It’s the law: Commercial property, from short lets to vacant possession
In this edition of ‘It’s the law’ our experts tackle some common themes that arise in relation to commercial property, including how to document short term occupation of commercial property without accidentally creating a protected tenant, how to secure vacant possession when you need it and what the proposed reform of the Landlord and Tenant Act 1954 has in store.
“Vacant possession challenges often start out life as a quick, informal arrangement that nobody thought needed documenting. Time spent on the paperwork at the start is usually a great deal more cost effective than months or even years spent arguing about things at the end.”
Aoife Murphy
Partner
Authors
Dan Moan
Partner
Aoife Murphy
Partner
Ben Halsey
Knowledge Development Lawyer
Introduction
When landowners want to document the short-term occupation of commercial property they have three options: a lease (also called a tenancy), a licence, or a tenancy at will. Each gives the occupier different rights, so it is critical to decide which one you want and then make sure you do not create one of the others by accident.
As a landlord, the distinction often matters most on the day you want to get the property back. Whether you are a developer assembling a site, a registered provider regenerating an estate or a landlord selling a portfolio, your programme depends on knowing exactly who is in occupation, on what basis, and how long it will take to get them out.
What follows is our plain English take on:
- The basics of security of tenure in the commercial property context.
- The practicalities of securing vacant possession.
- The reforms now heading towards the Landlord and Tenant Act 1954.
- What we are increasingly seeing regarding the treatment of commercial assets within wider (residential) stock rationalisation programmes.
- Placemaking issues - which is a nicer way of saying why the wording of a commercial lease matters, particularly when there are homes located in the same scheme.
What is security of tenure?
A commercial lease may give the occupier a valuable right known as security of tenure. Straightforward ‘licences’ and ‘tenancies at will’ do not.
Security of tenure comes from Part 2 of the Landlord and Tenant Act 1954 (the 1954 Act) and protects a business tenant in two ways:
- The tenancy does not end when the fixed term expires. It continues, and the tenant can stay, until it is brought formally to an end in one of the ways the 1954 Act allows. i.e. a specific notice must be served rather than simply packing your bags if you have stayed in occupation past the end of the original contractual term.
- The tenant can apply for a new lease. The new lease will be on similar terms at a market rent, the landlord can only resist on limited statutory grounds, and the renewed lease is protected too.
In short, once a protected tenant is in occupation, it is tricky to get them out.
Insecurity
There are four ways to stop an occupier acquiring security of tenure:
- Grant a lease, but ‘contract out’. Before the tenant commits, the landlord serves a prescribed warning notice and the tenant makes a declaration (a statutory declaration, sworn before an independent solicitor, if there are fewer than 14 days to go). The lease must then record what has been done. Done properly, the lease simply ends on expiry.
- Grant a lease for six months or less. But see ‘Back to back’ and ‘All change? Reform of the 1954 Act’ below.
- Grant a licence. The 1954 Act does not apply to licences.
- Grant a tenancy at will. Likewise.
Careful there
Landowners (and possibly some solicitors) often think the last two options are the easiest. A common mistake is to believe you are granting a licence or a tenancy at will but, by not getting it quite right, to grant a lease instead. Nobody will have gone through the contracting out procedure, because nobody thought it was needed. Hey presto and six months later you have a tenant with security of tenure. There are instances where a licence/tenancy at will are fine but you should consider the timelines of the intended occupation and be alive to the issues on any renewal (see Back to back).
A renewal option is no shortcut either. In Caterpillar Property Ltd v Park Cakes Ltd [2026] EWCA Civ 575 (Well known cake-making tenant gets a second helping: options to renew and security of tenure under the 1954 Act) the Court of Appeal confirmed that a tenant holding an unexercised option to renew keeps its statutory rights as well and can choose whichever route suits it best. The moral of this story is if you want the 1954 Act to be excluded, contract out.
Substance over style
Simply labelling a document a licence does not make it one. That would be too easy. A court will look at the substance of the arrangement, and the rights and obligations it contains, and decide for itself what has been created, especially if both parties had received legal advice when documenting the original arrangements.
