October 19, 2015

The pitfalls of residential tenants running a business from home

What’s the difference?

Residential and business tenancies come with completely different legal rights and obligations, set out under different legislation. If a tenant uses the property for both residential and business purposes, it can present unwelcome complications for both sides.

What does the law say?

The Government recently acknowledged this problem by attempting to clarify whether someone who works from home has a residential or business tenancy.

On 1 October 2015, both residential landlords and their tenants breathed a small sigh of relief at the enactment of the Small Business, Enterprise and Employment Act 2015 (Commencement No 2 and Transitional Provisions) Regulations 2015. This brings into force sections 35 and 36 of the Small Business, Enterprise and Employment Act 2015 (SBEEA) and addresses the problem by excluding certain tenanted residential properties also used as business premises from being business tenancies.

One of the aims of the Act is to encourage business start-ups. This is achieved by allowing landlords to permit tenants to use their homes as business premises without running the risk of the tenants acquiring the rights of a business tenant, including security of tenure.

What are the changes?

Previously, running a business from home could lead to the tenant acquiring business tenancy rights, even if the business activity was done in breach of the terms of the tenancy. Now, even if the landlord has agreed to the tenant using the property for business purposes (or agreed to it by failing to take action once discovering it), the tenant still does not obtain business tenancy security of tenure where the business use is solely for the purposes of a "home business". This is defined in a new section that has been added to the Landlord and Tenant Act 1954 by section 35 of SBEEA.

A "home business" is defined as "a business of a kind which might reasonably be carried on at home". However, the definition doesn’t say what is meant by "home" and makes reference to the word "house" - which raises questions about applying the law to a flat!

It sets requirements that the lease must provide that the let premises are to be occupied as a home, but permit the tenant to carry on a home business (or allow the landlord to consent to such a use), but it must not permit any other sort of business, or it will fall outside the section the definition.

What practical steps can be taken?

Residential landlords and tenants are encouraged to review whether their tenancy agreements permit the running of a business from home. If not, the tenant will breach the agreement by running a business and could be evicted as a result. Tenants signing up to new tenancy agreements should negotiate for the right to use the property as a “home business” to be included in the tenancy agreement. This is intended to encourage open discussions about what type of business it is. Some particular types of business are excluded and so both landlord and tenant should make careful checks.

Landlords must consider whether their mortgage terms, and (if their property is leasehold) that their own lease terms permit the use of the property in this way, to avoid breaching their own obligations. Landlords should also check that they have adequate insurance cover in place for the property to be used as a home business. If these items are likely to cause problems, landlords can still choose to forbid business use in the tenancy agreement.

If steps are not taken and the tenancy falls outside of the new provisions, security of tenure under the 1954 Act could still be gained, making it much more difficult for landlords to gain possession.

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