Short term lettings: avoiding the pitfalls
Empty property is bad news for landlords. It costs money in maintenance and rates, as well as being a possible target for vandals and squatters. To maximise income from property, landlords may wish to seize opportunities for short-term lettings to fill gaps between long-term arrangements. But as Andrew Little, commercial property expert with Pearsons & Ward Solicitors in Malton explains, it is vital to get the paperwork right.
‘If a potential tenant wants to get into your property and start trading and paying rent immediately, you may be tempted to skip the formal paperwork, but this can lead to real problems as business tenants can quickly acquire the right to stay on, which could get in the way of your long-term plans for the property’ explains Andrew. ‘The good news is that your solicitor can very easily draw up the necessary documents to make sure you can get your property back when you want.’
For lettings of six months or more, a lease that excludes the tenant's legal right to stay on is the best option, but this is not the right approach for shorter arrangements. Instead, your solicitor may suggest an occupational licence or a tenancy at will.
An occupational licence is a personal permission to the occupier to use the property, in return for a licence fee. It does not create any registrable interest in the property and, if implemented carefully, will not allow the occupier to acquire rights to stay on. There is no legal need for a licence to be in writing, but it is always better to set out clearly what the parties have agreed. Like rent under a lease, the licence fee can be paid in a lump sum or in regular instalments.
There are two areas where landlords must be especially careful when granting licences. The first is that the occupier must not be given exclusive possession, because that would indicate that the arrangement is a lease, not a licence. The courts have made it clear they will look at the substance of the arrangement, not the label the parties give to it, so just calling something a licence is not enough. To avoid the occupier having exclusive possession, the licence should make it clear that they have no right to prevent the landlord exercising their right to possess and control the property.
The second danger point is the period of occupation. If someone carries on a business in the property for more than 12 months then the landlord is vulnerable to a claim that the arrangement was, in fact, a lease and the occupier has acquired a right to remain in the property. If it is likely that the arrangement will go on for longer than six months, a lease excluding these legal rights is the best approach.
Tenancy at will
If a licence is not suitable, the other short-term option is a tenancy at will. This can be very useful, particularly if the occupier has already been in the property for a while and there is some doubt about whether they may have acquired legal rights to stay on. A tenancy at will stops any rights of this sort, effectively re-setting the clock.
Like a licence, a tenancy at will is a personal arrangement between the landlord and the tenant. The basis for a tenancy at will is that it has no fixed term but continues at the ‘will’ of the parties, which means until one of them brings it to an end. Tenancies at will can be put in place very quickly but, as with licences, there are traps to be avoided. The most important one is that a written tenancy at will must not set out any notice period for either party to end the arrangement, because that would mean it was a periodic tenancy, not one at the will of the parties. Tenancies at will are often seen as beneficial to a licence from the point of view of the property owner, because unlike a licence, no fixed term is required and it can be ended immediately when required.
Tenants increasingly want flexibility, so landlords should consider taking advantage of short term occupation to keep rental income flowing, but it pays to get the right advice. Mistakes could create long-lasting and costly problems.
For advice on short-term lettings, or any other commercial property matter, please contact Andrew Little on 01653 692247 or email Andrew.Little@pearslaw.co.uk.