Tenants using a rental home to run a business can be problematic for landlords, there are safeguards need to bear in mind.
Summary:
The article discusses the potential issues landlords may face when tenants use rental homes for business purposes in England. The Landlord and Tenant Act 1954 Part II provides security of tenure to tenants using premises for business or mixed residential and business purposes. Without careful consideration, landlords may inadvertently grant long-term security of tenure, especially in cases where there is no written agreement. The article highlights the distinction between working from home and running a business from home and mentions concerns under the Housing Act 1988 regarding assured shorthold tenancies.
The Small Business, Enterprise and Employment Act 2015 addressed this by introducing "Home Business Tenancies," allowing certain businesses to be conducted in residential premises without triggering business tenancy rights. The article emphasizes the importance of well-drafted tenancy agreements, warns about potential pitfalls for landlords, and suggests seeking legal advice to navigate complexities, especially for mixed-use properties. Additionally, it notes that tenancies commencing before October 1, 2015, are not covered by the new regulations, and landlords should consider other stakeholders' interests, such as insurers, mortgage lenders, and health and safety regulations.
The Landlord and Tenant Act 1954 Part II (for business tenancies) provides security of tenure to tenants of premises occupied for business purposes, or mixed residential and business purposes, so you need to take care not to give long term security of tenure by default.
This article applies primarily to England and is not a full interpretation of the law, only the courts can decide. Although tenancy laws are similar in other jurisdictions, there may be significant differences. Always seek professional advice before making or not making important decisions.
Under the provisions of the 1954 Act it is possible for a lease or tenancy of a property used for both residential and business purposes to be a business tenancy giving long-term secure tenancy. This means that residential tenants running a business from a home could inadvertently be given rights to remain in the premises pretty much indefinitely. This is particularly the risk where no written agreement exists or when it is deficient in some way.
It has to be said that working from home (WfH), something that has become popular through the pandemic, is not the same thing as running a business from home. However, there are many activities that could be construed as running a businesses, some of which could become a nuisance to neighbours resulting in complaints to the local authority.
This has long been a concern when letting under the Housing Act 1988, an assured shorthold tenancy (AST) when the tenant works from home. Many landlords and tenants are unaware of this anomaly, it is nevertheless a concern.
However, this has been recognised by Government in The Small Business, Enterprise and Employment Act 2015 which made an amendment to the main Landlord & Tenant Act 1954 to exclude such ‘Home Business Tenancies’ defined as ‘a business of a kind that might reasonably be carried on at home’. This made sure that residential landlords could be safe in the knowledge that home working can be encouraged without bringing in business tenancy rights.
The Small Business Enterprise and Employment Act 2015 received Royal Assent on 26 March 2015 and was operative from 1 October 2015. The Act consists of a raft of measures aimed at making the UK a good place to start and grow a business.
All good residential tenancy agreements have hitherto prohibited the use of domestic dwellings for business purposes, to avoid any potential argument about whether the tenancy is protected by the security of tenure provisions in the 1954 Act.
However, where it can be shown that a landlord knows that a business is being conducted from the premises, it well might be argued that continuation of such practice has been condoned and agreed and therefore security of tenure would apply.
The intention of the 2015 Act therefore was to remove the incentive for landlords to include a prohibition by providing that a tenancy of a dwelling house where a 'home business' is carried on will not fall within Part II of the 1954 Act.
This is to be known as a 'home business tenancy' which will permit the right kind of business for residential premises, a 'business of a kind which can reasonably be carried on at home, but no other type of business'.
The Act therefore is designed to encourage businesses by giving 'greater flexibility around home working' and more options in terms of where the business is carried on and where partners and employees can be based.
The Small Business, Enterprise and Employment Act 2015 (SBEE) defines it as when:
The Act defines a home as: "any business of a kind which might reasonably be carried on at home".
Certain specific businesses are excluded, for example, the supply of alcohol, and further regulations are to follow on this.
From the 1st October 2015 the provisions of the 1954 Act are now clearly excluded from residential tenancies, with or without any clause in the lease, and irrespective of the landlord’s response to any such occupation. People can use homes for working in the safety of landlords knowing that only residential tenancy rights exist. For example:
It remains to be seen just how many landlords permit their tenants to run home businesses, so caution is recommended here, but as home working in now becoming the norm it is sensible not to lose tenants by refusing suitable home businesses.
The 1954 Act has provisions for 'contracting out of the Act' in the case of all business tenancies, a procedure where the tenant and landlord agree before the lease is signed that the tenancy will be contractual and the security of tenure provisions of the Act will not apply. This is also a safe way to go but with the home business tenants this should not be necessary, consult a solicitor.
1. Tenancies commencing prior to 1 October 2015 are not covered by the new regulations. The legislation is not retrospective, therefore older tenancies rely on an appropriate restriction clause. It may be necessary to agree a new lease in some circumstances.
2. Think about other interests where the home is being used for business purposes. Insurers and mortgage lenders have an interest, as do superior landlords and management companies, also fire safety and health and safety issues matter. You need to inform them all and comply with their terms.
3. It gets more complicated with mixed use properties. It's different with multi-let areas at a property, different leases involved, or the type of business use, whether it's permanent or on and off at a property. You will need legal advice here.
See Part 35 of the Act - Exclusion of home businesses from Part 2 of the Landlord and Tenant Act 1954
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