify as a business tenancy, the property must be ‘occupied for the purposes of a business carried on by [the tenant] or for those and other purposes’ (s23(1) of the 1954 Act).

Note that the two are not mutually exclusive – a property may be let as a separate dwelling, but occupied for business purposes. Do both schemes of protection then apply?

No. Both the 1977 Act (s24(3)) and the 1988 Act (s1(2), para 4 of Sched 1) specifically provide that they can have no application to a tenancy which falls within the 1954 Act, so the business and residential schemes cannot simultaneously apply to the same tenancy.

‘Incidental’ use exception

In the simple case of a lease of a shop with flat above, occupied accordingly, it is the business scheme in the 1954 Act which will apply, and the residential scheme is excluded.

There may be less straightforward circumstances, however. To adopt an example instanced by Lord Denning in Cheryl Investments Ltd v Saldanha [1978], a professional man may take papers home from his office and work on them at evenings or weekends, and occasionally see a client at home, but:

He cannot in such a case be said to be occupying his flat ‘for the purposes of’ his profession. He is occupying it for the purpose of his home, even though he incidentally does some work there.

An actual example from case law was Gurton v Parrott [1991], in which a lady had occupied a property since 1939 as her home, although she was only granted a tenancy of it in 1974. At that time and for some years afterwards, various outbuildings and land comprised within the property were also used for her business of dog-kennelling, grooming and breeding, and the landlord subsequently gave notice to terminate under the 1954 Act, alleging that hers was a business tenancy (although the business use had by then ceased). The case was decided in the tenant’s favour on the basis that she occupied the property for the purposes of her residence, and that the running of the business there was merely incidental, ‘something akin to a hobby’.

From residential to business?

A rather more optimistic attempt to take advantage of this exception arose in the first of our two recent cases, Broadway Investments Hackney Ltd v Grant [2006].

The facts

In 1995 the tenant was granted a lease of premises which permitted the lower floor to be used as a shop and the upper floor for residential purposes. The lease described itself as a lease of shop premises, and there was an obligation on the tenant to keep the premises open as a shop at certain times.

The tenant lived in the residential part of the premises for some time while he fitted out the ground floor for the purpose of carrying out his business. By 2000 the tenant was using the shop to sell fish and groceries (as allowed by the user clause).

Following a rent review the tenant fell into arrears with his rent and the landlord commenced action to terminate the tenancy. This was straightforward if it was a business tenancy, but highly restricted if a residential tenancy. The issue went all the way to the Court of Appeal.

Decision

The Court of Appeal held that it was hard to see how the tenancy could not have been a business tenancy within the meaning of the 1954 Act, given that the lease positively required the tenant to use the lower part of the premises for business purposes. The terms of the lease were simply not compatible with the tenant’s contention that, once the shop was open, the business use was ‘incidental’ to the occupation of the upper floor as a residence.

It is notable that the Court was prepared to accept (without actually having to decide) that up to the point where the business use commenced, the tenant might have enjoyed protection under the residential legislation. This echoes Lord Denning’s development of the example quoted earlier:

… suppose now that [the professional man] decides to give up his office and to do all his work from home, there being nothing in the tenancy of his home to prevent him doing it. In that case he… ceases to have a ‘regulated tenancy’ [ie protected by the residential legislation] of his home. He has only a ‘business tenancy’ of it.

Peeping forward to the second of our recent cases, Tan v Sitkowski [2007], Neuberger LJ had no difficulty there with the idea that a tenant might have been granted a residential tenancy under the Rent Act 1977, then use the premises wholly or partly for business purposes, thus coming within the ambit of the 1954 Act, and subsequently discontinue the business use, thus returning to the fold of the 1977 Act. This, he considered, ‘would not be particularly odd’, though a landlord struggling to keep on top of the management of its property might disagree. In any event, despite these various dicta, there seems to have been no case in which a court has actually reached this result.

We note in passing that this outcome would depend on there being no prohibition on business use of the whole contained in the tenancy (s23(4) of the 1954 Act). Should there be such a prohibition, the 1954 Act could not apply, and the tenancy would remain within the Rent Act 1977 throughout.

From business to residential?

More common in the law reports is the situation where premises were originally let for mixed business and residential use, within the 1954 Act, but the tenant has subsequently given up the business use while continuing to live there. Does the tenant thereby gain the protection of the 1977 or 1988 Act? That was the issue in Tan v Sitkowski.

