“A gentleman’s word is his bond” ….or is it?
With the increasing rise in landlord and tenant disputes in the courts, relying on an oral agreement with your landlord or indeed your tenant is a real risk.
We all know that no relationship is guaranteed in life, not least one which involves property. When the relationship turns sour, seemingly it is quite common for one party to go back on their word and deny the existence of any agreement – leaving the distraught party to start court proceedings as the only means to enforce the oral agreement.
In those circumstances what protection does an oral agreement actually offer?
Just because the contract is not in writing or signed, it does not mean that there is no agreement per se. It is the conduct of each party that creates occupation rights and allows certain legal interests in property to arise however there are, as always, limitations. The type of tenancy created will depend on the terms of the oral agreement and how the occupation started / continued during that time.
I have discussed below the differing types of tenancies that can arise pursuant to an oral agreement and how this may affect your occupation rights. These agreements can be a (1) licence to occupy; (2) tenancy at will; and (3) lease:
(1) Licence to occupy
This type of arrangement provides permission to use the premises for a short term period which can either be fixed or can be dependent on payment of rent on a weekly or monthly basis.
The right to occupy the premises is on a non-exclusive basis. This gives the landlord the entitlement to occupy the premises itself and bring the licence to an end, by serving notice to terminate. Essentially a licence to occupy does not grant the tenant any legal interests in property.
(2) Tenancy at will
A tenancy at will is also used for short term lettings. The length of term of the agreement is not specified and simply continues while the premises are occupied (with the landlords consent). It can be terminated by either party at any time. The notice period is negotiable between the parties and is agreed at the outset. The agreement does not grant any exclusive possession to the tenant. Also it is worth noting, the tenancy will automatically come to an end if the landlord sells its interest in the premises or ends its ownership, say by death (or if a company, by way of insolvency).
This type of tenancy can arise either expressly (i.e. specifically agreed between the parties) or by implication (i.e. by virtue of the action of the parties involved) – the latter often arising where an appropriate lease has not been put in place.
A lease offers the most protection for a landlord and tenant however the Law of Property Act 1925 specifies certain formalities must be met for a lease to be validly created by way of an oral agreement. The law requires the term to be agreed at not more than 3 years, the tenant to take possession and pay the best market rent (as opposed to a lump sum premium at the outset).
Where the parties have a term longer than 3 years, the claiming party may have to turn to the courts to determine whether any rights based on the principles of fairness have been created.
Most oral agreements which are akin to a lease will offer security of tenure and are protected in law (by the Landlord & Tenant Act 1954). Security of tenure is the right of a tenant to continue to occupy a property unless the landlord obtains a court order for possession. In business this is more complicated. More specifically the requirements for protection are: (i) there must be a tenancy; (ii) the property consist of or include premises which are occupied by the tenant; (iii) the occupation must be for the purposes of a business; (iv) the business must be carried on by the tenant; and (v) the tenancy must not fall within any of the specific exclusions under the legislation.
When the agreed term of the lease expires, the lease may continue on exactly the same terms without the need for the tenant to vacate. A tenant will gain a legal interest in the property with a right to apply to the court for a renewal of the agreement.
Oral agreement vs written agreement
We recently acted for a tenant whose oral agreement with his landlord commenced in 2003 (for a term of 5 years). The agreement was protected by security of tenure as mentioned above (i.e. as detailed in the Landlord and Tenant Act 1954). We successfully argued that our client should be allowed to continue trading despite the landlord changing the locks to the property. The landlord was trying to send bailiffs and was threatening to issue legal proceedings. Our client successfully claimed for aggravated and exemplary damages and is continuing his occupation of the property.
The real key to a harmonious landlord-tenant relationship is transparency and this can only be achieved via formal written documentation. A properly drafted lease will comply with the various technical requirements to create a valid interest in the property and will clearly set out the landlord’s and tenant’s obligations to one another. With the right legal advice, a lease is the best form of protection for both parties.
The legal procedure is a fairly complex and should be left to lawyers to undertake the necessary steps to negotiate the lease on your behalf.
For an overview of how we can assist you with your lease, please click here to see our flowcharts.
Put your trust in us rather than your landlord and let us guide you through the process. Contact our commercial property department to discuss your property matter.