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Shed light on lets and leases

Schools should be wary about leasing spare space or they could find themselves with sitting tenants, says Malcolm Dowden.

Legal relationships between schools and commercial bodies can give rise to obligations which might not have been obvious to heads and governors at the outset. One key area of concern is that by granting commercial leases, schools may unwittingly confer security of tenure under the Landlord and Tenant Act 1954. The advantage of leasing rather than selling surplus property is that rental income - unlike sale proceeds - does not have to be earmarked for capital projects and surplus space may be let out for uses as imaginative and diverse as fitness centres, commercial nurseries, office space for small businesses or even as "telecottages" (offering Internet access, meeting rooms and temporary workspace).

It is essential that any letting is on a formal basis. If it is intended that use and occupation should be for a fixed period only, then the lease should contain an agreement to exclude sections 24 to 28 (inclusive) of the 1954 Act. Before the lease is completed the agreement to exclude these sections must be authorised by the county court (in the form of a consent order).

If a consent order is not obtained, the practical effect is that unless the tenant agrees to a surrender or the landlord has grounds to forfeit, the tenancy will not come to an end at the expiry of the contractual term granted by the lease. Instead, it will continue unless and until brought to an end by the landlord serving a notice or the tenant serving a request for a new tenancy.

A landlord's notice must specify which of the limited grounds set out in section 30 of the 1954 Act is being relied upon to justify termination.

These statutory grounds can be divided into "bad tenant" grounds - primarily persistent delay in paying rent or breach of repairing covenants - and grounds giving rise to an obligation to compensate the tenant, such as an intention on the part of the landlord to redevelop the property or to occupy the property itself.

However, the courts will require extremely compelling evidence to find that the tenant's conduct has been so bad as to justify termination of the tenancy without compensation.

If the landlord serves notice to vacate the premises, the tenant has two months to serve a counter-notice. If the tenant is unwilling to give up possession, the landlord must prove the validity of the grounds for his notice. For example, if the landlord has stated an intention to demolish and redevelop the property, he must satisfy the court that the intention is genuine. This usually involves producing planning permissions and any other necessary licences and consents (or showing a reasonable prospect of being able to obtain them).

If the landlord has not served a notice it is open to the tenant to serve a request under section 26 of the act for a new tenancy. The landlord has two months to object, but to succeed, the objection must be based upon at least one of the statutory grounds set out in section 30. Unless the landlord is able to rely wholly upon the "bad tenant" grounds, then he will have to pay compensation to the tenant. If the landlord is unable to make out any of the grounds, the tenant will be entitled to a new lease. The new lease will be on substantially the same terms as the old one. In the absence of agreement between the parties, the court has power to fix the rent at an open market level.

The implications of this key piece of legislation can be far-reaching. Landlords who thought they were entering into a short-term lease can find themselves with long-term tenants, unable to remove them without paying potentially substantial compensation.

There does not even have to be a formal lease in place. If a person or company occupies premises on what is thought to be a "informal" basis, paying rent and enjoying exclusive possession, the court might find that there is a tenancy, rather than a mere licence to occupy. If so, and if the premises are occupied wholly or in part for the purposes of a business, then the tenant will enjoy security of tenure.

The test of whether an arrangement is a tenancy or a licence to occupy is one of fact. It does not matter what the parties call it - the court will look to the substance, not the label. Often it is too late by the time a solicitor is called upon to analyse a document or a situation. A tenancy has already arisen.

To be safe, landlords should enter into formal leases excluding security of tenure - it is important the court order is obtained. This is usually a formality with the court fee currently set at Pounds 65. Saving costs by avoiding this fee and doing without a solicitor can backfire when the landlord is subsequently faced with a choice between accepting that the tenant has a right to stay or paying compensation to end the tenancy.

Malcolm Dowden is a solicitor at Shoosmiths Harrison, Reading

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