The facts

The tenant was granted a tenancy of premises in 1970 by the local authority. He used the ground floor for the purpose of his business and resided on the first floor. In 1989 the tenant ceased using the ground floor for his business, but continued in residential occupation of the upper floor.

In 1990 the freehold of the premises was sold and in 2003 the new landlord served a number of notices to quit, one of which was effective to terminate the tenancy. If it was a business tenancy the landlord was entitled to recover possession, but not if it was a residential tenancy.

The tenant contended that when the tenancy was granted he enjoyed the protection of the 1954 Act. However, when he ceased trading from the premises, because the 1954 Act no longer applied, it followed that s24(3) of the 1977 Act, to the effect that a business tenancy could not fall within the 1977 Act, no longer had effect to deprive him of residential protection.

Decision

Lord Denning, in Cheryl Investments Ltd v Saldanha, had stated in terms that the 1977 Act would not apply in such circumstances. That was, moreover, the outcome of the Court of Appeal’s decision in Pulleng v Curran [1982]. Neuberger LJ arrived at the same conclusion, and therefore found against the tenant. However, he was on pugnacious form, finding most of the reasoning in Pulleng v Curran to be ‘either incomprehensible or wrong’, and noting that Lord Denning’s observation in Cheryl Investments, while deserving of respect, was clearly obiter.

He found support for the proposition, in the end, in the reasoning of Taylor LJ in Wagle v Trustees of Henry Smith Charity [1990] and Webb v Barnet London Borough Council [1988]. Prior to the Rent Act 1965, reference in the residential legislation to premises ‘let as a separate dwelling’ included premises let for mixed business and residential use. That was initially the result of decided cases, but was later given express statutory force. From 1965, though, there was provision to the effect of the later s24(3) of the 1977 Act, that the residential legislation did not apply to tenancies within the 1954 Act, and it was therefore logical that premises should no longer be treated as ‘let as a separate dwelling’ unless they were let for purely residential purposes.

This rational justification was supported by the practical justification set out in the judgment of Sir George Baker P in Pulleng v Curran:

It certainly strikes me as a most remarkable conclusion if a tenant, by simply ceasing to carry on his business, could then say: ‘I am now in a position that I have the shop and all the premises subject to the Rent Restriction Acts [fore-runner to the Rent Act 1977]; we have moved under that umbrella, and you, the landlord, can whistle for possession’. He might indeed, if he was so minded, leave the shop to rot and simply confine himself to his upstairs premises. The corollary, it seems to me, is that the tenant could stop, start, stop, start, as long as he liked, juggling between the two Acts of Parliament.

Note that Neuberger LJ, as previously mentioned, had no difficulty with that outcome where the tenancy had begun as one with the greater degree of protection conferred by the 1977 Act. That is surely correct, with respect, since there can be no objection to a tenant who has commenced with a high degree of protection resuming that protection once circumstances revert. The opposite case, where a tenant might obtain a high degree of protection which they did not have previously, simply by ceasing business use, would be most unfair to the landlord.

There is a suggestion, arising from another observation of Lord Denning, that even where a tenancy commenced as a business tenancy, the tenant might acquire residential protection by ceasing the business use, if the landlord has ‘affirmatively assented to the change of user until it has become let in whole or in part [as a separate dwelling]’. Quite what would amount to a sufficient affirmation is unclear, and this has not formed the basis of any decided case. Neuberger LJ, dismissing the argument in Tan v Sitkowski, was clear that mere knowledge of the change of use coupled with acceptance of rent would not be sufficient. The question remains open.

Conclusion

In circumstances where premises are used for both residential and business purposes, pursuant to one lease, the starting- point is that the 1954 Act will apply, unless the business use is incidental to the tenant’s occupation as a residence. That exception will apply only in very limited circumstances.

Tan v Sitkowski should reassure landlords that having granted a tenancy within the 1954 Act, the ability for a tenant to unilaterally increase its protection by simply discontinuing business use is highly restricted. Indeed, it is hard to imagine circumstances in which this might work.

Where landlords might well find themselves in practical difficulties is where they come to terminate a tenancy originally granted within a residential scheme of protection, but since turned over to business use, either in whole or in part. If a tenant can dip into and out of the residential protection, it will be extremely difficult for a landlord to know which termination procedures apply at which time. Fortunately, this is not likely to crop up very often.  © Property Law Journal