Landlord and tenant - formalities for lease creation

In the last edition of Property update we reported on the decision in Fitzkriston LLP v Panayi, which considered the nature of the requirements for a valid lease. This issue has come up again in the recent case of Looe Fuels Ltd v Looe Harbour Commissioners, where the court adopted a slightly different approach.

Leases normally have to be created by deed. However, certain leases can be created under section 54(2) Law of Property Act 1925 without the need for any writing at all. For a lease to come within section 54(2), 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.

In both Fitzkriston LLP v Panayi and Looe Fuels Ltd v Looe Harbour Commissioners, the question was whether the rent reserved was a market rent.

Looe Harbour Commissioners owned and operated a port at Looe, in Cornwall. The Harbour Commissioners leased a fuel tank to Looe Fuels, which used it to run its business refueling fishing boats. The tank reached the end of its natural life and needed to be replaced.

Looe Fuels argued that the Harbour Commissioners had agreed orally to grant it a three year lease of a site which would contain a new fuel tank. 75% of the funding for the tank was to be obtained through a government grant. The proposal was that Looe Fuels would pay the remaining 25%, spread over the 3 year term. These payments would be classified as rental for the new tank.

Although an agreement for lease must normally be made in writing, there is an exception where the agreement is for a lease which falls within section 54(2) of the Law of Property Act 1925 (see above).

The Court of Appeal held that the oral agreement was for the best rent which could reasonably be obtained, within the meaning of section 54(2). The Harbour Commissioners would recover the whole of their capital outlay within three years, which was a very good bargain. Although the original outlay was only 25% of the overall cost, the judge was entitled to look at the actual, as opposed to the notional, position when deciding whether the rent was the best which could be reasonably obtained for the site. On the facts, the judge was entitled to conclude that the agreed rent almost certainly exceeded the annual market value for the land.

Things to consider

The Court of Appeal's judgment did not refer to any valuation evidence of market rents in the area. The basis for its decision would appear to mean that if the government grant had been for, say, 90% of the cost of the tank, payment by Looe Fuels of the remaining 10% over the three year period would still have been a market rent, even though this would have resulted in a lower figure. This contrasts with Fitzkriston v Panayi, where some (albeit limited) valuation evidence was before the court. In that case the court found that the rent reserved was not a market rent, with the result that no lease had been created.

It is important to comply with the requisite formalities when creating leases and agreements for lease. Any arrangement which is not made by deed must comply with section 54(2) of the Law of Property Act if it is to create a valid lease which will bind purchasers of the landlord's interest and be capable of attracting security of tenure under the Landlord and Tenant Act 1954. Similarly, an agreement for lease should comply with section 2 of the Law of Property (Miscellaneous Provisions) Act 1989, unless the lease when granted will be within the exception in section 54(2) of the Law of Property Act. Section 2 provides that an agreement must be in writing, contain all the terms which have been agreed and be signed by or on behalf of each party.

Where these formalities are not observed, landlords looking to argue that informal arrangements have not given rise to a periodic tenancy which has security of tenure should gather evidence of market rents in the area. It will be easier for the landlord to make its case where the "rent" being paid by the occupier is nominal only.

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

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