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Tenancies without Tenants12th June 2020 Commercial Litigation
As a result of COVID-19, more and more landlords are facing situations where tenants seek to break out of tenancies which they felt had already been agreed.
This creates a uniquely difficult situation where a tenancy agreement has been entered into, maybe as much as several months prior to the commencement of its term, but tenants no longer wish to move. In some cases they may accept that money paid already is lost in others they will demand a full refund. We have seen this particularly, for example, in the case of student accommodation where university campuses are closed and likely to remain so and students no longer need or want accommodation they have secured away from home.
The starting position is that where a tenancy contract has been entered into, the tenant is liable to pay rent for the full term of the tenancy, regardless of the tenant’s unwillingness to move in. However, where a tenancy has been agreed in principle, but never actually fully entered into, there is likely to be no obligation on either party. Whether or not the tenancy contract has been entered into is therefore critical. Where a tenancy is arranged using the phrase “subject to contract”, as most are, then the tenancy will only have been entered into properly if both parties have signed the agreement (and if there are multiple tenants that will mean all of them) and the tenancy agreement has been executed by dating it at the start. Anything else will probably mean that the “subject to contract” formula remains in place and the contract will not be binding. Tenants can therefore pull out and their liability will be limited to any separate holding deposit agreement they are bound by.
A question which has been coming up in this respect is whether a tenancy agreement is frustrated as a result of the pandemic or refusal to move in. It is not correct to say that where a tenant has not moved in or not paid any of the initial rent or deposit there is no contract. If it was properly executed then the landlord can sue for damages under the agreement. The fact that the tenant has elected not to comply with the agreement does not stop it being binding. In terms of frustration, the argument is extremely difficult to run in Court. Frustration is a doctrine which applies where the parties wish to carry out the agreement but are not able to do so due to some circumstance beyond their control in which the core subject matter of the agreement is rendered unusable or unavailable. In most cases a tenant can in fact travel to a property as the government guidance permits movement to take up occupation of a property. A hypothetical example of such circumstances could potentially be a tenant who was moving into the UK from abroad and the UK closes its borders, thus making the tenant’s arrival impossible. However, in this case the difficulty for the tenant is that the property is still available to be occupied and so the core subject matter of the tenancy is available to use. In general terms, the fact that it is no longer economic, convenient or desirable for the tenant for the tenancy to go ahead, is insufficient for frustration to kick in.
In practice, landlords may struggle to obtain rent from tenants who do not want to move in. It may be sensible for both parties to engage in a dialogue where an attempt is made to find a replacement tenant and the original tenant provides some compensation to the landlord to cover the period during which the property is untenanted.
The Government’s guidelines once again come to mind, where both landlords and tenants are encouraged to act reasonably.
In relation to agents, where an agency fee is due for the introduction, this is may still payable to the agent by the landlord (subject to the agent’s T&Cs), despite the tenant’s refusal to honour the agreement. Agents are usually entitled to a fee where they introduce a tenant who is “ready, willing and able” to enter into a tenancy. If the tenant has in fact entered into a valid agreement the agent will be entitled to their fee. If, however, the agreement has not been properly entered into then the fact that the tenant has pulled out would seem to indicate that they were not “ready, willing and able” and so the agency fee is probably not payable. Many agents have clauses which allow for fee rebates when tenants leave agreements early and so landlords will want to consider if they can take advantage of these options. As with landlord and tenant relationships it probably makes sense for agents to think of the bigger picture and the need to retain landlords and therefore to try to come to reasonable compromises wherever possible.
Partner and Head of Department
Commercial Litigation/Corporate Recovery and Insolvency