What is a lease?
A lease gives the tenant an interest in land. As a general rule (although subject to exceptions) one will exist where there is:
- Exclusive possession. The tenant can exclude everyone from the land or premises, including the landlord, save for any rights of entry the landlord has reserved. The tenant does not need to be physically there. It is a question of control, and a key element is literally who has the keys.
- A determinable period. A term from now until next 1 January passes the test. A term from now until the weather gets warmer does not. A fixed term with a break right is fine, even though nobody knows when the break will be exercised.
- Usually, a rent. It can be tiny. ‘A peppercorn per year’ is common. ‘A single white rose per annum representing the love and affection of one party to another’ is more poetic but can be troublesome when you are filling in your Stamp Duty Land Tax return.
The benefit of a lease is certainty - the landowner knows where it stands and can expressly exclude security of tenure. Flexibility can be added safely with a mutual rolling break clause. The downside is that even a short lease is a longer document than a licence, takes longer to negotiate and may have SDLT implications for the tenant.
What is a licence?
A licence is a personal permission to do something on the licensor’s property. No interest in land is created. Licences are often used for shared or serviced space, or for the period between exchange and completion of a sale contract or agreement for lease.
Whether a ‘licence’ is really a lease will usually turn on exclusive possession. The right to park in a specific, numbered space points towards a lease. The right to park in any free space in the car park cannot be a lease and points towards a contractual licence arrangement.
What is a tenancy at will?
A tenancy at will is often granted where the occupier needs to get in quickly and there is no time to sort out the formalities, typically while a lease is still being negotiated. It lets the tenant in promptly and lets the landlord take the property back easily.
The critical feature is that either party can end it at any time, without notice. It is not unheard of for the parties to sign a tenancy at will and then, with a nudge and a wink, agree that neither will terminate without giving, say, a month’s notice. Big mistake. Huge mistake. A court will look at what was really agreed and is likely to find a periodic tenancy instead, which is protected by the 1954 Act and cannot be contracted out.
Back to back
Leases of six months or less are outside the 1954 Act, but a landlord cannot get around security of tenure by granting one after another. The exclusion is lost if the lease can be renewed or extended beyond six months, or if the tenant (together with any predecessor in the same business) has already been in occupation for more than 12 months. In practice two consecutive short lets is the safe limit. A third is asking for trouble.
Getting it back: vacant possession in practice
Redevelopment, regeneration, a disposal or a change of use will usually need vacant possession by a fixed date. The legal tools are well known. The problems are almost always practical.
Start with an audit
Find out who is actually there and on what paperwork. Not just the shops, but the nursery, the community hall, the lock-up garages used by a local trader, the substation, the advertising hoarding and the telecoms mast on the roof. Expect to find expired leases, occupiers holding over and arrangements that were never documented at all. An occupier who has paid rent for years with no paperwork may well be a protected periodic tenant.
Then work back from your start on site date
- Protected tenants. The landlord must serve a section 25 notice giving between six and 12 months’ notice, expiring no earlier than the contractual term, and must then prove a statutory ground of opposition. For redevelopment that is ground (f): an intention to demolish, reconstruct or carry out substantial works that cannot reasonably be done without obtaining possession.
- Proving ground (f). The intention must be firm, settled and deliverable by the date of the hearing, so planning, funding and board approvals all matter. Since S Franses Ltd v Cavendish Hotel (London) Ltd [2018] UKSC 62 it must also be genuine: works devised to get the tenant out, which would not be done if the tenant left voluntarily, will not do.
- Compensation. A tenant removed on ground (f) is entitled to statutory compensation of one times the rateable value, or twice that where the business has been in occupation for 14 years or more. Budget for it.
