Lawbite: Perpetual tenancy, periodic tenancy, or perpetual confusion?!

Summary

The Upper Tribunal (the Tribunal) recently grappled with the law around perpetually renewable leases and their interaction with the statutory rent review mechanisms in the Housing Act 1988 (the Act).

In Constantine v Bird the Tribunal upheld the First Tier Tribunal (FTT)’s finding that a clause giving a tenant the “option to renew for a further 12 months at the same rent” did not create a perpetually renewable tenancy where the rent was fixed at its original amount. Instead the option allowed the tenant to renew once only, and thereafter a statutory periodic tenancy arose. This was important as it meant that the landlord could propose a rent increase once the statutory periodic tenancy arose.

This decision is particularly relevant to landlords and tenants of residential property in England due to the nature of the underlying tenancy, but the observations on perpetually renewable tenancies will have wider relevance. The decision highlights the court’s reluctance to find perpetually renewable tenancies and underscores the importance of clear lease drafting to avoid unintended consequences.

Statutory periodic tenancies

The Act provides that when a fixed term assured tenancy ends, a statutory periodic tenancy arises, allowing the tenant to remain in the property until it chooses to leave or the landlord regains possession. The new tenancy’s terms mirror those of the original fixed term tenancy (save as to term), including rent. During a statutory or contractual assured periodic tenancy the landlord may serve notice under s.13 of the Act proposing a new rent. If the parties cannot reach an agreement on the new rent, the tenant may apply to the Tribunal for a rent determination.

A statutory periodic tenancy (and therefore the right to seek a statutory rent review) will not arise, however, if the tenant is otherwise granted a new tenancy of the same property immediately after the fixed term ends (for example if a party exercises a renewal right contained in the lease).

Perpetually renewable tenancies

Perpetually renewable tenancies are created where a tenancy agreement includes a tenant option to renew on the terms of the existing tenancy agreement. If that is read as including the option to renew, the tenant is given the perpetual right to renew. Unsurprisingly, these types of perpetual tenancies are often created unintentionally. Perpetually renewable leases are converted to a 2000-year term under section 145 and Schedule 15 of the Law of Property Act 1925.

The Right to Renew

The parties to this dispute originally entered into a 12-month fixed-term tenancy in March 2017 at a monthly rent of £1,256.25. Clause 3.23 of the tenancy offered the tenant, Mr Constantine, the right to renew the tenancy at the end of the term for another 12 months at the same rent.

In March 2024 the landlord, Mr Bird,  served notice under s.13 of the Act proposing a new monthly rent of £1,450.

The tenant contended that when his original fixed-term tenancy ended, a new 12-month tenancy arose, not a statutory periodic one, provided he gave notice to extend. He claimed that the option made his tenancy a perpetually renewable tenancy fixed at the original monthly rent of £1,256.25 and as such Mr Bird could not propose a new rent  He then applied to the Tribunal for a determination.

The FTT found in favour of the landlord, finding that no perpetual tenancy had arisen; as a matter of construction, clause 3.23 of the tenancy only granted the tenant the right to renew his tenancy on the same terms for one further year. After this (i.e. since March 2019), a statutory periodic tenancy arose, along with the landlord’s right to propose rent increases. The Tribunal upheld the finding.

Key points

• The courts tend to lean against perpetually renewable tenancies and this decision reinforces that
• only unequivocal wording to this effect will give rise to perpetual renewal
• Whilst ambiguous renewal terms are unlikely to be interpreted as giving rise to a perpetual right of renewal it is still important for commercial and residential landlords of property in England and Wales take care not to inadvertently grant perpetually renewable tenancies as this could lead to unintended consequences
• Once again, a decision which highlights that clear terms often help in avoiding future disputes