Desk rental: understanding the legal issues

Some of the most common questions we get asked about desk rental are about the law of leases. So we asked property law ace Susanne Hinde of Hewitsons to talk us through the legal pitfalls and how to get around them.

Desk rental, eh?

The spare desk in the corner of your office could be a useful source of revenue especially in the current economic climate. People looking for such space range from start-up businesses to self-employed consultants, in fact, anyone who needs an office environment to work in. For many people working from home can be distracting and unproductive. However, businesses should be wary of an informal arrangement to allow a third party to occupy a spare desk, regardless of whether or not they are a well known to someone within that business.

So what rights could a desk renter acquire?

The government has sought to encourage business and protect them from unscrupulous landlords, and therefore businesses can acquire rights of occupation (known as security of tenure), without either party necessarily being aware of it. These statutory rights are conferred by the Landlord and Tenant Act 1954.

The Act regulates the way in which business tenancies can be terminated. First, a business tenancy will not come to an end at the expiry of a fixed term, nor can a periodic tenancy be terminated by the landlord serving an ordinary notice to quit. Instead, notwithstanding the ending of the contractual term, the tenancy will be automatically continued until such time as it is terminated in one of the ways specified by the Act. In addition, a tenant who has security of tenure is usually entitled to apply to Court for a new tenancy at the end of the current one. The provisions are heavily weighted in favour of the tenant, and a landlord seeking to evict a protected tenant has limited opportunity to do so.

How do I avoid security of tenure?

There are very few exceptions to automatic security of tenure, but a six-month lease would not attract security of tenure unless it contains a provision for extending the term beyond that six-month period. A second six-month term bringing the total period of occupation to a year would, however, attract security of tenure.

The parties can agree to exclude the security of tenure provisions of the Act applying to the tenancy. The procedure required involves the landlord serving a notice (in a prescribed form) on the tenant and the tenant providing a declaration (or statutory declaration where the tenancy is to be entered into in less than 14 days) also in a prescribed form, declaring that they understand that they are giving up the rights which would otherwise be conferred by the Act. This is by far the safest option for a business seeking to let superfluous space.

To avoid having to repeat the process for a renewal lease, the lease could be for a longer period than initially required but contain break clauses.

A tenancy at will is exempt from the security of tenure provisions of the Act, but only if it is truly a tenancy at will. There must be no suggestion that the tenant can stay for a minimum or maximum period of time and the document must unequivocally state that the landlord can ask the tenant to leave at any time. Clearly this leaves the tenant very vulnerable and therefore is likely to be unacceptable in many cases. In addition a tenancy at will must not refer to rent being payable in advance for a set period. This is a common trap for those wishing to regularise what is only really meant to be a temporary measure.

I've heard I can get around this by using a licence rather than a lease - is that right?

Many people wrongly assume that a document headed "Licence" and making reference to a "licence fee" could not fall within section 23(1) of the Act conferring security of tenure, but that is not the case. It is not the name of the document or the terminology used that matters, but the content of it. An agreement made on the basis that a third party can occupy the "desk in the corner" for any period of time paying a fee for the privilege of doing so could, as far as a Court is concerned, amount to a lease. This was firmly laid down by the Court in the case of Street v Mountford [1985].

A document purporting to be a licence is not a licence if it:

• grants exclusive possession;
• is for a fixed term;
• reserves a rent.

A true licence is a personal privilege; it does not create any right to or interest in the property in question. It does not attract security of tenure and therefore the lease/licence distinction has been hotly contested in the courts. Each case inevitably turns on its own facts, but the following terms are indications that the parties intended to enter into a licence:

• an obligation on the licensee not to interfere with the owner’s right to occupation and control of the space;
• the right for the owner to move the space occupied by the licensee to another part of the building. This must be a realistic option and not just a clause inserted to attempt to avoid actual exclusive possession;
• a provision prohibiting use of the space for certain parts of the day, or only allowing use of it for certain parts of the day.

Terms which may indicate a lease rather than a licence include a reservation by the landlord to enter the premises to inspect or repair, the reservation of a right of way, forfeiture clauses or clauses preventing assignment or underletting.

Extreme caution should therefore be used where the parties wish to go down the licence route. Without taking appropriate advice it is easy to see how a lease may be inadvertently created. Such a lease would (in most cases), attract security of tenure.