- Time. A tenant who contests can add a year or more of court time. Serve early, and negotiate a surrender in parallel. The 1954 Act does not apply to a lease that is surrendered with immediate effect by a deed or by operation of law but an agreement to surrender a protected lease is only binding if a notice and declaration procedure, similar to contracting out, has been followed first. Care therefore needs to be taken as to how a lease is surrendered to ensure that any settlement agreement does not inadvertently take effect as an agreement to surrender if the relevant procedural steps have not been followed.
- Bring them with you. A tenant you want in the new scheme can be offered an agreement to surrender coupled with an agreement for lease of a new unit. We have seen a fully let parade of protected shops redeveloped this way.
- Break clauses. A redevelopment break right only works if its conditions are followed to the letter. Where the lease is protected, a section 25 notice and ground (f) are needed as well.
- Contracted out leases. These end on expiry, but only if you act. Let the tenant stay on paying rent and you risk creating a new, protected, periodic tenancy. Document any holding over as a tenancy at will, promptly.
- Telecoms. Operators have their own statutory protection under the Electronic Communications Code. Removing apparatus for redevelopment generally needs at least 18 months’ notice and, if contested, a tribunal order. It is frequently the longest item on the programme.
Meanwhile
Do not leave units empty by default. Short term ‘meanwhile’ lettings, contracted out and with landlord rolling breaks, bring in income, keep buildings secure and mean that an occupier is covering business rates, insurance and service charge, all without compromising vacant possession. Remember that any flats above the shop sit under entirely different residential legislation, with their own notice periods and grounds.
All change? Reform of the 1954 Act
The 1954 Act is more than 70 years old and is being reformed on two fronts (Modernising security of tenure: Law Commission launches second consultation on business tenancy renewals).
The Law Commission review
After a first consultation in November 2024, the Law Commission confirmed in June 2025 that security of tenure will stay, on the current contracting out model. Its second consultation, ‘Modernising security of tenure’, was published on 16 June 2026 and closed on 16 September 2026. The headline proposals and questions were:
- Short lets. Raising the six month threshold to one or two years, so that many more short leases fall outside the 1954 Act automatically.
- Periodic tenancies. Excluding most new periodic tenancies from protection altogether.
- Contracting out. Putting the warning and the tenant’s declaration in the lease itself and abolishing statutory declarations.
- Ground (f). Widening the redevelopment ground to reflect modern refurbishment and retrofit, including works needed to meet minimum energy efficiency standards.
- Compensation. Basing it on rent rather than rateable value, with stepped bands in place of the single 14 year threshold.
- Surrenders and disputes. Simplifying or removing the formalities for agreements to surrender, and asking whether renewal disputes should move from the county court to the tribunal or the High Court.
A parallel consultation looked at the Landlord and Tenant Act 1987 and the Landlord and Tenant (Covenants) Act 1995. A final report will follow, and any legislation will then be a matter for the Government. For now, the existing rules apply in full, but the direction of travel is helpful to anyone managing short term occupation or planning a redevelopment.
Upward-only rent reviews
Separately, the English Devolution and Community Empowerment Act 2026, which received Royal Assent on 29 April 2026, amends the 1954 Act to ban upward-only rent reviews in new business leases, whether or not they are contracted out (EDCEA 2026 - Stepping closer to the ban on upward only rent reviews). The ban is not yet in force and is not expected to be before 2027, with further consultation promised on the detail. As drafted it may catch long leases of residential property to registered providers and other corporate tenants, so it matters well beyond the high street.
The shops under the flats
Most registered providers hold more commercial property than they think: parades of shops beneath flats, offices, nurseries, community space and the occasional pub. On recent stock rationalisation projects we have seen RPs fold these assets into a separate lot or lots, apart from the residential tenures being disposed of, often with their own timetable, advisers and buyers.
We think that is the right approach. The buyers are largely outside the sector, ‘best’ value often depends on how the assets are packaged, and the legal work looks more like a commercial portfolio sale than a stock transfer. The scope of work we have recently proposed for a commercial lot of this kind covered:
- Shaping the package. Working with the agents on whether to sell whole or split by asset type, geography or lot size, and testing an outright sale against a structure that retains income or a share of future value.
