Are undated or unsigned leases worth the paper that they are written on?

Motti Black, Solicitor

When considering a potential commercial property investment, a key issue for the prospective purchaser is whether the tenant covenants in the occupational leases at the property are enforceable. This will directly affect the value of the property.

Generally, a lease becomes enforceable on completion. This usually occurs when the solicitors of both parties date the lease, following valid execution of the document. If a potential purchaser notices that the leases are deficient in that they are undated or unsigned by the tenant it would appear, at first sight, that the covenants are not enforceable as the leases have not completed. This is not always the case, however, and we set out in this article some of the possible ways that the covenants in the lease may still be enforceable (at least to some degree) and we look at some of the legal consequences of how the deficient lease is treated.

       1. Implied Periodic Tenancy

A periodic tenancy is one in which the term of the lease is for a specific period of time and runs until terminated by notice to quit. It can be created either expressly or by implication. In both the case of an unsigned and undated tenancy an implied periodic tenancy could occur, depending on the specific facts of the case, where the tenant is in occupation of the property and the landlord accepts a monthly or quarterly rent. The length of the term of the tenancy would be determined based on the rent that is reserved for a specific period (e.g. if the annual rent is agreed between the parties, a yearly periodic tenancy may have been created). The terms of the deficient lease will likely help to determine what the terms of the periodic tenancy would be. This kind of tenancy, therefore, would clearly have the advantage of allowing the potential purchaser to enforce the tenant covenants that are set out in the deficient lease (at least somewhat).

However, it is important to note that a period tenancy is terminated by either party serving a notice to quit. Although the notice must be at least equal to the period of the tenancy, this would still mean that the potential purchaser does not have the security of a tenant in occupation of the property for the unexpired residue of the term of the lease, as would usually be the case – the tenant could serve a notice to quit at any time. Furthermore, depending on how long the tenant has been in occupation, the lease may be protected under the Landlord and Tenant Act 1954 (the “1954 Act”). This Act gives a tenant the right to remain in occupation of a property at the expiry of the term. This would be of great benefit to the tenant but would, of course, be detrimental to the landlord/potential purchaser.

       2. Equitable Lease

Another possibility is that the deficient lease could be enforceable in equity, despite not being enforceable at law, as equity may view the lease as having completed in line with the intention of the parties. This means that the court would be able to force the parties to comply with the terms set out in the lease under a remedy known as specific performance, which could be beneficial to a potential purchaser. It is important to note that a party trying to argue that a lease is enforceable in equity will have to comply with the rules of equity, such as coming with “clean hands”. They will also have to bear in mind that less remedies are available for a breach of a covenant in the lease. A further consideration here is whether an equitable tenancy is protected under the 1954 Act and it is not clear how a court would rule in this matter.

In the case where a tenant has not signed the lease (as opposed to an undated lease) it is harder to argue that there will be an equitable tenancy in favour of the landlord. The purchaser could even find themselves in a position where the landlord covenants could be enforced against them if the tenant chooses to enforce them as they signed the lease but the tenant covenants could not be enforced if the tenant argued that there was no lease.

       3. Tenancy at Will

A tenancy at will arises where the tenant is occupying the property but negotiations of the terms of a lease are ongoing between the parties. As its name suggests, either party can terminate this agreement at will so, although it can sometimes be a useful temporary arrangement, a potential purchaser would likely not attach too much significance to the tenant in occupation, given its fragile nature. A tenancy at will does not enjoy protection under the 1954 Act but the line between an implied periodic tenancy and a tenancy at will is often blurred so a tenant will always look to try to argue that there is a protected tenancy. Where the tenant has been in occupation for many years under an unsigned or undated lease, it is highly unlikely that the court would construe this as a tenancy at will. On the other hand, where the tenant has gone into occupation prior to formal completion and the lease just has not yet been dated, this will often be considered a tenancy at will.

In conclusion, an undated or unsigned lease in a sale pack should undoubtedly be raised as a red flag as the value of the lease will be greatly diminished. However, as we have seen, it is important to consider the specific facts on a case-by-case basis to determine how the deficient lease may be treated and then make an informed view, from both a legal and commercial perspective, as to whether to proceed with the purchase.