Are landlords being made responsible for their tenants' business activities?

Landlords are responsible for the buildings they own. But increasingly this responsibility is being extended to encompass the behaviour of their tenants. This is not just a question of activities that might upset or offend nearby occupiers; it seems that landlords are now required to take on some of the work of the police or of HMRC. Is this part of a Government move to reduce the burden on the state or is it merely a perception magnified by the media? In this piece we discuss this trend and advise landlords on the current extent of their liabilities.

The landlord/tenant relationship

Leases typically require the tenant to comply with the law as far as it relates to the premises and the tenant's use of the premises, and not to use the premises for an illegal act. However, they do not include a general obligation to comply with the law in the running of their business – and a tenant would surely object to such an obligation. It is also likely that a landlord would not want to include this sort of provision. If the landlord has power to stop the tenant doing something then this power may come with an enforcement responsibility – as with the concept of being a "knowing permitter" under environmental legislation. The knowing permitter becomes liable if it has the ability to stop something but doesn't do so.

Under environmental legislation, the knowing permitter becomes liable if it has the ability to stop something but doesn't do so.

Modern slavery

One of the most high profile cases of landlord exposure to blame for tenant's misdeeds came last year when Hermes came into the firing line over the behaviour of Sports Direct, one of its tenants. In a well-documented case, Sports Direct were accused of mistreating their employees. Although as a matter of law, and under the terms of Sports Direct's lease, Hermes had neither the right nor the responsibility to intervene in its tenant's treatment of its staff, Hermes was concerned about possible reputational damage it might suffer through the behaviour of its tenant. It complained to Sports Direct and (in its capacity as shareholder) voted against the re-election of the chairman and 3 directors.

It also considered introducing anti-slavery clauses into its leases, although it is generally agreed that the impact of the Modern Slavery Act ("MSA") 2015 on parties to leases is limited. All organisations which carry out business in the UK with an annual turnover of £36m are required to produce an annual slavery and human trafficking statement. This statement typically describes the measures that the organisation is implementing "to ensure that slavery and human trafficking is not taking place in any of its supply chains, and in any part of its own business". There is no formalised mechanism for evaluating the extent to which the organisation implements those measures in practice. Applying that requirement to the landlord and tenant relationship:

Qualifying landlords do not as a matter of law need to consider their tenants' businesses' compliance, as they are not part of their supply chain.
This position is reversed in the unusual situation where the tenant supplies additional services to the landlord.
However, all landlords may want to think about checking before granting a new lease that their qualifying prospective tenants have published their annual statements, in order to protect their public standing.
Qualifying landlords need to consider the businesses which supply services to them whether directly or indirectly through their property managers.
Qualifying tenants should consider their landlords' businesses' compliance, particularly if they receive services from their landlords, as they would form part of the tenant's supply chain. However, in practice it is very rare for leases to contain obligations on a landlord in relation to any services it provides or works it carries out.

Landlords' areas of responsibility for tenants' compliance with the law

There are some areas of law where landlords can be made directly responsible for their tenants' compliance. These include:

Contamination – the Environment Protection Act 1990 is focussed on clearing up any contamination. This means that liability can fall on a landlord if the tenant fails to execute a clean-up during its term.
Tax and National Insurance – if a landlord who contributes to the cost of works that its tenant is carrying out falls within the definition of a" contractor" under the Construction Industry Scheme, it must register under that scheme and pay its contribution to the tenant net of income tax and NI.
Immigration status - landlords of residential property are responsible under the Immigration Act 2014 for checking that their tenants have sufficient immigration rights to give them the "right to rent".

Tobacco duty

Earlier this year, in a consultation paper on sanctions to tackle the evasion of tobacco duty, the Government said it was considering imposing a duty on landlords to take steps to ensure that their property is not being used to evade duty, including checking the premises and the business the tenant carries out there, taking steps to ensure they are aware of illicit activity, and reporting immediately any concerns to the authorities. This would cut across the tenant's entitlement to quiet enjoyment of the premises, standard in all leases for centuries, and make the landlord an enforcer for HMRC. The consultation ended in May 2017 and its conclusions are awaited.

Cannabis farming

In a similar vein, there seems to be a suggestion from the police and the media that a landlord should be held responsible if a tenant is running a cannabis farm from the premises. For example, in a recent report in the Crewe Guardian regarding a cannabis operation, the police urged landlords to make regular checks on their properties and to report to the police any information gleaned. Here there is likely to be a breach of the terms of the lease, but it will be up to the landlord (if it knows what is going on) to decide what enforcement action (if any) to take under the lease.

Conclusion

One of the key concepts underlying the leasehold relationship is that the tenant acquires a legal interest in the land and with it the entitlement to enjoy the premises without interference from the landlord. There seems to be a general drift by the Government and the media to move responsibility for ensuring the tenant upholds the law from the enforcement agencies to the landlord, a move that should perhaps be resisted.

Read Alex Millar Profile