In order to enjoy the protection of Part II of the Landlord and Tenant Act 1954, it is essential that at least a part of the demised premises is occupied by the tenant for the purposes of its business. This is the effect of s23(1) of the Act (see box overleaf). A tenant who allows a third party into occupation of the whole of the demised premises therefore risks losing the protection of the Act altogether.

Allowing a third party into occupation of part of the property can put at risk the tenant’s right to apply for a new tenancy of that part. While, on the expiry of the contractual term, a continuation tenancy will arise in respect of the whole of the premises demised to the tenant, the right to apply for a new tenancy may only be applicable to the part that it still occupies for the purposes of its business. This is partially the effect of s23(3) of the Act (see box overleaf), which defines the extent of the property in respect of which the tenant is entitled to apply for a new tenancy.

The term ‘occupation’ is not defined in the Act, but its meaning in that context has been considered by the courts on many occasions. The word clearly connotes some physical use of the property by the tenant for the purposes of its business, and the exercise of control over others using the premises. Whether a tenant is in occupation for the purpose of the Act will be a question of fact in each case. Clearly a problem arises where the business of the tenant involves sharing occupation of the premises with third parties for their own purposes (be they business or residential) This was the situation in Smith and others v Titanate Ltd [2005], a decision of Judge Roger Cooke sitting in the Central London County Court.

The facts of Titanate

The tenant company held a building situated in Mayfair, London, comprising six self-contained flats, each with its own bathroom and kitchen, and a small office under a lease for a term of 52 years expiring in June 2004. The individual flats were ‘let’ on a furnished basis by the tenant, with telephones and TVs, heating, lighting and hot water provided. Additionally, the tenant provided tea and coffee, as well as a twice-weekly change of linen and a daily change of towels. The flats were occupied in this way for varying periods; it was suggested in evidence that the average period was three weeks. The forms of agreement used reserved rights of access to the landlords on adequate notice. The office in the building was used by the tenant’s manager to negotiate and supervise the lettings and to oversee the provision of services.

In the context of a claim by the tenant to acquire the freehold from the landlords under the Leasehold Reform Act 1967 (as amended by the Commonhold and Leasehold Reform Act 2002), the landlords sought a declaration from the court that the tenant was in business occupation of the building for the purpose of s23(1) of the Act. In such event, the tenant would have to satisfy a residence test to enfranchise and, being a company, it would not be able to do so.

Earlier authorities

Judge Cooke reviewed a considerable number of earlier authorities, including those referred to below.

In Bagettes Ltd v GP Estates Ltd [1956] the tenant of a building, who was in the business of providing residential accommodation, sublet the individual flats within the building but retained control and management of the common parts. These included the caretaker’s rooms and the boiler room. The Court of Appeal held that the tenant did not occupy any part of the building for the purposes of a business. The appeal judges appear to have assumed that the tenant could not be said to occupy the flats once they were let (there was no decision on the point). They also found that the common parts were used merely as ancillary to the flats. Once the flats were let, and ceased to be occupied by the tenant, they were no longer available to form part of the holding for the purpose of s23(3) of the Act. On that happening, there was no longer a business purpose to the tenant’s occupation of the common parts.

The Court of Appeal also decided the later case of Lee-Verhulst (Investments) Ltd v Harwood Trust [1973], where the question of whether a tenant could occupy parts of the demised premises that were at the same time occupied by third parties was answered. The tenant was again in the business of providing residential accommodation, namely 20 fully furnished apartments. It retained a very high degree of control over them. The appeal judges held that both the tenant and the third parties could be in simultaneous occupation of the apartments, the former for the purpose of the Act and the latter for the purpose of the Rent Acts. Those two purposes were separate and distinct and could co-exist.

That decision was followed in William Boyer & Sons Ltd v Adams [1976]. Judge Cooke thought it questionable, however, whether the decision would now stand in light of the later decision by the House of Lords in Graysim Holdings Ltd v P & O Property Holdings Ltd [1996].

In Graysim the demised premises comprised an enclosed market hall. The tenant employed a market superintendent who occupied an office there, locked and unlocked the hall and controlled the heating etc. The third parties, namely the individual stallholders, were found to have exclusive possession of their respective stalls and therefore to enjoy rights in the nature of a tenancy.