Does my lease stop me from renting out desks?

Most commercial leases contain provisions restricting the tenant’s ability to share premises or to sublet all or part of them. The only exception which is sometimes given is that a company may share its premises with a group company. The basic reasons for restricting underletting or sharing are obvious; a landlord would want to be in control of who is in occupation of the premises, and would wish to avoid "sitting" tenants who occupy only part of the premises making them potentially unlettable when the main occupier leaves in what is an already unfavourable market.

Allowing a third party to occupy the spare desk would be in breach of such provisions and could lead to forfeiture of the lease. The technically correct approach would be to approach the landlord for consent notwithstanding the prohibition in the lease. The downside of course that he may well refuse.

If a landlord is aware of an unlawful desk renting arrangement, then he has two options. He can either stop collecting rent and serve a section 146 notice followed by forfeiture of the lease, or he can turn a blind eye and continue to collect rent in the usual way. Technically, the latter would amount to a waiver of the breach, meaning that the landlord could no longer rely on the usual remedies in respect of that particular breach. In the current climate any business wanting to rent out superfluous space needs to weigh up the probability of a landlord forfeiting the lease.

While in the past landlords would have been very eagle eyed on such matters, they are probably keener at the moment to protect their income stream and thus not forfeit your lease.

Anything else I should bear in mind?

Bank lending

If the property is owner occupied, then you might have thought that there would be no problem letting out that spare desk with minimal fuss. However if there is a mortgage over the property, it is more than likely that the owner has given covenants to the bank in the mortgage document not to let out or share the space or allow anyone else to occupy it without the consent of the bank. A bank would be concerned about a third party being in occupation in case the owner stopped paying the mortgage and the bank had to repossess and then sell the property. If the desk renter claimed to have rights in respect of their desk space, this could affect saleability and/or value. Therefore you must obtain the bank’s consent.

Confidentiality and security

Having a non-employee present in the office raises other issues such as confidentiality. Most businesses will have documentation containing confidential information which is not in the public domain. In particular if you have client information around the office then you should consider very seriously whether it is worth allowing a third party to occupy the spare desk at all. A confidentiality clause in any licence or lease may be appropriate. However, you should consider that the remedies for breach of that clause may be insufficient to re-build confidence in your business if crucial information were to be leaked.

Matters of security are also important. Access codes should be changed frequently to ensure that third parties do not gain access after their licence or lease arrangement has come to an end. The desk renter should be obliged to hand in keys are passes before leaving.

Insurance

If you decide to allow a third party use the spare desk then you should inform your insurers and you should comply with any additional requirements the insurer may have. Any licence or lease should provide for the desk renter to comply with the terms of the insurance. A copy of the policy or a summary of its conditions should therefore be made available to them.

Health and safety and other matters

Whilst the desk renter is not an employee, there are certain elements of health and safety and other legislation that are bound to apply to that person. Note that you cannot exclude liability for death or personal injury.

You should ensure that the desk renter is fully aware of the relevant fire escapes and fire equipment and they should be obliged to take part in any fire drills.

The desk renter must also agree to submit to electrical testing on their equipment to comply with any insurance requirements.

It should be made clear in any licence or lease that (to the extent that the law allows) the owner takes no responsibility for the physical welfare, such as ergonomic assessments, of the desk renter and that they should be responsible for their own furniture (even though some may be made available to them).

IT and services

Any licence or lease should set out clearly what you are expected to provide in terms of services (e.g. cleaning, photocopying, postal services, use of meeting rooms canteen services etc). With the spread of mobile phones, laptops and wi-fi the need for fixed land lines is limited, but if the desk renter is permitted to use data services then the limits must be clearly set out in any agreement.

And so...

The parties should only use a licence if that is what is actually and practically intended. Otherwise a lease contracted out of the Act is preferable in most cases, particularly if a short term arrangement could turn into something longer (and who knows how long the recession is going to last).

Finally, "a gentleman’s agreement" is not an option! An arrangement that the desk renter will pay a weekly or monthly fee for their desk without any further specific terms could infer a periodic tenancy protected by the Act.

Susanne Hinde is a Principal Solicitor in the Commercial Property Department at the Cambridge office of Hewitsons LLP. For more information contact Susanne on 01223 461155 or by email at [email protected]