Tenants running businesses from their home – protecting landlords from tenants acquiring 1954 Act security of tenure rights

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

Summary

Keen to encourage home businesses, legislation has been enacted (but which has yet to come into force) which seeks to deal with landlords' concerns that allowing a residential tenant to run a business from home may enable the tenant to obtain business security of tenure rights.

Detail

The Government is keen to encourage businesses carried out from home. However, most residential leases prevent tenants from running a business at home. One of the reasons for this is the landlord's concern that the tenant may obtain security of tenure rights under Part 2 of the Landlord and Tenant Act 1954. Such rights prima facie apply to homes in which business is also carried on in the premises. The 1954 Act may offer tenants rights to remain in premises that are wider than those available under the legislation for dwellings. However, the 1954 Act will not apply through the inclusion of a covenant against business use (by virtue of section 23(4)), barring consent or acquiescence by the landlord. So the law currently provides strong motivation for landlords to include such a covenant in the tenancies of dwellings. A consequence of this is that tenants among the large and growing number of people who conduct business activities in their homes are likely to be doing so in breach of their tenancies.

As a result, provisions are included in the recently enacted Small Business, Enterprise and Employment Act 2015 (which have yet to come into force) to address this concern. The aim is to encourage business by allowing landlords to permit tenants to use their homes as business premises without running the risk of the tenants acquiring security of tenure.

Section 35 of the 2015 Act is intended to remove the motivation to include an absolute covenant against business use in tenancies of dwellings, and thereby facilitate the operation of home businesses. It will do this by establishing a new concept of the "home business". This may be carried on in the home (known as a "dwelling-house") without the home as a result falling within the 1954 Act. A new section is added to the 1954 Act, which defines a home business as "a business of a kind which might reasonably be carried on at home" and excludes the supply of alcohol for consumption on licensed premises from that definition. The definition is a bit woolly and while future regulations may clarify further, this may become a point of dispute.

To fall within the home business exception, the tenancy needs to comply with certain conditions including that the tenancy must relate to a home let as a separate dwelling; to an individual tenant or tenants; for occupation as a home whether or not the individual's only or principal home; must permit a home business, or permit a home business only with consent of the landlord; and must not permit the carrying on of a business other than a home business. Where the original tenancy prohibits any business use, if the landlord subsequent consents to, or acquiesces in the carrying on of a home business, then the tenancy will also come within the exception to security of tenure under the 1954 Act.

A "home business tenancy" also applies in situations where the property is held on trust and where at least one trustee or beneficiary of the trust is living in the dwelling (whether or not as that person's only or principal home).

The new legislation also ensures that a dwelling let on a home business tenancy will be "let as a separate dwelling" within the meaning of that expression in the Rent Act 1977 (protected tenancies), Housing Act 1985 (secure tenancies), the Housing Act 1988 (assured tenancies), and any other England and Wales enactment relating to protected, secure or assured tenancies. The effect is that the exception can also apply in those contexts.

It is not entirely clear whether a residential lease of a flat in a block is caught by the new provisions in view of the reference in the legislation to it applying to dwelling-houses.

The legislation, when it comes into force, provides that a house (or part of a house) that is let for mixed residential and business use is "capable" of being let as a dwelling and can, therefore, come within the exception. It will be a question of fact if the premises are actually let as a dwelling.

There are transitional provisions excluding from the new provisions tenancies entered into before the day on which the new provisions come into force, or tenancies pursuant to contracts entered into before the day on which the new provisions come into force, or tenancies which arise by operation of any enactment or other law when the previously mentioned excluded tenancies come to an end.