- Buyer-ready packs. Title, lease and search information put together for the likely bidder: income and recovery for an investor, planning risk for a developer. Summary reports that bidders can rely on are an optional extra where the uplift justifies the cost.
- Model heads of terms. Settling the non-negotiables before marketing: price and overage, arrears and rent deposits, VAT and transfer of a going concern, capital allowances, insurance, environmental liability, TUPE and service contracts. Bidders then compete on the same terms, which supports a genuine best and final offers process, and the contract records a deal instead of reopening one.
- Vacant units. Using short term, contracted out lettings to cover holding costs and give a buyer breathing space on planning, without creating a protected tenant. Everything earlier in this edition applies.
- Regulatory position. Commercial assets are generally free of the consents and consultation that apply to social housing, but that needs checking asset by asset where there is a charge, grant funding, a consent regime tied to how the asset was acquired, or a charitable owner.
- Clean break or continuing relationship. Where the shop and the flats above end up in different hands, the documents have to do the job that common ownership used to do. See ‘Upstairs, downstairs’ below.
That last point is why sector knowledge still matters on what looks like a purely commercial sale. The risks that count sit at the join between the commercial unit and the housing around it.
“The shops under the flats are no longer an afterthought. They offer an opportunity to secure income and placemake. A good commercial offering drives up the value of any adjoining property as it makes the location desirable. [A balance between the competing commercial and residential interests should be preserved].”
Dan Moan
Partner
Upstairs, downstairs
In a mixed use building the commercial lease is not just a deal with the shopkeeper or other commercial tenant. It is the main tool for protecting the primacy of the homes above and around it, including the residents’ quiet enjoyment, the landlord’s ability to manage and insure the building, and the value, mortgageability and marketability of the flats (especially if they are to be disposed of as shared ownership homes).
That also matters when the commercial unit is sold or let on a long lease to an investor. From then on, what the lease says is the only control you have left. The points to get right are:
- Use. Planning will not usually do the job for you. Since 2020 and the planning changes, a shop can become a restaurant, gym or nursery within Use Class E without planning permission, and may be able to convert to housing under permitted development rights. Say exactly what use is allowed, rule out the uses residents will not thank you for (late night opening, hot food, alcohol) and prohibit planning applications without consent.
- Day to day operation. Trading and delivery hours, noise, smells and extraction, refuse, signage and shutters. A general covenant against nuisance is hard to enforce. A specific one is not.
- Alterations. No structural or external works, and nothing that touches fire stopping, compartmentation or shared services, without consent.
- Service charge. The commercial tenant must pay its full and fair share of the building’s costs. Residential service charges are tightly regulated, so a cap or a gap in the commercial lease cannot simply be passed upstairs: the shortfall lands on the landlord. Consider whether an estate charge should be imposed now, while you still can.
- Insurance. One policy usually covers the whole building. The tenant should pay its share plus any loading its use attracts, comply with the insurer’s requirements and do nothing to invalidate cover.
- Building and fire safety. The tenant should be obliged to cooperate with whoever holds the building safety duties, give access and information, and manage fire risk in its own unit. In a higher-risk building under the Building Safety Act 2022 this is essential.
- Control. Rights of entry for inspection and works, sensible limits on assignment and underletting and, where regeneration is on the horizon, a contracted-out lease or a redevelopment break.
Why go to the trouble?
Because the flats are where the value sits. Many lenders are wary of flats above certain commercial uses, hot food in particular, and their solicitors will look hard at the service charge, insurance and management arrangements. A defect agreed on a commercial unit may only surface years later, on a staircasing or resale, when a lender’s solicitor declines to proceed. It is far cheaper to draft it out at the start.
Want to find out more? Get in touch. We would be happy to talk through your occupiers, your programme or your portfolio.
This document is part of Devonshires’ ‘It's the law’ series, tailored for people working in development and regeneration. All reasonable precautions have been taken to ensure that the information contained is materially accurate. However, this document is not intended to be legally comprehensive, and no action should be taken on the matters covered without seeking specific legal advice.
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