Landlord and tenant: the dangers of failing to comply with the formalities for creating a lease

Most land transactions require certain formalities to be observed. Leases normally have to be created by deed. However, certain leases can be created under section 54 Law of Property Act 1925 without the need for any writing at all. For a lease to come within section 54, it must:

• be for a term not exceeding three years. Periodic tenancies (tenancies which are not for a fixed term, but run e.g. from week to week, month to month, or year to year) fall within this definition;
• take effect in possession. In other words, reversionary leases (where the term starts later than the date the lease is completed) are excluded from this section; and
• reserve the best rent reasonably obtainable without taking a fine. This means the market rent for the premises.

It is this last requirement which came under the spotlight in Fitzkriston LLP v Panayi.

P occupied a commercial unit which had been purchased by F. The only written evidence of the basis of P's occupation was a document which purported to grant a tenancy for one year, at a rent of £4,000 per annum, payable monthly in advance. The document had not been signed by the then freeholder, and so was not a valid deed. P therefore had to show that he had a tenancy pursuant to section 54 of the Law of Property Act. If established, such a tenancy would be an overriding interest binding F as purchaser of the unit, and would be protected by the Landlord and Tenant Act 1954 such that P would also have security of tenure.

The Court of Appeal focused on the rent paid under the arrangement. Evidence before the court showed that the market rent for the premises at the relevant time was between £12,000 and £20,000 per annum. The court therefore rejected the suggestion that P had a valid lease under section 54. The most P's interest could amount to was a tenancy at will, which could be determined at any time and would not be protected by the Landlord & Tenant Act 1954.

Things to consider

Informal arrangements such as this are not uncommon. The risk for a building owner or potential developer is that, by virtue of possession coupled with regular payments of "rent", an occupier has a periodic tenancy under section 54, and has therefore acquired security of tenure. This case shows that the courts are willing to scrutinise the terms of such arrangements to see whether they fall within the strict terms of section 54. For occupiers, it illustrates the potential vulnerability of relying on letting arrangements which are not formally created by deed.

This analysis was written by Sarah Allen, associate in Wragge & Co's Real Estate group.

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