Lord Nicholls, with whose judgment the other members of the House of Lords simply concurred, indicated that where the interest of the third party is in the nature of a tenancy, the third party will normally be the occupier for the purpose of the Act. The entitlement of the third party to exclusive possession will render the tenant incapable of occupying for that purpose. Where, however, the third party merely has rights in the nature of a licence, it will be less difficult for the tenant to establish that it has retained a sufficient degree of control to qualify as occupier for the purpose of the Act. (However, Lord Nicholls did not rule out the possibility in other cases, where the third party had rights in the nature of a tenancy, of the tenant nevertheless reserving rights that were so extensive that the tenant still remained in occupation for the purpose of the Act.)

Their lordships held that the third parties in this case had tenancies that were business tenancies protected by the Act. They went on to hold that the tenant, accordingly, had no right to a new tenancy of the demised premises. It could not be regarded, in these circumstances, as being in occupation itself for the purpose of the Act. There could not be dual occupation of the premises by the tenant and a subtenant for the purpose of the Act. In other words, the Act ‘looks through’ to the occupying subtenants and affords them protection, rather than the tenant.

(It must be borne in mind that the third parties in Graysim occupied for business rather than residential purposes. In other words, the tenant and the third parties were rivals in a claim for the protection of the Act. It is difficult to see how the finding of dual occupation in Lee-Verhulst can now be justified, at least in the situation where the third party occupies for business purposes, though Lord Nicholls seems to have left the door slightly open in the case of residential accommodation.)

The decision in Graysim was later followed by the Court of Appeal in Bassari Ltd v Camden London Borough Council [1999], where the third parties were found to occupy residential units as tenants, and the tenant retained virtually no control. It was held that the tenant was not in occupation for the purpose of the Act.

The judgment in Titanate

Judge Cooke held that the tenant company did not occupy the demised premises for the purposes of a business within the meaning of s23(1) of the Act. The flats were occupied by third parties under the terms of arrangements that amounted, on the basis of the principles stated by the House of Lords in Street v Mountford [1985], to tenancies. Accordingly, the third parties enjoyed rights of exclusive possession. The tenant company did not have a sufficient degree of control over the flats to maintain that it was in occupation for the purpose of the Act.

However, the judge went on to hold that if, on a true construction, the arrangements amounted to no more than licences, the tenant still did not enjoy the protection of the Act. The self-contained nature of the flats, and the fact that the tenant’s rights over them were restricted, militated strongly against any argument that the tenant was in occupation for the purposes of the Act.

Conclusion

Judge Cooke gave a lengthy and detailed judgment that bears reading, even though it has no binding force. Moreover, it contains a helpful review of the earlier authorities, particularly Lee-Verhulst and Graysim. But where does this leave us?

Clearly, for the tenant to sustain renewal rights under the Act, it must occupy at least a part of the demised premises, and it must be running a business in so doing. Whether this is found to be true will, in every case, be a question of fact. This is so whether or not there are third parties also present on the demised premises. Where there are, the examples will lie along a spectrum.

At one end you may find the tenant of a conventional purpose-built hotel seeking to renew its tenancy. It occupies the premises for the purpose of a business, namely the provision of short-stay accommodation and meals on terms that will inevitably involve third parties enjoying no more than rights in the nature of a licence. It will exercise an extremely high level of management control, and not only because the arrangements will include the provision of comprehensive services. No one could successfully contend that the presence of third parties in the hotel in these circumstances denies that tenant its right of renewal.

At the opposite end of the spectrum is the tenant of an office block that has been sublet in its entirety. The third parties will almost certainly enjoy rights in the nature of a tenancy. Even where rights of entry are reserved by the tenant, it is inconceivable, after Graysim, that the tenant would be able to argue successfully that it was in occupation for the purpose of the Act. Furthermore, the courts have long been unwilling to regard the mere collection of rent as a business.

In between, there will be various shades of grey, but it will remain a matter of fact and degree in every case whether the tenant remains in business occupation. What still muddies the water, in the case of residential premises, is the question of whether the reasoning in Lee-Verhulst can still be justified.  © Property Law Journal